What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-10 · 405 added, 328 removed, 723 unchanged (50% of the section changed)

24 unchanged sentences

AFG Net Assets

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45 2022 First Quarter FORM 10-Q |

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

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

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.

As of June 30, 2022, net assets of AFG, excluding its equity investments in subsidiaries, were $218.

Cash and short-term investments $ 120

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(1) Includes surplus notes (fair value of $61) issued by AAC that are eliminated in consolidation.

From April 1, 2022, through June 30, 2022, AFG repurchased 1,605,316 shares for $14 at an average purchase price of $8.86 per share.

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

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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

The key value metrics for the Specialty Property and Casualty Insurance segment for the three and six months ended June 30, 2022 were as follows:

Three and six months ended June 30 Three Months Six Months

Gross premiums written $ 41 $ 65

3 unchanged sentences

Stockholders Equity (1)

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.

(1) Represents the share of Ambac stockholders equity for each subsidiary within the Specialty Property and Casualty Insurance segment, including intercompany eliminations.

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 admitted 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.

1 unchanged sentence

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

The key value metrics for the Insurance Distribution segment for the three and six months ended June 30, 2022 were as follows:

Three and six months ended June 30 Three Months Six Months

Premiums placed $ 24 $ 69

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Stockholders Equity (2)

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

(1) Included in Operating Expense within the Consolidated Statements of Comprehensive Income.

(2) Represents the share of Ambac stockholders equity for each subsidiary within the Insurance Distribution segment, including intercompany eliminations.

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

The key value metrics for the Legacy Financial Guarantee Insurance segment for the three and six months ended June 30, 2022 were as follows:

Three and six months ended June 30 Three Months Six Months

Net premiums earned $ 11 $ 24

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Adversely Classified Credit Net Par Outstanding $ 5,217

(1) Represents the share of Ambac stockholders equity for each subsidiary within the Legacy Financial Guarantee Insurance segment, including intercompany eliminations.

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

At June 30, 2022, AAC owned $282 of distressed Ambac-insured bonds, including significant concentrations of insured RMBS bonds, and excluding Ambac's holdings of Sitka Senior Secured Notes.

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 six months ended June 30, 2022.

Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase or sell Ambac-insured securities (including Sitka Secured Notes), surplus notes and/or other Ambac issued securities, and may consider opportunities to

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

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

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exchange securities issued by it from time to time for other securities issued by it.

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 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.

Ambac completed risk reduction transactions consisting of refinancings and commutations of $878 and $1,187 of net par exposure for the three and six months ended June 30, 2022, of which $317 and $584 related to Puerto Rico.

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

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.

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at June 30, 2022 and December 31, 2021.

Net par exposure within the U.S.

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Watch list 3,332 3,824 (492) (13) %

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;

including, but not limited to, higher unemployment;

volatility in the capital markets;

closure or severe curtailment of the operations and,

hence, revenues, of many businesses and public and private enterprises to which we are directly or indirectly exposed.

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

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

As of 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.

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

Russia and Ukraine Conflict

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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.

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

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.

However, as the conflict continues and if it were to escalate, the global economy and capital markets may 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 three months ended March 31, 2022, included the following:

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

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2021, 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, 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.

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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.

While Ambac believes the LIBOR law is generally a positive step, there remains some 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.

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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.

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and governance, material impacts (operational and financial), risk identification and management, and Scope 1, 2 and 3 emissions (the “Proposed Rule”).

For 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 2024 and begin to apply to SEC filings in 2025.

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Financial guarantee products were sold in three principal markets:

public finance, U.S.

structured finance and international finance.

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

structured and international finance.

The following table provides a breakdown of guaranteed net par outstanding by market at June 30, 2022 and December 31, 2021.

Net par exposures within the U.S.

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Total net par outstanding $ 25,300 $ 28,020

(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:

(1) Includes $5,446 and $5,490 of Military Housing net par outstanding at June 30, 2022 and December 31, 2021, respectively.

(2) Includes $467 and $1,054 of Puerto Rico net par outstanding at June 30, 2022 and December 31, 2021, respectively.

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at June 30, 2022:

Risk Name Country-Bond

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IF AUK Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations BBB 2033 786 3.1 %

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

IF AUK National Grid Gas UK-Utility BBB+ 2037 765 3.0 %

IF AUK Aspire Defence Finance plc UK-Infrastructure A- 2040 741 2.9 %

PF AAC New Jersey Transportation Trust Fund Authority US-Lease and Tax-backed Revenue BBB- 2036 623 2.5 %

IF AUK Posillipo Finance II S.r.l Italy-Sub-Sovereign BIG 2035 594 2.3 %

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

IF AUK National Grid Electricity Transmission UK-Utility BBB+ 2036 533 2.1 %

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

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

UK-Infrastructure BBB- 2040 509 2.0 %

IF AUK RMPA Services plc UK-Infrastructure BBB+ 2038 486 1.9 %

Total $ 6,788 26.8 %

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Net par related to the top ten exposures reduced $537 from December 31, 2021.

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.

Exposures are impacted by changes in foreign exchange rates ($648 reduction during the six months

ended June 30, 2022), certain indexation rates, reinsurance transactions and scheduled and unscheduled paydowns.

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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) was 27% at June 30, 2022, and 26% at December 31, 2021.

Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $31 per single risk, with insured exposures ranging up to $453 and a median net par outstanding of $5.

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Net Par Outstanding

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

($ in millions) June 30, 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

PR Infrastructure Financing Authority (Special Tax Revenue) — 403

PR Convention Center District Authority (Hotel Occupancy Tax — 86

Commonwealth of Puerto Rico - General Obligation Bonds — 11

1 unchanged sentence

Total Net Exposure to The Commonwealth of Puerto Rico and Related Entities $ 467 $ 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 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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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.

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.

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

1) their respective shares of GO/PBA plan consideration available under the Eighth Amended POA, 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.

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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.

During the second quarter of 2022, 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 were all 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.

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2022, a PRHTA Disclosure Statement hearing was held before Judge Laura Taylor Swain, U.S.

District Judge for the District of Puerto Rico, and Judge Judith G.

Magistrate Judge.

On June 23, 2022, Judge Swain entered an order approving the PRHTA Disclosure Statement and, among other things, set a schedule for the PRHTA POA confirmation process, culminating in a confirmation hearing scheduled for August 17-18, 2022.

If confirmed, the PRHTA POA is expected to become effective late in the third quarter of 2022 or early in the fourth quarter of 2022.

On July 27, 2022, the HTA Insured Bondholder Group, comprising Franklin Advisers, Inc.

and Nuveen Asset Management, filed a limited objection to the PRHTA POA as to its proposed treatment of certain bonds insured by Assured Guaranty Corp.

and an affiliate ("AGC").

The limited objection challenges the treatment of AGC-insured bonds under the plan, and grant of third-party releases to AGC.

While the limited objection did not include similar challenges to PRHTA bonds insured by AAC, it is possible, though we believe unlikely, that a ruling upholding this limited objection could impact other insured bonds under the plan, including AAC-insured bonds.

Any ruling that impacts A AC-insured bonds could negatively affect exposure reduction strategies and/or significantly increase reserves related to AAC-insured PRHTA bonds.

PRHTA/CCDA PSA

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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.

Under the PRHTA/CCDA PSA, PRHTA creditors shared $389 of cash proceeds that was payable once the PRHTA distribution condition was met pursuant to the Eighth Amended POA (the “Interim Distribution”).

In addition, PRHTA creditors received an approximately 69% share of the Clawback CVI, subject to a lifetime nominal cap of about $3,698, which was also paid as part of the Interim Distribution.

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

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

Interim Distribution

On July 8, 2022, following satisfaction of the PRHTA distribution condition, AAC received its share of the Interim

Distribution of cash and Clawback CVI related to the Ambac-insured PRHTA ’68 and ’98 bonds in satisfaction of the Clawback claims against the Commonwealth.

The Interim Distribution to AAC totaled approximately $19 of cash and $295 maximum notional value of Clawback CVI.

On the PRHTA POA effective date, a portion of the cash and Clawback CVI, or the proceeds thereof, will either be:

(i) distributed to PRHTA ’98 commuting bondholders together with the new PRHTA bonds (or cash plan consideration) in connection with the PRHTA POA and a commutation payment from AAC in full satisfaction of in full and final discharge of Ambac’s obligations under the Ambac insurance policies or (ii) deposited into a trust, as described below, together with the new PRHTA bonds or cash plan consideration in connection with the PRHTA POA.

Bondholder Elections

As outlined in the July 2022, Form of Election Notice for AAC-insured Bond Holders with Claims in Class 6 (the AAC Insured PRHTA 98 Senior Bonds), AAC-insured PRHTA 98 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:

(i) their respective shares of certain consideration available under PRHTA/CCDA PSA, including the aforementioned Interim Distribution of cash and Clawback CVI as well as the new PRHTA bonds or cash related to the PRHTA POA and (ii) a cash commutation payment from AAC equivalent to 48% of the outstanding insured bond balance as of July 1, 2022, less any subsequent insured policy payments prior to the PRHTA plan effective date.

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

Under the second option, the bondholders’ respective shares of consideration, or the proceeds thereof, related to the Interim Distribution and the new PRHTA bonds or cash to be distributed under the PRHTA POA, will be deposited into a trust.

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

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

In addition, on the PRHTA plan effective date, all AAC-insured HTA 68 bonds will be accelerated, satisfying AAC’s obligations under the applicable AAC Insurance Policies.

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;

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 Eight Amended POA, as it relates to the PRHTA Interim Distribution, and under the PRHTA POA;

(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.

(iii) whether and when the PRHTA POA will be confirmed and whether or not it will be confirmed in substantially the same form as currently drafted;

and (iv) other factors,

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including market conditions such as interest rate movements and credit spread changes on the new CVI instruments.

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

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

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

Ambac Title III Litigation Update

AAC 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.

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Exposure Currency

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

The table below shows the distribution by currency of AAC’s insured exposure as of June 30, 2022:

Currency Net Par Amount

7 unchanged sentences

Total $ 25,300

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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 March 31, 2022 and December 31, 2021.

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

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

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Summary of Below Investment Grade Exposure:

Net Par Outstanding

Bond Type March 31,

Bond Type June 30,

2022 December 31,

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Accordingly, due to these and other factors, it is not unreasonable to expect the proportion of below investment grade exposure in the guarantee portfolio to increase in the future.

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Results of Operations ($ in millions)

1 unchanged sentence

A summary of our financial results is shown below:

Three Months Ended March 31, 2022 2021

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

2022 2021 2022 2021

Gross premiums written $ 37 $ (3) $ 67 $ (5)

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Net income (loss) attributable to common stockholders $ 5 $ (29) $ 7 $ (12)

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

Ambac's results for the three and six months ended June 30, 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.

This gain included (i) a net benefit in losses and (ii) a 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 accelerated amortization of the insurance intangible asset.

In the second quarter 2022, the newly created VIEs combined with changes to the fair value of securities received by AAC resulted in losses totaling $17.

• During the six months ended June 30, 2022 management recorded a reduction to AAC’s estimated R&W subrogation

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53 2022 Second Quarter FORM 10-Q |

recoveries in the amount of $242, $186 of which was based on AAC's evaluation of the potential 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.

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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.

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.

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

Gross premiums written increased $40 and $72 for the three and six months ended June 30, 2022, compared to the same periods in the prior year.

The increase was primarily driven by the growth in the Specialty Property & Casualty Insurance segment of $39 and $63 for the three and six months ended June 30, 2022, respectively.

Net Premiums Earned.

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 premiums earned increased $3 and increased $3 for the three and six months ended June 30, 2022, compared to the same periods in the prior year.

The increase was driven by $3 and $4 of specialty property and casualty net premiums earned for the three and six months ended June 30, 2022, partially offset by a slight reduction in legacy financial guarantee premiums earned.

Net Investment Income.

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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;

Net investment income for the periods presented were driven by the legacy

financial guarantee segment;

other segments' results were not significant.

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and Other investments is summarized in the table below:

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53 2022 First Quarter FORM 10-Q |

Three Months Ended March 31,

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

2022 2021 2022 2021

Securities available-for-sale:

Ambac-insured (including LSNI Secured Notes) $ 7 $ 15

Ambac-insured (including Secured Notes) $ 5 $ 14 $ 12 $ 29

Securities available-for-sale and short-term other than Ambac-insured 8 8 15 15

Other investments (includes trading securities) (34) 20 (43) 47

Net investment income $ 5 $ 49

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 income (loss) $ (21) $ 42 $ (16) $ 91

Net investment income (loss) decreased $63 and $107 for the three and six months ended June 30, 2022, respectively, compared to the prior year periods.

• Other investments income (loss) decreased $54 and $90 for the three and six months ended June 30, 2022, respectively, compared to the same periods in the prior year.

The three and six months ended June 30, 2022, included losses of $11 and $21 on securities received in the Puerto Rico restructuring which are classified as trading.

Pooled fund investments results decreased $43 and $70 for the three and six months ended June 30, 2022, respectively, compared to the prior year periods, driven primarily by losses on hedge funds, equity and high-yield and leveraged loan funds in the 2022 periods.

Investments in pooled funds may be volatile, but are generally expected to produce higher returns than available-for-sale investments.

Each of the aforementioned pooled fund categories reported positive performance in the three and six months ended June 30, 2021.

• Net investment income from Ambac-insured securities for the three and six months ended June 30, 2022 decreased $10 and $17 compared to the prior year periods, due primarily to lower income on LSNI Secured Notes which were redeemed in July 2021.

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

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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

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

2022 2021 2022 2021

Net gains (losses) on securities sold or called $ (2) $ 1 $ 7 $ 7

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Intent / requirement to sell impairments — — — —

Total net realized gains (losses) $ 10 $ 2

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.

Net investment gains (losses), including impairments $ 7 $ (2) $ 17 $ 1

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

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.

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

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

If management either:

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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 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.

Results from credit derivatives were not significant to the periods presented and as of June 30, 2022, all outstanding credit derivatives have matured.

Net gains (losses) on interest rate derivatives for the three and six months ended June 30, 2022, were $28 and $85 compared to ($11) and $14 for the three and six months ended June 30, 2021.

The net gains in 2022 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 improved results for the three and six months ended June 30, 2022, resulted from the significant rate

increases in the periods combined with favorable portfolio positioning, partially offset by the impact of wider credit spreads in derivative assets as 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 $9 for the three months ended March 31, 2022 and 2021, respectively.

In periods when credit spreads are stable counterparty credit adjustments will generally have a proportionate offsetting impact to gains or losses on derivative assets, relative to fully collateralized assets.

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

Generally, narrowing (widening) of credit spreads will increase (decrease) derivative gains relative to a period of stable credit spreads.

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 $4 for the three and six months ended June 30, 2022, respectively, and $(3) and $6 for the three and six months ended June 30, 2021, respectively.

The lower counterparty credit adjustments for the three and six months ended June 30, 2022 reflected lower underlying asset values, partially offset by wider credit spreads.

Changes in counterparty credit adjustments for the three and six months ended June 30, 2021 related to underlying asset values in addition to narrowing spread for the six months ended June 30, 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.

Commission income for the three and six months ended June 30, 2022 was $6 and $15 compared to $6 and $13, for the three and six months ended June 30, 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.

The increase was driven by greater premiums placed by Xchange Benefits, although it was moderated by an adjustment to profit commissions in the the second quarter of 2021.

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 |

For the three and six months ended June 30, 2022 Sub-producer commissions of $4 and $8 compared to $4 and $7 in three and six months ended June 30, 2021.

Net Realized Gains on Extinguishment of Debt.

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.

Net realized gains on extinguishment of debt was $57 for three and six months ended June 30, 2022, resulting from repurchases of surplus notes below their carrying values.

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

Refer to Note 1.

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Income (Loss) on Variable Interest Entities.

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.

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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.

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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.

Income (loss) on variable interest entities was $(6) and $15 for the three and six months ended June 30, 2022, respectively, compared to $2 and $2 for the three and six months ended June 30, 2021.

Results for the three and six months ended June 30, 2022, related primarily to two VIE trusts created in connection with the Puerto Rico restructurings in March 2022.

The three months ended June 30, 2022 included losses of $7 from these VIEs driven by interest costs and changes in fair value of assets received in the restructuring.

The six months ended June 30, 2022 also included first quarter losses of $6 from changes to fair value of these VIEs' assets and the initial $28 gain upon consolidation on March 15, 2022.

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

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

Refer to Note 9.

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Losses and Loss Expenses.

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.

Loss and loss expenses increased $14 and $30 for the three and six months ended June 30, 2022, compared to the same periods in the prior year.

Legacy financial guarantee loss and loss expenses (benefit) were $(14) and $9 for the three and six months ended June 30, 2022.

Specialty Property and Casualty Insurance loss and loss expenses were $2 and $3 for the three and six months ended June 30, 2022.

Intangible Amortization.

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.

Insurance intangible amortization for the three and six months ended June 30, 2022, was $13 and $26, flat as compared to the the three months ended June 30, 2021 and a decrease of $5 over the six months ended June 30, 2021.

The decrease was driven primarily by the run-off of the financial guarantee insured portfolio and timing of its de-risking activity.

Other intangible amortization for the three and six months ended June 30, 2022, was $1 and $1, respectively unchanged from the three and six months ended June 30, 2021.

Operating Expenses.

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

Three Months Ended March 31, 2022 2021

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

2022 2021 2022 2021

Compensation $ 16 $ 14 $ 32 $ 30

1 unchanged sentence

Gross operating expenses 33 28 67 61

Amortization of deferred acquisition costs 3 — 4 —

Reinsurance commissions, net (2) — (3) —

Total operating expenses $ 34 $ 28 $ 68 $ 62

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.

Gross operating expenses increased $6 and $5 for the three and six months ended June 30, 2022, respectively, compared to the same periods in the prior year.

The increase in operating expenses during the three and six months ended June 30, 2022, as compared to the three and six months ended June 30, 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 and Insurance Distribution segments, higher incentive compensation expense including the impact of performance factor adjustments and higher severance costs in the Legacy Financial Guarantee Insurance segment.

• Higher non-compensation costs primarily related to Legacy Financial Guarantee Insurance segment legal defense costs and transaction consulting fees;

Specialty Property and Casualty Insurance segment auditing and licensing fees and equipment costs associated with growth of the business;

and Insurance Distribution segment sub-producer commissions.

These items were partially offset for the six months comparative periods by first quarter 2021 consulting fees associated with Legacy Financial Guarantee Insurance debt restructuring.

Interest Expense.

2 unchanged sentences

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

Three Months Ended March 31, 2022 2021

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

2022 2021 2022 2021

Surplus notes (1)

$ 20 $ 19 $ 41 $ 37

LSNI Ambac Note — 24 — 49

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Tier 2 Notes 7 7 14 13

Other — — 1 1

Total interest expense $ 45 $ 50 $ 89 $ 100

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

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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.

The decrease in interest expense for the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 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.

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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 $593 at March 31, 2022.

Total accrued and unpaid interest for surplus notes outstanding to third parties were $559 at June 30, 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 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.

The provision for income taxes for the three months ended June 30, 2022 and 2021, was $1, and $11 respectively, a decrease of $10.

This resulted from the 2021 effect on the deferred tax liability of enactment of an increase in UK tax rates from 19% to 25%.

.The provision for income taxes reported for six months ended June 30, 2022 and 2021 was $1 and $13, respectively, a decrease of $11, resulting from the same factors as stated above.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

Three Months Ended March 31, 2022 2021

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

2022 2021 2022 2021

Net premiums earned $ 11 $ 11 $ 24 $ 25

3 unchanged sentences

Net realized gains on extinguishment of debt 57 — 57 33

Other (6) 3 18 1

Total 75 42 184 160

1 unchanged sentence

Operating expenses 23 21 44 38

Total 10 (5) 54 20

Earnings before interest, taxes, depreciation and amortization 65 47 130 140

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Stockholders equity (1)

(1) Represents the share of Ambac stockholders equity for each subsidiary within the Legacy Financial Guarantee Insurance segment, including intercompany eliminations.

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).

The variability in the financial results are primarily driven by changes in loss and loss expenses resulting from, amongst other items, credit developments, interest rates and de-risking transactions.

Additionally, the segment results are impacted by changes in interest rates as they impact net gains on derivative contracts and interest expense on the floating rate AAC Sitka Note.

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:

Net premiums earned decreased $— and $1 for the three and six months ended June 30, 2022, compared to the same period in the prior year.

Net premiums earned were impacted by the organic and active runoff of the financial guarantee insured portfolio resulting in a reduction to current and future normal net premiums earned and 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.

The positive impact on net premiums earned related to credit losses amounted to $1 and $3 for the for the three and six months ended June 30, 2022, as

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57 2022 Second Quarter FORM 10-Q |

compared to $2 and $6 for the three and six months ended June 30, 2021.

• Accelerated financial guarantee premiums earned as a result of calls and other accelerations on insured obligations, largely due to active de-risking of the insured portfolio, of $2 and $6 for the for the three and six months ended June 30, 2022, as compared to $0 and $0 for the three and six months ended June 30, 2021.

Losses and Loss Expenses.

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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 $1,480 and $1,704 at March 31, 2022, and December 31, 2021, respectively.

Ambac has recorded representation and warranty subrogation recoveries, net of reinsurance, of $1,462 and $1,704 at June 30, 2022, and December 31, 2021, respectively.

Refer to Note 2.

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

Three Months Ended March 31, 2022 2021

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

2022 2021 2022 2021

Structured Finance $ (11) $ (16) $ 202 $ (23)

Domestic Public Finance (3) (11) (194) (2)

(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.

Other — 1 1 7

$ (14) $ (26) $ 9 $ (18)

(1) Includes loss expenses incurred of $8 and $8 for the three and six months ended June 30, 2022, respectively, and $13 and $23 for the three and six months ended June 30, 2021, respectively.

Loss and loss expenses (benefit) for the three months ended June 30, 2022, were largely driven by the positive impact of discount rates and stronger recoveries, partially offset by a reduction to R&W subrogation recoveries (driven by higher discount rates and lower credit losses) and loss expenses incurred.

Losses and loss expenses (benefit) for the six months ended June 30, 2022, were driven by a reduction to AAC’s estimated R&W subrogation recoveries in the amount of $242, partially offset by

favorable loss development in domestic public finance (primarily due to the Puerto Rico restructuring) and the positive impact of discount rates during 2022.

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

The increases in operating expenses of $2 and $5 during the three and six months ended June 30, 2022, as compared to the three and six months ended June 30, 2021, is primarily due to additional legal fees related to defensive litigation costs and additional compensation costs from the impact of incentive compensation performance factor adjustments, partially offset by a net reduction in headcount within the segment.

Specialty Property and Casualty Insurance

Three Months Ended March 31, 2022 2021

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

2022 2021 2022 2021

Gross premiums written $ 41 $ 2 $ 65 $ 2

4 unchanged sentences

Other income (program fees) — — 1 —

Total 4 — 5 —

Losses and loss expenses incurred 2 — 3 —

1 unchanged sentence

Other expense — — — —

Total 5 2 9 3

Earnings before interest, taxes, depreciation and amortization (1) $ (2) (4) $ (3)

2 unchanged sentences

Combined Ratio 160.8 % NM

Stockholders Equity $ 115 $ 106

Ambac's stockholders equity (1)

(1) Represents the share of Ambac stockholders equity for each subsidiary within the Specialty Property and Casualty Insurance segment, including intercompany eliminations.

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.

Eleven programs were authorized to issue policies as of June 30, 2022.

The growth in both the number and size of these programs has contributed to the increase in gross and net

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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 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 markets.

In addition, 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.

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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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Segment pre-tax net income was favorably impacted by the growth in earned premium and program fees relative to loss and loss expenses incurred and operating expenses for the three month period ended June 30, 2022, compared to the three month period ended June 30, 2021.

Costs associated with the acquisition of additional shell insurance companies, as we continue to ramp up Everspan's operations, impacted pre-tax income for the six months ended June 30, 2022, relative to the six months ended June 30, 2021.

Insurance Distribution

Three Months Ended March 31, 2022 2021

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

2022 2021 2022 2021

Premiums placed $ 24 $ 22 $ 69 $ 62

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Pretax income (loss) — $ — $ 2 $ 2

Stockholders Equity, net of NCI $ 66 $ 69

Ambac's stockholders equity (2)

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

(2) Represents the share of Ambac stockholders equity for each subsidiary within the Insurance Distribution segment, including intercompany eliminations.

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.

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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.

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

Xchange underwrote and placed premiums for its carriers of approximately $24 and $65 for the three and six months ended June 30, 2022, an increase of $2 or 8% and $7 or 10% as compared to the three and six months ended June 30, 2021, respectively.

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.

ESL is Xchange's largest business.

Other Operating Expenses.

Other operating expenses for the three and six months ended June 30, 2022 increased slightly as compared to the three and six months ended June 30, 2021 as a result of employees hired to support the ESL renewal rights acquisition that occurred on April 29, 2022.

LIQUIDITY AND CAPITAL RESOURCES

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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

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $218 as of June 30, 2022, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

AFG's investments include securities directly issued by AAC (i.e.

surplus notes), which are eliminated in consolidation.

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

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AFG's principal uses of liquidity are:

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

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.

AFG received distributions from Xchange of $2 and $3 during the six months ended June 30, 2022 and 2021.

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

Everspan's ability to make future dividend payments will mostly depend on its future profitability relative to its capital needs to support growth.

Everspan is not expected to pay dividends in the near term.

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).

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

Operating Companies' Liquidity

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

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

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

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

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.

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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.

In addition to the consolidated principal amounts of $2,283 as of June 30, 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 is obligated to pay principal on surplus notes held by AFG of $67.

AAC's future interest obligations include $79, subject to changes in interest rates, annually on the Sitka AAC Note through maturity on July 6, 2026, $678 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, 2023 (including surplus notes held by AFG), and Tier 2 Note interest that may be paid-in-kind until maturity on February 12, 2055 at which time $5,046 would be due.

The above amounts exclude surplus notes repurchased and held directly by AAC.

• Ambac Financial Services ("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.

AAC lends AFS cash and securities 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.

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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.

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

Three Months Ended March 31, 2022 2021

Six Months Ended June 30, 2022 2021

Cash provided by (used in):

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(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.

The receipt of $393 from AAC plus the existing cash assets of the consolidated trusts fully redeemed the trust certificates (AAC was the holder of $164 of the PRIFA trust certificates that were fully redeemed).

As a result of the AAC claim payments and associated full redemption of the trust certificates, the remaining non-cash assets of the trusts, valued at $111, were distributed to AAC.

Because these trusts are consolidated VIEs, this activity will be reflected as $274 payments of VIE liabilities in second quarter 2022 financing activities.

Operating activities

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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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

The following represents the significant cash operating activity during the six months ended June 30, 2022 and 2021:

• Debt service payments on the Sitka AAC Note were $32 for the six months ended June 30, 2022.

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

• Payments related to (i) operating expenses we re $54 and $45 for the six months ended June 30, 2022 and 2021, respectively;

and (ii) reinsurance premiums were $22 and $9 for the six months ended June 30, 2022 and 2021, respectively

• Cash provided by (i) premiums were $55 and $19 for the six months ended June 30, 2022 and 2021, respectively;

(ii) interest rate derivatives were $32 and $(3) for the six months

ended June 30, 2022 and 2021, respectively;

(iii) investment portfolio income were $29 and $44 for the six months ended June 30, 2022 and 2021, respectively;

and (iv) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts was $47 for the six months ended June 30, 2022.

• Net Legacy Financial Guarantee Insurance loss and loss expenses paid, including commutation payments, during the six months ended June 30, 2022 and 2021 are detailed below:

Six Months Ended June 30, 2022 2021

Net loss and loss expenses paid (recovered):

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Net cash flow $ 21 $ 38

Future operating 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, operating expenses, net claim and loss expense payments, investment coupon receipts and premium collections.

Financing Activities

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.

Financing activities for the six months ended June 30, 2022, included payments for extinguishment of surplus notes of $58, share repurchases of $14 and paydowns and maturities of VIE debt obligations of $359 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

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

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.

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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

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All collateral and margin obligations are currently met.

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.

Collateral and margin posted by AFS totaled a net amount of $98 (cash and securities collateral of $13 and $85, respectively), including independent amounts, under these contracts at June 30, 2022.

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

At June 30, 2022, there are no outstanding credit derivative contracts.

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.

Total assets decreased by approximately $2,242 from December 31, 2021, to $10,061 at June 30, 2022, primarily due to the settlement of VIE obligations (including the accelerated payment of the PRIFA and CCDA Trusts established in the first quarter of 2022), 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, repurchases of Ambac common stock and AAC surplus notes, lower premium receivables and intangible assets from the continued runoff of the financial guarantee insurance portfolio.

Total liabilities decreased by approximately $1,989 from December 31, 2021, to $9,198 as of June 30, 2022, primarily due to payments of VIE long-term debt, payments of loss and loss expenses, repurchases of AAC surplus notes and lower derivative liabilities caused by rising interest rates.

As of June 30, 2022, total stockholders’ equity was $846, 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.

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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.

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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,

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at June 30, 2022 and December 31, 2021:

Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated

June 30, 2022

Fixed maturity securities $ 1,314 $ 85 $ — $ 11 $ 1,410

Fixed maturity securities - trading 2 — — — 2

Short-term 313 24 — 115 452

Other investments 587 — — 11 598

Fixed maturity securities pledged as collateral 85 — — — 85

Total investments (1)

$ 2,301 $ 109 $ — $ 137 $ 2,547

December 31, 2021

Fixed maturity securities $ 1,631 $ 72 $ — $ 28 $ 1,730

Fixed maturity securities - trading — — — — —

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$ 2,688 $ 104 $ — $ 163 $ 2,955

(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.

(1) Includes investments denominated in non-US dollar currencies with a fair value of £295 ($360) and €34 ($36) as of June 30, 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 March 31, 2022 and December 31, 2021:

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The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at June 30, 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 20% and 32% of the March 31, 2022 and December 31, 2021 combined fixed maturity portfolio, respectively.

(2) Below investment grade and not rated bonds insured by Ambac represent 23% and 32% of the June 30, 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 $317 at March 31, 2022, from $323 at December 31, 2021.

Ambac's premium receivables decreased to $311 at June 30, 2022, from $323 at December 31, 2021.

As further discussed in Note 6.

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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.

At June 30, 2022, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $288 and $22, respectively.

Premium receivables by payment currency were as follows:

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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.

Ambac benefited from letters of credit and collateral amounting to approximately $108 from its reinsurers at June 30, 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.

As of June 30, 2022 and December 31, 2021, reinsurance recoverable on paid and unpaid losses were $55 and $55, respectively.

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.

Intangible assets primarily include (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 $284 at June 30, 2022, (ii) intangible assets established as part of the acquisition of Xchange (Insurance Distribution Segment) on December 31, 2020 of $32 at June 30, 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 June 30, 2022.

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As of June 30, 2022 and December 31, 2021, intangible assets were $330 and $362, respectively.

The decline is primarily due to amortization partially offset by the new intangible asset acquired during 2022.

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 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.

Derivative assets decreased from $76 at December 31, 2021, to $40 as of June 30, 2022.

Derivative liabilities decreased from $95 at December 31, 2021, to $61 as of June 30, 2022.

The net decreases resulted primarily from higher interest rates during the six months ended June 30, 2022.

Loss and Loss Expense Reserves and Subrogation Recoverable

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

Loss and loss expense reserves are based upon estimates of the ultimate aggregate losses inherent in the non-derivative portfolio

for insurance policies issued to beneficiaries, excluding consolidated VIEs.

The evaluation process for determining the level of reserves is subject to certain estimates and judgments.

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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 March 31, 2022 and December 31, 2021, were $(647) and $(522), respectively.

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The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of June 30, 2022 and December 31, 2021, were $(647) and $(522), respectively.

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

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Expenses Recoveries (1)

March 31, 2022:

June 30, 2022:

Loss and loss expense reserves $ 44 $ 1,101 $ (87) $ (38) $ 1,019

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Totals $ 32 $ 1,837 $ (2,335) $ (56) $ (522)

(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.

(1) Present value of future recoveries includes R&W subrogation recoveries of $1,484 and $1,730 at June 30, 2022 and December 31, 2021, respectively.

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Legacy Financial Guarantee Insurance:

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These bond types represent 94% of our ever-to-date insurance claims recorded, with RMBS comprising 72%.

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:

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at June 30, 2022 and December 31, 2021:

Outstanding (1)

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Expenses Recoveries

March 31, 2022:

June 30, 2022:

Structured Finance $ 2,185 $ 730 $ (1,664) $ (8) $ (942)

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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 $646 and $14 respectively, at March 31, 2022, and $784 and $24, respectively at December 31, 2021.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $504 and $14 respectively, at June 30, 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) 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.

(3) As a result of the Puerto Rico restructuring and the subsequent acceleration of the AAC insured PRIFA and CCDA bonds gross par outstanding was reduced by $593.

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.

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Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there can be no assurance that the ultimate liability will not be higher than such estimates.

It is possible that our estimated future losses for insurance policies discussed above could be understated or that our estimated future recoveries could be overstated.

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 March 31, 2022, 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 June 30, 2022, and, among other things, 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.

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.

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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Structured Finance Variability

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.

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

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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 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);

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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:

Additionally, our actual R&W subrogation recoveries could be significantly lower than our estimate of $1,462, net of reinsurance, as of June 30, 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.

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Student Loans:

Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other factors, including the COVID-19 related economic impact.

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

Structured Finance Variability:

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at March 31, 2022, could be approximately $20.

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 June 30, 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 $1,482.

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

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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Due to the uncertainties related to risks associated with structured finance credits, there can be no assurance that losses may not exceed our stress case estimates.

Domestic Public Finance Variability:

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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 because of the continuing effects of COVID-19 pandemic.

Additionally, our loss reserves may be under-estimated because of the local, regional or national economic impact from public health crises and/or natural or other catastrophic events.

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.

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In the COFINA case, the senior bonds still received a reduction or "haircut" despite the existence of junior COFINA bonds, which received a recovery rate equal to about 56% of pre-petition amounts owed.

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In addition, municipal entities may be more inclined to use bankruptcy to resolve their financial stresses if they believe preferred outcomes for various creditor groups can be achieved.

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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.

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;

PRHTA is subject to a plan support agreement and will be subject to the PRHTA POA that was filed on May 2, 2022, and that is expected to be confirmed in late third quarter or early fourth quarter 2022, following the PRHTA POA plan confirmation hearing scheduled for August 17-18, 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 as it relates to the Interim Distribution of Clawback CVI to PRHTA creditors and to new PRHTA bonds or cash under PRHTA POA;

(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;

(iii) whether and when the PRHTA POA will be confirmed and whether or not it will be confirmed in substantially the same form as currently drafted;

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.

Insurance Contracts and Note 14.

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 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.

Material additional losses on our public finance credits caused by the aforementioned factors would have a material adverse effect on our results of operations and financial condition.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at June 30, 2022, the possible

increase in loss reserves could be approximately $195 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 $345 greater than the loss reserves at March 31, 2022.

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 $310 greater than the loss reserves at June 30, 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

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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:

The carrying value of each of these as of June 30, 2022 and December 31, 2021 is below:

2022 December 31, 2021

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Total Long-term Debt $ 2,189 $ 2,230

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.

The decrease in long-term debt from December 31, 2021, resulted from repurchases of surplus notes, partially offset by accretion on the carrying value of Sitka AAC Note, and Ambac UK debt and paid-in-kind interest on Tier 2 notes.

VARIABLE INTEREST ENTITIES

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Please refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and in Part I, Item 1 on this Form 10-Q for a discussion of the impact of other recent accounting pronouncements on Ambac’s financial condition and results of operations.

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Item 1 on this Form 10-Q for a discussion of the impact of other recent accounting pronouncements on Ambac’s financial condition and results of operations.

INSURANCE STATUTORY BASIS FINANCIAL RESULTS ($ in million)

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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, 2021.

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 $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.

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $700 and $1,283 at June 30, 2022, respectively, as compared to $757 and $1,322 at December 31, 2021, respectively.

As of June 30, 2022, statutory policyholder surplus and qualified statutory capital included $788 principal balance of surplus notes outstanding and $138 liquidation preference of preferred stock outstanding.

These surplus notes (in addition to related accrued interest of $612 that is not recorded under statutory basis accounting principles);

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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.

The driver to the net decrease in policyholder surplus was (i) the repurchase of surplus notes for $58, (ii) contingency reserve contribution of $18, and (iii) decrease in fair value with undistributed earnings (losses) of pooled funds of $14, partially offset by statutory net income of $32 for the six months ended June 30, 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.

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 $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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Everspan Indemnity Insurance Company’s statutory policyholder surplus was $109 at June 30, 2022, as compared to $106 at December 31, 2021.

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 £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.

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 £452 at June 30, 2022, as compared to £444 at December 31, 2021.

At June 30, 2022, the carrying value of cash and investments was £503, 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.

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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 £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.

Available capital resources under Solvency II were a surplus of £287 at June 30, 2022, the most recently published position, of which £282 were eligible to meet solvency capital requirements.

Eligible capital resources at June 30, 2022, were in comparison to regulatory capital requirements of £228.

Therefore, Ambac UK had a surplus of capital resources as compared to regulatory capital requirements of £54 at June 30, 2022.

NON-GAAP FINANCIAL MEASURES

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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.

stockholders’ equity for adjusted book value.

A non-GAAP financial measure is a numerical measure of financial performance or financial position

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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 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.

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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 for both Adjusted Earnings and Adjusted Book Value;

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.

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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:

Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated

Three Months Ended June 30, 2022

Pretax income (loss) (1)

$ 7 $ (1) $ — $ 1 $ 6

Interest expense 45 — — — 45

Depreciation — — — — —

Amortization of intangible assets 13 — 1 — 13

Net (gain) attributable to noncontrolling interest — — —

Earnings before interest, taxes, depreciation and amortization $ 65 $ (1) $ 1 $ 1 $ 65

Three Months Ended June 30, 2021

Pretax income (loss) (1)

$ (16) $ (2) $ — $ — $ (18)

Interest expense 50 — — — 50

Depreciation — — — — —

Amortization of intangible assets 13 — 1 — 14

Net (gain) attributable to noncontrolling interest — —

Earnings before interest, taxes, depreciation and amortization $ 47 $ (2) $ 1 $ — $ 46

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Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated

Three Months Ended March 31, 2022

Six Months Ended June 30, 2022

Pretax income (loss) (1)

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Earnings before interest, taxes, depreciation and amortization $ 130 $ (4) $ 3 $ (3) $ 126

Three Months Ended March 31, 2021

Six Months Ended June 30, 2021

Pretax income (loss) (1)

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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 March 31,

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

2022 2021 2022 2021

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

$ Amount Per Diluted Share (1)

Net income (loss) attributable to common stockholders $ 5 $ 0.11 $ (29) $ (0.63) $ 7 $ 0.15 $ (12) $ (0.54)

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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.

This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis.

This non-GAAP

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adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis.

In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR.

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• 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.

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

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

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Adjusted book value $ 773 $ 17.20 $ 874 $ 18.88

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).

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 six months ended June 30, 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 March 31, 2022, there were no material changes in the market risks that the Company is exposed to since December 31, 2021.

As of June 30, 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