What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-08 · 353 added, 354 removed, 774 unchanged (48% of the section changed)

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

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

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

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

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

As of September 30, 2022, AFG's stand alone net assets, excluding its equity investments in subsidiaries, were $223.

Cash and short-term investments $ 112

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(1) Includes surplus notes (fair value of $69) 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.

(2) Includes strategic minority investments in insurance services businesses of $24, including investments of $5 made during 2022.

From April 1, 2022, through September 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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46 2022 Second Quarter FORM 10-Q |

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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 and six months ended June 30, 2022 were as follows:

Three and six months ended June 30 Three Months Six Months

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

Three and nine months ended September 30, Three Months Nine Months

Gross premiums written $ 30 $ 95

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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.

(1) Represents Ambac's stockholders equity in 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.

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

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.

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

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

Insurance Distribution Segment

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

Three and six months ended June 30 Three Months Six Months

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

Three and nine months ended September 30, Three Months Nine Months

Premiums placed $ 28 $ 97

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(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.

(2) Represents Ambac's stockholders equity in the Insurance Distribution segment, including intercompany eliminations.

On November 7, 2022, Ambac acquired controlling interests in All Trans Risk Solutions, LLC and Capacity Marine Corporation, adding approximately $60 of annual premiums placed to the Insurance Distribution segment, for a collective purchase price of $26.

Refer to Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further details on these acquisitions.

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 and six months ended June 30, 2022 were as follows:

Three and six months ended June 30 Three Months Six Months

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

Three and nine months ended September 30, Three Months Nine Months

Net premiums earned $ 7 $ 31

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Operating expenses 20 64

Interest expense 49 138

Pretax income (loss) $ 349 $ 362

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Adversely Classified Credit Net Par Outstanding $ 4,979

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

(1) Represents Ambac's stockholders equity in 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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These strategic cash needs include activities associated with Ambac's liability management and loss mitigation programs.

In October 2022, AAC entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Bank of America Corporation and certain affiliates thereof (together, the “BOA Parties”) whereby the BOA Parties paid AAC the sum of $1,840 (the “Settlement Payment”) in October 2022.

In connection with the Settlement Payment, as required under the terms of AAC's secured debt, AAC utilized $1,431 of the Settlement Payment to redeem a majority of the principal and accrued interest of its secured debt.

Following these redemptions, current principal outstanding on AAC's long-term debt consisted of $143 of Tier 2 Notes and $788 current par of surplus notes (including $67 of surplus notes held by AFG).

Refer to Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further details of the Settlement Agreement and related impacts on Ambac's Statement of Comprehensive Income.

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Asset Management

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

At September 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.

At September 30, 2022, AAC owned $87 of Sitka Senior Secured Notes within Fixed Maturity Securities in the Consolidated Balance Sheet.

As further discussed in Note 1.

Background and Business Description, the Sitka Senior Secured Notes were fully redeemed effective as of October 29, 2022, and Ambac will recognize an investment gain on these investments of $5 during the fourth quarter of 2022.

Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase or sell Ambac-insured securities, surplus notes and/or other Ambac issued securities, and may consider opportunities to exchange securities issued or insured 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 $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.

Ambac completed risk reduction transactions consisting of refinancings and commutations of $169 and $1,357 of net par exposure for the three and nine months ended September 30, 2022, of which $584 related to Puerto Rico for the nine months ended September 30, 2022.

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 June 30, 2022 and December 31, 2021.

Ambac also recovered losses on insured RMBS pursuant to the Settlement Agreement with Bank of America Corporation and related entities, as discussed in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements included in this Form 10-Q.

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

Net par exposure within the U.S.

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

September 30,

2022 December 31,

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Watch list 3,184 3,824 (640) (17) %

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

The decrease in total and ACC credit net par outstanding resulted from active de-risking, and strengthening of the USD versus the GBP and EURO, as well as scheduled maturities, amortizations, refundings and calls.

Russia and Ukraine Conflict

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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 six months ended June 30, 2022, included the following:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the nine months ended September 30, 2022, included the following:

Net income (1)

Gain (loss) on foreign currency translation (net of tax) (78)

Unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax) 9

Gain (loss) on foreign currency translation (net of tax), included in other comprehensive income (136)

Foreign currency impact on unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax), included in other comprehensive income 17

Impact on total comprehensive income (loss) $ (105)

(1) A portion of Ambac UK's, and to a lesser extent AAC's, assets and liabilities are denominated in currencies other than its functional currency and accordingly, we recognized net foreign currency transaction gains/(losses) as a result of changes to foreign currency rates through our Unaudited Consolidated Statement of Total Comprehensive Income (Loss).

(1) A portion of Ambac UK's, and to a lesser extent AAC's, assets and liabilities are denominated in currencies other than its functional currency.

Other than the foreign currency impact on unrealized gains (losses) on available-for-sale securities, which is included in Other comprehensive income, foreign currency transaction gains/(losses) as a result of changes to foreign currency rates are reported through Net income in the Unaudited Consolidated Statement of Total Comprehensive Income (Loss).

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, 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,

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

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

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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 some 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 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

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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”).

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

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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.

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

Net par exposures within the U.S.

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

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

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

September 30,

2022 December 31,

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Total net par outstanding $ 24,063 $ 28,020

(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

(1) Includes $5,424 and $5,490 of Military Housing net par outstanding at September 30, 2022 and December 31, 2021, respectively.

(2) Includes $467 and $1,054 of Puerto Rico net par outstanding at September 30, 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 September 30, 2022:

Risk Name Country-Bond Type Ambac

Outstanding % of Total

IF AUK Anglian Water UK-Utility A- 2035 $ 820 3.4 %

IF AUK Capital Hospitals plc (2)

UK-Infrastructure A- 2046 810 3.4 %

IF AUK Anglian Water UK-Utility A- 2035 874 3.5 %

IF AUK Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations BBB 2033 719 3.0 %

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UK-Infrastructure BBB- 2040 470 2.0 %

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

PF AAC Hickam Community Housing LLC US-Housing Revenue BBB- 2052 452 1.9 %

Total $ 6,338 26.5 %

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Net par related to the top ten exposures reduced $987 from 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.

Exposures are impacted by changes in foreign exchange rates ($1,045 reduction during the nine months ended September 30, 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) was 27% at September 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 $450 and a median net par outstanding of $5.

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

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

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

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Net Par Outstanding

($ in millions) June 30, 2022 December 31, 2021

($ in millions) September 30, 2022 December 31, 2021

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

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

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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 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

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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.

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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.

AAC's remaining unrestructured PROMESA Puerto Rico exposure, PRHTA, is subject to the PRHTA Plan of Adjustment ("PRHTA POA"), which is expected to become effective in the fourth quarter of 2022 following a confirmation order entered by Judge Laura Taylor Swain, U.S.

District Judge for the District of Puerto Rico on October 12, 2022.

PRHTA/CCDA PSA

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

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

The new PRHTA bonds or cash will be distributed to creditors upon consummation of the PRHTA POA, which, following the confirmation of the plan on October 12, 2022, is expected to occur prior to December 31, 2022.

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 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 amount 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.

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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”).

The first option allowed 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.

(i) their respective shares of certain consideration available under PRHTA/CCDA PSA, including the aforementioned Interim Distribution of cash and Clawback CVI from Ambac 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.

Approximately 21% of PRHTA 98 bondholders, by par outstanding, elected treatment under this first option.

Under the second option, the bondholders’ respective shares of consideration, or the proceeds thereof, related to the Interim Distribution from Ambac 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.

Approximately 79% of PRHTA 98 bondholders, by par outstanding, elected treatment under this second option.

In addition, on the PRHTA plan effective date, all AAC-insured PRHTA 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 Eight Amended POA, as it relates to the PRHTA Interim Distribution, and under the PRHTA POA;

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

and (iii) other factors, 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.

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Exposure Currency

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

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

Currency Net Par Amount

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Total $ 24,063

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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 June 30, 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 June 30,

Bond Type September 30,

2022 December 31,

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Total $ 4,215 $ 5,438

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

The net decline in below investment grade exposures is primarily due to de-risking activities, including the Puerto Rico restructuring, and foreign exchange losses of $164.

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

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)

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A summary of our financial results is shown below:

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

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

2022 2021 2022 2021

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Net income (loss) attributable to common stockholders $ 340 $ 17 $ 347 $ 5

Ambac's results for the three and six months ended June 30, 2022 were significantly impacted by the following:

Ambac's results for the three and nine months ended September 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.

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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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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.

DLJ Mortgage Capital, Inc.

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

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

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

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

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three and six months ended June 30, 2022 and 2021, respectively.

• During the three and nine months ended September 30, 2022 management recorded an increase to AAC’s estimated R&W subrogation recoveries in the amount of $319 and $80, respectively.

The change in recorded RMBS R&W recoveries is primarily attributable to the impact of the Settlement Agreement with Bank of America Corporation and certain affiliates thereof described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements in this Form 10-Q.

AAC’s ultimate recoveries in its remaining RMBS litigation 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 and nine months ended September 30, 2022 and 2021, respectively.

Gross Premiums Written.

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.

Gross premiums written increased $18 and $90 for the three and nine months ended September 30, 2022, compared to the same periods in the prior year, as shown by segment below.

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

2022 2021 2022 2021

Legacy Financial Guaranty Insurance $ (13) $ (5) $ (12) $ (13)

Specialty Property & Casualty Insurance 30 4 95 6

Total $ 16 $ (1) $ 83 $ (6)

Legacy Financial Guarantee Insurance negative gross written premiums relate to reductions in expected and contractual premium cash flows.

Net 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 premiums earned decreased $0 and increased $3 for the three and nine months ended September 30, 2022, compared to the same periods in the prior year as shown by segment below.

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

2022 2021 2022 2021

Legacy Financial Guaranty Insurance $ 7 $ 11 $ 31 $ 36

Specialty Property & Casualty Insurance 4 — 8 —

Total $ 11 $ 11 $ 39 $ 36

The reduction in Legacy Financial Guarantee Insurance segment was primarily due to run-off of the insured portfolio, de-risking activities and the impact from the strengthening of the US dollar relative to the British Pound Sterling.

Net Investment Income.

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

Net investment income primarily consists of interest and net discount accretion on fixed maturity securities classified as available-for-sale, interest and changes in

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58 2022 Third Quarter FORM 10-Q |

fair value of fixed maturity securities classified as trading, and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets.

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

3 unchanged sentences

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

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

financial guarantee segment;

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

other segments' results were not significant.

2 unchanged sentences

and Other investments is summarized in the table below:

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

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

2022 2021 2022 2021

4 unchanged sentences

Net investment income (loss) $ 11 $ 21 $ (6) $ 112

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.

Net investment income (loss) decreased $11 and $118 for the three and nine months ended September 30, 2022, respectively, compared to the prior year periods.

• Other investments income (loss) decreased $13 and $103 for the three and nine months ended September 30, 2022, respectively, compared to the same periods in the prior year.

The three and nine months ended September 30, 2022, included losses of $1 and $22 on securities received in the Puerto Rico restructuring which are classified as trading.

Pooled fund investments results decreased $12 and $81 for the three and nine months ended September 30, 2022, respectively, compared to the prior year periods.

Results of most fund categories decreased for the three months ended September 30, 2022 compared to third quarter 2021, with the largest declines in hedge funds, equities and real estate.

The decrease for the nine months ended September 30, 2022 were driven primarily by market losses in equities, hedge funds and high-yield and leveraged loan funds, all of which performed well in the comparable prior year period.

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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54 2022 Second Quarter FORM 10-Q |

• Net investment income from Ambac-insured securities for the three and nine months ended September 30, 2022 decreased $1 and $19 compared to the prior year periods, due primarily to different levels of secured note holdings, the impact of the March 15, 2022, Puerto Rico restructuring and continued runoff of AAC-insured RMBS.

LSNI secured notes were held until redeemed in July 2021.

Sitka Senior Secured Notes were purchased in the second and third quarters of 2022.

• Net investment income from available-for-sale and short-term securities, other than Ambac-insured increased for the three and nine months ended September 30, 2022, compared to the same periods in the prior year due to higher portfolio yields.

Net Investment Gains (Losses), including Impairments.

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

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

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

2022 2021 2022 2021

4 unchanged sentences

Net investment gains (losses), including impairments $ 14 $ 3 $ 31 $ 4

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.

Net gains for the three and nine months ended September 30, 2022, included $4 from the distribution of residual assets of a legacy financial guarantee student loan restructuring vehicle.

Net gains for the nine months ended September 30, 2022, also 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 nine months ended September 30, 2021, included a gain of $4 realized on the sale AFG's equity interest in the Corolla Trust in connection with the Corolla Exchange Transaction.

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

2 unchanged sentences

If management either:

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

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

Net Gains (Losses) on Derivative Contracts.

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

Net gains (losses) on derivative contracts include results from the

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59 2022 Third Quarter FORM 10-Q |

Company's interest rate derivatives portfolio and its runoff credit derivatives portfolio.

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

1 unchanged sentence

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.

Net gains (losses) on interest rate derivatives for the three and nine months ended September 30, 2022, were $37 and $122 compared to $5 and $18 for the three and nine months ended September 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.

The improved results for the three and nine months ended September 30, 2022, resulted from the significant rate increases in the periods combined with favorable portfolio positioning, and the impact of changing 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.

2 unchanged sentences

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.

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 $6 for the three and nine months ended September 30, 2022, respectively, and $2 and $8 for the three and nine months ended September 30, 2021, respectively.

The lower counterparty credit adjustments for all periods were driven primarily by lower underlying asset values.

Commissions Income.

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.

Commission income for the three and nine months ended September 30, 2022 was $7 and $22 compared to $7 and $20, for the three and nine months ended September 30, 2021.

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

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.

The increase was driven by greater premiums placed by Xchange Benefits.

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 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.

For the three and nine months ended September 30, 2022 Sub-producer commissions of $4 and $13 compared to $4 and $11 in three and nine months ended September 30, 2021.

Net Realized Gains on Extinguishment of Debt.

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.

Net realized gains on extinguishment of debt was $57 for nine months

ended September 30, 2022, resulting from repurchases of surplus notes below their carrying values.

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

Refer to Note 1.

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

AAC may continue to repurchase surplus notes and other debt in future periods.

Income (Loss) on Variable Interest Entities.

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55 2022 Second Quarter FORM 10-Q |

subsidiaries, including gains or losses attributable to consolidating or deconsolidating FG VIEs during the periods reported.

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

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

4 unchanged sentences

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 (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.

Income (loss) on variable interest entities was $(1) and $14 for the three and nine months ended September 30, 2022, respectively, compared to $3 and $5 for the three and nine months ended September 30, 2021.

Results for the three months ended September 30, 2022, related to decline in fair value of net assets on VIEs driven by higher market discount rates.

Results for the nine months ended September 30, 2022, related primarily to two VIE trusts created in connection with the Puerto Rico restructurings in March 2022.

The nine months ended September 30, 2022 included the initial $28 gain upon consolidation on March 15, 2022, losses of $8 from changes to fair value of these VIEs' assets, and losses of $4 from these VIEs driven by interest costs.

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

Results for the nine months ended September 30, 2022 and 2021 included realized gains of $2 and $2, respectively, on sales of assets, together with higher valuation of net assets on VIEs.

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Refer to Note 9.

1 unchanged sentence

Losses and Loss Expenses.

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.

Loss and loss expenses decreased $(298) and $(268) for the three and nine months ended September 30, 2022, compared to the same periods in the prior year.

Legacy financial guarantee loss and loss expenses (benefit) were $(356) and $(347) for the three and nine months ended September 30, 2022.

Specialty Property and Casualty Insurance loss and loss expenses were $3 and $5 for the three and nine months ended September 30, 2022.

Legacy financial guarantee loss and loss expenses (benefit) for the three months ended September 30, 2022, were largely driven impact of the Settlement Agreement with Bank of America Corporation and certain affiliates of approximately $319 as described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements in this Form 10-Q.

Legacy financial guarantee loss and loss expenses (benefit) for the nine months ended September 30, 2022, were driven by favorable loss development in domestic public finance (primarily due to the Puerto Rico restructuring), favorable RMBS development due to the positive impact of discount rates, and the impact of the Settlement Agreement with Bank of America Corporation and certain affiliates thereof of $80.

Intangible Amortization.

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.

Insurance intangible amortization for the three and nine months ended September 30, 2022, was $5 and $32, a decrease of $5 as compared to the the three months ended September 30, 2021 and a decrease of $10 over the nine months ended September 30, 2021.

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

Other intangible amortization for the three and nine months ended September 30, 2022, was $1 and $2, respectively unchanged from the three and nine months ended September 30, 2021.

Operating Expenses.

1 unchanged sentence

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

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

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

2022 2021 2022 2021

2 unchanged sentences

Gross operating expenses 31 28 102 93

Sub-producer Commissions 4 4 13 11

Amortization of deferred acquisition costs 3 — 7 —

1 unchanged sentence

Total operating expenses $ 37 $ 32 $ 104 $ 94

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;

The increase in gross operating expenses during the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 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 and higher incentive compensation expense including the impact of performance factor adjustments.

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

Specialty Property and Casualty Insurance segment auditing, 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.

These items were partially offset for the nine months comparative periods by first quarter 2021 advisory 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:

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56 2022 Second Quarter FORM 10-Q |

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

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

2022 2021 2022 2021

7 unchanged sentences

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

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.

The increase in interest expense for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was mainly driven by higher rates on the Sitka AAC note.

The decrease in interest expense for the nine months ended September 30, 2022, compared to the nine months ended September 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.

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

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

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

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of June 7, 2022.

As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, shall be extended until OCI grants approval to make the payment.

2 unchanged sentences

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

Total accrued and unpaid interest for surplus notes outstanding to third parties were $559 at June 30, 2022.

Total accrued and unpaid interest for surplus notes outstanding to third parties were $575 at September 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 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.

The provision for income taxes for the three months ended September 30, 2022 and 2021, was $2, and $2 respectively, a decrease of $0.

The provision for income taxes reported for nine months ended September 30, 2022 and 2021 was $4 and $15, respectively, a decrease of $11, resulting primarily from the 2021 effect on the deferred tax liability of enactment of an increase in UK tax rates from 19% to 25%.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

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

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

2022 2021 2022 2021

10 unchanged sentences

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

403 81 533 221

Interest expense 49 44 138 144

3 unchanged sentences

Stockholders equity (1)

(1) Abbreviated as "EBITDA" in future references

(2) 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.

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

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.

2 unchanged sentences

Net premiums earned.

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 decreased $4 and $5 for the three and nine months ended September 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 $3 for the for the three and six months ended June 30, 2022, as

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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.

The positive impact on net premiums earned related to credit losses amounted to $1 and $3 for the for the three and nine months ended September 30, 2022, as compared to $1 and $7 for the three and nine months ended September 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 $5 for the for the three and nine months ended September 30, 2022, as compared to $1 and $1 for the three and nine months ended September 30, 2021.

Losses and Loss Expenses.

1 unchanged sentence

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

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

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

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

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

Ambac has recorded representation and warranty subrogation recoveries, net of reinsurance, of $1,785 and $1,704 at September 30, 2022, and December 31, 2021, respectively.

Refer to Note 2.

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

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

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

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

2022 2021 2022 2021

3 unchanged sentences

$ (356) $ (55) $ (347) $ (73)

(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.

(1) Includes loss expenses incurred of $19 and $27 for the three and nine months ended September 30, 2022, respectively, and $19 and $42 for the three and nine months ended September 30, 2021, respectively.

Loss and loss expenses (benefit) for the three months ended September 30, 2022, were largely driven impact of the Settlement Agreement with Bank of America Corporation and certain affiliates of approximately $319 as described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements in this Form 10-Q.

Losses and loss expenses (benefit) for the nine months ended September 30, 2022, were driven by favorable loss development in domestic public finance (primarily due to the Puerto Rico restructuring), favorable RMBS development due to the positive impact of discount rates, and the impact of the Settlement Agreement with Bank of America Corporation and certain affiliates thereof of $80.

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

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

Operating Expenses.

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.

The increases in operating expenses of $2 and $5 during the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, is 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 June 30, Six Months Ended June 30,

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

2022 2021 2022 2021

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Operating expenses 4 2 11 5

Other expense — — — —

Total 7 2 16 5

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

EBITDA (1) $ (2) (5) $ (4)

Pretax income (loss) $ (1) $ (2) $ (5) $ (4)

Loss and LAE Ratio 66.5 % NM

Combined Ratio 160.8 % NM

Loss and LAE Ratio 65.2 % NM 65.7 % NM

Combined Ratio 150.8 % NM 176.5 % NM

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.

(1) Represents Ambac stockholders equity in 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.

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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58 2022 Second Quarter FORM 10-Q |

premiums written, net premiums earned and net loss and loss expenses incurred.

Thirteen programs were authorized to issue policies as of September 30, 2022.

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

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

5 unchanged sentences

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 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.

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On September 28, 2022, Hurricane Ian reached landfall resulting in significant damage primarily in the states of Florida and South Carolina.

Everspan's estimate of its losses and loss expenses is minimal and to date has received one claim related to Hurricane Ian.

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 September 30, 2022, compared to the three month period ended September 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 nine months ended September 30, 2022, relative to the nine months ended September 30, 2021.

Insurance Distribution

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

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

2022 2021 2022 2021

5 unchanged sentences

Net (gain) attributable to noncontrolling interest — — (1) (1)

Earnings before interest, taxes, depreciation and amortization 1 1 3 3

EBITDA 1 1 4 4

Depreciation — — — —

4 unchanged sentences

(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.

Ambac's Insurance Distribution segment currently includes Xchange Benefits, a P&C MGA specializing in accident and health products.

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

1 unchanged sentence

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.

Xchange underwrote and placed premiums for its carriers of approximately $28 and $97 for the three and nine months ended

September 30, 2022, unchanged and up $6 or 7% as compared to the three and nine months ended September 30, 2021, respectively.

Higher premiums placed and shifts in mix of business 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.

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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.

Other operating expenses for the three and nine months ended September 30, 2022 increased slightly as compared to the three and nine months ended September 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 $218 as of June 30, 2022, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $223 as of September 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.

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

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

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

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

AFG supported the development of the Specialty P&C Insurance business, and its acquisitions, by contributing $15 of capital to Everspan Indemnity in the first nine months of 2022 and $92 in 2021, respectively.

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

AFG received distributions from Xchange of

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$4 and $5 during the nine months ended September 30, 2022 and 2021.

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

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Operating Companies' Liquidity

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

Sources of liquidity for the Company’s insurance subsidiaries are through funds generated from premiums;

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

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investment income and maturities and sales of investments.

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

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

timing of receipt of any such recoveries, including 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 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.

See Part I, Item 1A.

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

• See Note 6.

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

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

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

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

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

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

As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, OCI declined AAC's request to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on June 7, 2022.

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 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.

As further described in Note 1.

Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1

in this Form 10-Q, effective as of October 29, 2022, AAC wholly redeemed the Sitka AAC Note and partially redeemed Tier 2 Notes.

Following these redemptions, current principal outstanding on AAC's long-term debt consisted of $143 of Tier 2 Notes and $788 of surplus notes (including $67 of surplus notes held by AFG and eliminated in consolidation).

AAC's future interest obligations on long-term debt after giving effect to the redemptions on October 29, 2022 include $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 $2,030 would be due.

• 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.

2 unchanged sentences

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.

6 unchanged sentences

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

Six Months Ended June 30, 2022 2021

Nine Months Ended September 30, 2022 2021

Cash provided by (used in):

4 unchanged sentences

Net cash flow $ 14 $ (14)

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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.

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Operating activities

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

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

• Cash provided by (i) gross premiums were $100 and $29 for the nine months ended September 30, 2022 and 2021, respectively;

(ii) interest rate derivatives were $61 and $(5) for the nine months ended September 30, 2022 and 2021, respectively;

(iii) investment portfolio income were $59 and $66 for the nine months ended September 30, 2022 and 2021, respectively;

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

• Debt service payments on the Sitka AAC Note were $51 for the nine months ended September 30, 2022.

Debt service payments on the LSNI Ambac Note and Sitka AAC Note were $51 and $14, respectively, for the nine months ended September 30, 2021.

• Payments related to (i) operating expenses we re $75 and $65 for the nine months ended September 30, 2022 and 2021, respectively;

and (ii) reinsurance premiums paid were $43 and $20 for the nine months ended September 30, 2022 and 2021, respectively

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

Nine Months Ended September 30, 2022 2021

Net loss and loss expenses paid (recovered):

3 unchanged sentences

Net cash flow $ 24 $ 74

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.

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

Financing Activities

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.

Financing activities for the nine months ended September 30, 2022, included payments for extinguishment of surplus notes of $58, share repurchases of $14 and paydowns and maturities of VIE debt obligations of $404 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

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

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

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

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All collateral and margin obligations are currently met.

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.

Collateral and margin posted by AFS totaled a net amount of $77 (cash and securities collateral of $8 and $69, respectively), including independent amounts, under these contracts at September 30, 2022.

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BALANCE SHEET ($ in millions)

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.

Total assets decreased by approximately $2,891 from December 31, 2021, to $9,412 at September 30, 2022, primarily due to the reduction in asset values of VIEs of $2,352.

This decline was driven by increases in interest rates, the strengthening of the US dollar against the British Pound Sterling and assets used to fund VIE obligation repayments.

Additional declines in total assets were the result of (i) the payment of loss and loss expenses, interest and operating expenses, (ii) declines in invested asset values, (iii) lower derivative assets caused by rising interest rates, (iv) lower subrogation recoverables, (v) repurchases of Ambac common stock and AAC surplus notes, and (vi) lower premium receivables and intangible assets from the continued runoff of the financial guarantee insurance portfolio, partially offset by cash and securities received relating to the Interim Distribution from Puerto Rico HTA in connection with the PRHTA POA.

Total liabilities decreased by approximately $2,863 from December 31, 2021, to $8,324 as of September 30, 2022, primarily due to reductions in the value of VIEs liabilities of $2,294 (consistent factors as noted above in assets).

Additional liability declines driven by (i) payments of loss and loss expenses, (ii) repurchases of AAC surplus notes, and (iii) lower

derivative liabilities caused by rising interest rates;

partially offset by the establishment of a liability relating to the Interim Distribution received from Puerto Rico HTA that will need to be distributed by Ambac in connection with the PRHTA POA.

As of September 30, 2022, total stockholders’ equity was $1,071, 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 partially offset by net income for the nine months ended September 30, 2022.

Investment Portfolio

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Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, for further description of Ambac's investment policies and applicable regulations.

Refer to Note 4.

Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for information about Ambac's consolidated investment portfolio.

Ambac's investment policies and objectives do not apply to the assets of VIEs consolidated as a result of financial guarantees written by its insurance subsidiaries.

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

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

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

June 30, 2022

September 30, 2022

Fixed maturity securities $ 1,278 $ 94 $ — $ 12 $ 1,384

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$ 2,687 $ 104 $ — $ 164 $ 2,955

(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.

(1) Includes investments denominated in non-US dollar currencies with a fair value of £296 ($330) and €37 ($37) as of September 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.

3 unchanged sentences

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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:

67 2022 Third Quarter FORM 10-Q |

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at September 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 23% and 32% of the June 30, 2022 and December 31, 2021 combined fixed maturity portfolio, respectively.

(2) Below investment grade and not rated bonds insured by Ambac represent 22% and 32% of the September 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.

Premium Receivables

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

Ambac's premium receivables decreased to $268 at September 30, 2022, from $323 at December 31, 2021.

As further discussed in Note 6.

Insurance Contracts, the decrease is primarily due to activities in the Legacy Financial Guarantee Insurance Segment partially offset by growth in the Specialty P&C Insurance Segment.

The Legacy Financial Guarantee Insurance Segment declines are due to premium receipts, partially offset by decreases to the allowance for credit losses and accretion of the premium receivable discount.

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

The Legacy Financial Guarantee Insurance Segment declines are due to premium receipts, impact of foreign currency movements and adjustments for changes in expected and contractual cash flows, partially offset by accretion of the premium receivable discount and decreases to the allowance for credit losses.

At September 30, 2022, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $259 and $9, 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 $108 from its reinsurers at June 30, 2022.

Ambac benefited from letters of credit and collateral amounting to approximately $99 from its reinsurers at September 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 June 30, 2022 and December 31, 2021, reinsurance recoverable on paid and unpaid losses were $55 and $55, respectively.

As of September 30, 2022 and December 31, 2021, reinsurance recoverable on paid and unpaid losses were $80 and $55, respectively primarily due to growth in the Specialty P&C Insurance Segment, including an increase to reinsurance recoverables related to legacy liabilities which were $47 and $30 as of September 30, 2022 and December 31, 2021, respectively.

Intangible Assets

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.

68 2022 Third Quarter FORM 10-Q |

Xchange (Insurance Distribution Segment) on December 31, 2020 of $31 at September 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 September 30, 2022.

As of September 30, 2022 and December 31, 2021, intangible assets were $318 and $362, respectively.

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

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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 $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.

Derivative assets decreased from $76 at December 31, 2021, to $28 as of September 30, 2022.

Derivative liabilities decreased from $95 at December 31, 2021, to $40 as of September 30, 2022.

The net decreases resulted primarily from higher interest rates during the nine months ended September 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 June 30, 2022 and December 31, 2021, were $(647) and $(522), respectively.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of September 30, 2022 and December 31, 2021, were $(940) 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)

June 30, 2022:

September 30, 2022:

Loss and loss expense reserves $ 75 $ 1,174 $ (205) $ (34) $ 1,009

5 unchanged sentences

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

(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.

(1) Present value of future recoveries includes R&W subrogation recoveries of $1,811 and $1,730 at September 30, 2022 and December 31, 2021, respectively.

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Legacy Financial Guarantee Insurance:

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These bond types represent 93% of our ever-to-date insurance claims recorded, with RMBS comprising 73%.

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:

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

Outstanding (1)

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Expenses Recoveries

June 30, 2022:

September 30, 2022:

Structured Finance $ 2,073 $ 670 $ (1,968) $ (8) $ (1,306)

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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 $504 and $14 respectively, at June 30, 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 $525 and $10 respectively, at September 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.

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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 June 30, 2022, and, among other things, 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 September 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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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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We utilize a model to project losses in our RMBS exposures and changes to reserves, either upward or downward, are not unlikely if we used a different model or methodology to project losses.

In the case of both first and second-lien exposures, the possible stress case assumes a lower housing price appreciation projection, which in turn drives higher defaults and severities.

We established a representation and warranty subrogation recovery as further discussed in Note 6.

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

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

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

delays in realizing such recoveries, including as a result of trial delays due to court closures related to COVID-19 or other events or circumstances (such as changes in law that affect any basis on which AAC seeks recovery);

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

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

For example, AAC expects the implications of the decision of the New York Court of Appeals in the case entitled U.S.

Bank National Association v.

DLJ Mortgage Capital, Inc.

relating to Home Equity Asset Trust 2007-1, a residential mortgage-backed securities trust, to be the subject of additional arguments, decisions and appeals in certain of its RMBS litigations as well as in unrelated cases.

Actions or decisions by trial or appellate courts regarding the implications of HEAT may significantly impact the manner in which AAC presents its case, AAC's ultimate recoveries, or the timing of trials or pre-trial procedures, filings or actions.

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

Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition.

Student Loans:

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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 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.

A loss of this magnitude may render AAC insolvent.

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at September 30, 2022, could be approximately $15.

Combined with the absence of any unsettled R&W subrogation recoveries, a possible increase in loss reserves for structured finance credits could be approximately $115.

Additionally, loss payments are sensitive to changes in interest rates, increasing as interest rates rise.

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Our experience with the city of Detroit's bankruptcy and Commonwealth of Puerto Rico's Title III proceedings as well as other municipal bankruptcies demonstrates the preferential treatment of certain creditor classes, especially the public pensions.

The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have significant exposure, such as Chicago's school district, the State of New Jersey and many others.

Chicago's school district, the State of New Jersey and many others.

Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors.

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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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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 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;

PRHTA is subject to the PRHTA POA that was confirmed October 12, 2022, and that is expected to become effective in the fourth quarter 2022.

However, uncertainty remains as to (i) the 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 the 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) 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.

and (iii) 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

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manner due to favorable or unfavorable developments or results with respect to these factors.

Insurance Contracts and Note 14.

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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.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at September 30, 2022, the possible increase in loss reserves could be approximately $145 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 $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.

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 $285 greater than the loss reserves at September 30, 2022.

There can be no assurance that losses may not exceed our stress case estimates.

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All long-term debt relates to the Legacy Financial Guarantee segment.

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

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

September 30,

2022 December 31, 2021

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Total Long-term Debt $ 2,201 $ 2,230

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.

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

The Sitka AAC Note was wholly redeemed and the Tier 2 Notes were partially redeemed following the receipt of recoveries under the Settlement Agreement with Bank of America Corporation and related entities in October 2022.

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

VARIABLE INTEREST ENTITIES

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Please refer to Note 2.

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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.

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.

INSURANCE STATUTORY BASIS FINANCIAL RESULTS ($ in million)

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Ambac Assurance Corporation

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.

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $870 and $1,457 at September 30, 2022, respectively, as compared to $757 and $1,322 at December 31, 2021, respectively.

As of September 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 $629 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 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 surplus notes, 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.

The driver to the net increase in policyholder surplus was the statutory net income of $211 for the

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nine months ended September 30, 2022, largely driven by the statutory net income impact of the Bank of America litigation settlement gain of $183 million, partially offset by (i) repurchase of surplus notes for $58, (ii) contingency reserve contribution of $21, and (iii) decrease in fair value with undistributed earnings (losses) of pooled funds of $16.

The Bank of America Settlement proceeds were received in October 2022.

AAC's 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 remaining 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 remaining balance of the Tier 2 Notes (after the partial repayment in October 2022), (iii) approval by OCI of payments on surplus notes, (iv) ongoing interest costs associated with surplus notes and Tier 2 Notes, (v) swap gains and losses at AFS, the financial position of which is supported by certain guarantees and financing arrangement from 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, (xi) the ultimate residual value of Ambac UK, which may be impacted by numerous factors including foreign exchange rates, and (xii) future changes to prescribed practices.

Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $109 at June 30, 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 six months ended June 30, 2022.

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

The significant drivers to the increase in policyholder surplus were capital contributions of $15 partially offset by the admitted asset limitation on goodwill within investment in subsidiaries, and operating expenses during the nine months ended September 30, 2022.

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 £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.

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 £466 at September 30, 2022, as compared to £444 at December 31, 2021.

At September 30, 2022, the carrying value of cash and investments was £526, 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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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.

A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP.

We 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:

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

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Pretax income (loss) (1)

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Earnings before interest, taxes, depreciation and amortization $ 403 $ (1) $ 1 $ (6) $ 397

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Pretax income (loss) (1)

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Earnings before interest, taxes, depreciation and amortization $ 81 $ (2) $ 1 $ (6) $ 74

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

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Pretax income (loss) (1)

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Earnings before interest, taxes, depreciation and amortization $ 533 $ (5) $ 4 $ (8) $ 523

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Pretax income (loss) (1)

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This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance.

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The following table reconciles net income (loss) attributable to common stockholders to the non-GAAP measure, Adjusted Earnings (loss) on a dollar amount and per diluted share basis, for all periods presented:

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

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

2022 2021 2022 2021

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$ Amount Per Diluted Share (1)

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

Net income attributable to common stockholders $ 340 $ 7.41 $ 17 $ 0.35 $ 347 $ 7.48 $ 5 $ (0.19)

Insurance intangible amortization 5 0.11 10 0.22 32 0.68 42 0.90

Foreign exchange (gains) losses (7) (0.15) (2) (0.04) (14) (0.30) 6 0.12

Adjusted earnings (loss) $ 13 $ 0.28 $ (13) $ (0.30) $ 27 $ 0.57 $ 27 $ 0.30

Adjusted earnings $ 338 $ 7.37 $ 25 $ 0.53 $ 365 $ 7.86 $ 53 $ 0.83

(1) Per Diluted share includes the impact of adjusting redeemable noncontrolling interest to its redemption value

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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

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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.

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

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

However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity.

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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:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

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

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Adjusted book value $ 1,040 $ 23.13 $ 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 six months ended June 30, 2022 (excluding earned premium previously included in Adjusted Book Value).

The increase in Adjusted Book Value since December 31, 2021 was primarily attributable to Adjusted earnings (excluding earned premium previously included in Adjusted Book Value), partially offset by the adverse effect foreign exchange losses and higher discount rates on the PV of legacy financial guarantee installment premiums.

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.

Net unearned premiums and fees in excess of expected losses will affect Adjusted Book Value for (i) changes to future premium assumptions (e.g.

Net unearned premiums and fees in excess of expected losses will affect Adjusted Book Value for (i) changes

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to future premium assumptions (e.g.

expected term, interest rates, foreign currency rates, time passage), (ii) changes to expected losses for policies which do not exceed their related unearned premiums and (iii) new reinsurance transactions.

Quantitative and Qualitative Disclosure About Market Risk

As of June 30, 2022, there were no material changes in the market risks that the Company is exposed to since December 31, 2021.

As of September 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