OCTAVE SPECIALTY GROUP INC 10-K

ambc-20221231 Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2022 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-10777 AMBAC FINANCIAL GROUP, INC. (Exact name of Registrant as specified in its charter) Delaware 13-3621676 (State of incorporation) (I.R.S. employer identification no.) One World Trade Center New York NY 10007 (Address of principal executive offices) (Zip code) (212) 658-7470 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbols Name of each exchange on which registered Common Stock, par value $0.01 per share AMBC New York Stock Exchange Warrants AMBC WS New York Stock Exchange Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”and"emerging growth company" in Rule 12b-2 of the Exchange Act): (Check one): Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of voting stock held by non-affiliates of the Registrant as of the close of business on June 30, 2022 was $ 510,068,047 . As of February 24, 2023, there were 45,287,112 shares of Common Stock, par value $ 0.01 per share, were outstanding. Documents Incorporated By Reference Portions of the Registrant’s Proxy Statement related to its annual meeting of stockholders are incorporated by reference in this Form 10-K in response to Part III Items 10, 11, 12, 13, and 14. Table of Contents AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995 1 Item Number Page Item Number Page PART I PART II (CONTINUED) 1 Business 2 Balance Sheet 46 Introduction 2 Accounting Standards 52 Description of the Business 2 U.S. Insurance Statutory Basis Financial Results 52 Enterprise Risk Management 9 Ambac UK Financial Results Under UK Accounting Principles 54 Available Information 10 Non-GAAP Financial Measures 54 Insurance Regulatory Matters and Other Restrictions 10 7A Quantitative and Qualitative Disclosures about Market Risk 57 Investments and Investment Policy 12 8 Financial Statements and Supplementary Data 59 Employees 13 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 133 1A Risk Factors 13 9A Controls and Procedures 133 1B Unresolved Staff Comments 25 9B Other Information 134 2 Properties 25 PART III 3 Legal Proceedings 25 10 Directors, Executive Officers and Corporate Governance 134 4 Mine Safety Disclosures 25 11 Executive Compensation 134 PART II 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 134 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 25 13 Certain Relationships and Related Transactions, and Director Independence 135 6 Reserved 26 14 Principal Accountant Fees and Services 135 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 PART IV Executive Summary 27 15 Exhibits, Financial Statement Schedules 135 Critical Accounting Policies and Estimates 30 Schedule I—Summary of Investment 139 Financial Guarantees in Force 32 Schedule II—Condensed Financial Information of Registrant (Parent Company Only) 140 Results of Operations 38 Schedule III—Supplementary Insurance Information 145 Liquidity and Capital Resources 44 SIGNATURES 146 Table of Contents CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 In this Annual Report, we have included statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A in this Annual Report on Form 10-K. Any or all of management’s forward-looking statements here or in other publications may turn out to be incorrect and are based on management’s current belief or opinions. Ambac Financial Group’s (“AFG”) and its subsidiaries’ (collectively, “Ambac” or the “Company”) actual results may vary materially, and there are no guarantees about the performance of Ambac’s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) the high degree of volatility in the price of AFG’s common stock; (2) uncertainty concerning the Company’s ability to achieve value for holders of its securities, whether from Ambac Assurance Corporation (“AAC”) and its subsidiaries or from the specialty property and casualty insurance business, the insurance distribution business, or related businesses; (3) inadequacy of reserves established for losses and loss expenses and the possibility that changes in loss reserves may result in further volatility of earnings or financial results; (4) potential for rehabilitation proceedings or other regulatory intervention or restrictions against AAC; (5) credit risk throughout Ambac’s business, including but not limited to credit risk related to insured residential mortgage-backed securities, student loan and other asset securitizations, public finance obligations (including risks associated with Chapter 9 and other restructuring proceedings), issuers of securities in our investment portfolios, and exposures to reinsurers; (6) our inability to effectively reduce insured financial guarantee exposures or achieve recoveries or investment objectives; (7) our inability to generate the significant amount of cash needed to service our debt and financial obligations, and our inability to refinance our indebtedness; (8) Ambac’s substantial indebtedness could adversely affect its financial condition and operating flexibility; (9) Ambac may not be able to obtain financing or raise capital on acceptable terms or at all due to its substantial indebtedness and financial condition; (10) greater than expected underwriting losses in the Company’s specialty property and casualty insurance business; (11) failure of specialty insurance program partners to properly market, underwrite or administer policies; (12) inability to obtain reinsurance coverage on expected terms; (13) loss of key relationships for production of business in specialty property and casualty and insurance distribution businesses or the inability to secure such additional relationships to produce expected results; (14) the impact of catastrophic public health, environmental or natural events, or global or regional conflicts, on significant portions of our insured portfolio; (15) credit risks related to large single risks, risk concentrations and correlated risks; (16) risks associated with adverse selection as Ambac’s financial guarantee insurance portfolio runs off; (17) the risk that Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss; (18) restrictive covenants in agreements and instruments that impair Ambac’s ability to pursue or achieve its business strategies; (19) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce financial guarantee risks in its insured portfolio; (20) disagreements or disputes with Ambac's insurance regulators; (21) loss of control rights in transactions for which we provide financial guarantee insurance; (22) inability to realize expected recoveries of financial guarantee losses; (23) risks attendant to the change in composition of securities in the Ambac’s investment portfolio; (24) adverse impacts from changes in prevailing interest rates; (25) events or circumstances that result in the impairment of our intangible assets and/or goodwill that was recorded in connection with Ambac’s acquisitions; (26) risks associated with the expected discontinuance of the London Inter-Bank Offered Rate; (27) factors that may negatively influence the amount of installment premiums paid to Ambac; (28) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith; (29) the Company’s ability to adapt to the rapid pace of regulatory change; (30) actions of stakeholders whose interests are not aligned with broader interests of Ambac's stockholders; (31) system security risks, data protection breaches and cyber attacks; (32) regulatory oversight of Ambac Assurance UK Limited (“Ambac UK”) and applicable regulatory restrictions may adversely affect our ability to realize value from Ambac UK or the amount of value we ultimately realize; (33) failures in services or products provided by third parties; (34) political developments that disrupt the economies where the Company has insured exposures; (35) our inability to attract and retain qualified executives, senior managers and other employees, or the loss of such personnel; (36) fluctuations in foreign currency exchange rates; (37) failure to realize our business expansion plans or failure of such plans to create value; (38) greater competition for our specialty property and casualty insurance business and/or our insurance distribution business; (39) loss or lowering of the AM Best rating for our property and casualty insurance company subsidiaries; (40) disintermediation within the insurance industry or greater competition from technology-based insurance solutions; (41) changes in law or in the functioning of the healthcare market that impair the business model of our accident and health managing general underwriter; and (42) other risks and uncertainties that have not been identified at this time. | Ambac Financial Group, Inc. 1 2022 FORM 10-K Table of Contents , PART I Item 1. Business INTRODUCTION Ambac Financial Group, Inc. ("AFG"), headquartered in New York City, is a financial services holding company incorporated in the State of Delaware on April 29, 1991 . References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires. Ambac operates three principal businesses: • Legacy Financial Guarantee ("LFG") Insurance — Ambac's financial guarantee business includes the activities of Ambac Assurance Corporation ("AAC") and its wholly owned subsidiaries, including Ambac Assurance UK Limited (“Ambac UK”) and Ambac Financial Services LLC ("AFS"). Both AAC and Ambac UK are financial guarantee insurance companies that have been in run-off, having not underwritten any new business since 2008. AFS uses interest rate derivatives to hedge interest rate risk in AAC's insurance and investment portfolios. • Specialty Property and Casualty Insurance — Ambac's Specialty Property and Casualty Insurance program business. Currently includes five admitted carriers and an excess and surplus lines (“E&S” or “nonadmitted”) insurer, Everspan Indemnity Insurance Company (all carriers collectively, “Everspan”). Three of the five admitted carriers were acquired in 2022. Everspan carriers have an AM Best rating of 'A-' (Excellent). • Insurance Distribution — Ambac's specialty property and casualty ("P&C") insurance distribution business, which could include Managing General Agents and Underwriters (collectively "MGAs" or "MGA/Us"), insurance wholesalers, brokers and other distribution businesses, currently includes Xchange Benefits, LLC (“Xchange”) a P&C MGA specializing in accident and health products, All Trans Risk Solutions, LLC ("All Trans"), an MGA/U specializing in commercial automobile insurance for specific "for-hire" auto clauses, and Capacity Marine Corporation ("Capacity Marine"), a wholesale and retail brokerage and reinsurance intermediary specializing in marine and international risk. Refer to Note 4. Business Combination in this Annual Report on Form 10-K, for further information relating to these acquisitions. Beginning in the first quarter of 2022, the Company began reporting these three business operations as segments; see Note 3. Segment Information for further information. AFG, on a standalone basis, had $223 million in net assets (excluding its investment in subsidiaries) and net operating loss carry-forwards of $ 3,454 million ($ 1,824 million of which is allocated to AAC) at December 31, 2022. See Schedule II for more information on the holding company. Strategies to Enhance Shareholder Value The Company's primary goal is to maximize long-term shareholder value through the execution of key strategies for its (i) Specialty Property and Casualty Insurance and Insurance Distribution businesses and (ii) Legacy Financial Guarantee Insurance. Specialty Property and Casualty Insurance and Insurance Distribution strategic priorities include: • Growing a Specialty Property and Casualty Insurance business which generates underwriting profits and an attractive return on capital from a diversified portfolio of commercial and personal liability risks accessed through program administrators. • Building an Insurance Distribution business based on deep domain knowledge in specialty and niche classes of risk which generate attractive margins at scale. This will be achieved through acquisitions, new business “de-novo” formation and incubation, and product expansion supported by a centralized technology led shared services offering. • Making opportunistic investments that are strategic to both the Specialty Property and Casualty Insurance and Insurance Distribution businesses. Legacy Financial Guarantee Insurance strategic priorities include: • Actively managing, de-risking and mitigating insured portfolio risk, and pursuing recovery of previously paid losses. • Improving operating efficiency and optimizing our asset and liability profile. • Exploring strategic options to further maximize value for AFG. DESCRIPTION OF THE BUSINESS Legacy Financial Guarantee Insurance: Financial guarantee insurance policies provide an unconditional and irrevocable guarantee which protects the holder of a debt obligation against non-payment when due of the principal and interest on the obligations guaranteed. Pursuant to such guarantees, AAC and Ambac UK make payments if the obligor responsible for making payments fails to do so when due. AAC and Ambac UK wrote the last insurance policy in 2008 and have been in run-off ever since. Ambac's Financial Guarantee business strategy is to increase the residual value of AAC and Ambac UK with the ultimate goal of monetizing such value through (i) dividends and capital distributions while managing their active run-off; (ii) one or more reinsurance transactions or other de-risking transactions that will accelerate or enhance the ability of AAC and/or Ambac UK to pay dividends and make capital distributions; (iii) the sale of all or portions of AAC and/or Ambac UK, or (iv) other strategic transactions to accelerate and/or enhance the above-stated corporate strategy. AAC and Ambac UK have been reducing risk within their insured portfolios and focusing on exposures to financially stressed municipal entities and asset- | Ambac Financial Group, Inc. 2 2022 FORM 10-K Table of Contents , backed securities as well as large and concentrated exposures. Opportunities for remediating losses on poorly performing insured transactions depend on a number of factors including market conditions, the structure of the underlying risk and associated policy, as well as counterparty specific factors. AAC's ability to remediate risk and commute policies may be limited by available liquidity. Additionally, AAC and Ambac UK are actively managing their regulatory frameworks and seeking to optimize capital allocation in a complex insured portfolio that includes long duration obligations. The execution of Ambac’s strategy to increase and monetize the residual value of AAC is subject to significant risk as well as the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC, as well as the Stipulation and Order among the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”), AFG and AAC that became effective on February 12, 2018, as amended (the “Stipulation and Order”), each of which requires OCI and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of AAC. In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of AFG. See Note 1. Background and Business Description to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information. Financial guarantee revenues consist mostly of premiums earned from run-off insurance contracts, net of reinsurance, and income on investments held in AAC's and Ambac UK's investment portfolios. Financial guarantee expenses consist of: (i) loss and commutation payments; (ii) loss adjustment expenses; (iii) interest expense on debt, (iv) operating expenses and (v) insurance intangible amortization. AAC has a significant amount of debt outstanding in the form of principal and accrued but unpaid interest on surplus notes. Surplus notes are treated as capital for regulatory purposes as the obligation to pay principal and interest on them is subordinated to the obligation to pay policyholder claims and such payments cannot be made without the explicit authorization of the OCI. OCI is developing a new capital framework ("OCI's Runoff Capital Framework") to assist OCI with making decisions related to AAC's capital and liquidity management. OCI's Runoff Capital Framework is not yet complete and therefore we are not able to predict the results of such and what it may mean for our Legacy Financial Guarantee strategy, particularly as it relates to deleveraging AAC and distributing capital to AFG. AAC’s ability to pay dividends to AFG has also been significantly restricted by the deterioration of AAC’s financial condition and by regulatory, legal and contractual restrictions. Substantial uncertainty remains as to AAC's ability to pay dividends to AFG and the timing of any such dividends, which constrains AFG's liquidity. Refer to "Dividend Restrictions, Including Contractual Restrictions" below and to Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in this Annual Report on Form 10-K, for more information on dividend payment restrictions. Interest rate derivative transactions are executed through AFS, a wholly-owned subsidiary of AAC. Interest rate derivatives are used to partially hedge interest rate risk in the financial guarantee insurance and investment portfolios. Accordingly, interest rate derivatives are positioned to benefit from rising rates. AFS is required to post collateral in excess of the market value of interest rate derivatives when they are in a mark-to-market loss position. Early termination of AFS’s derivatives could result in losses. AFS has borrowed cash and securities from AAC to help support its collateral and margin posting requirements, termination payments and other cash needs. Given the reduction in the size of the financial guarantee insured portfolio, recent interest rate increases and other considerations, the size of the interest rate derivatives portfolio was materially reduced in the fourth quarter of 2022 and may be further reduced or eliminated in the future. AFS also maintains a few interest rate derivatives with legacy financial guarantee customers, the exposure to which is fully hedged. Ambac manages a variety of risks inherent in its businesses, including credit, market, liquidity, operational and legal. These risks are identified, measured, and monitored through a variety of control mechanisms, which are in place at different levels throughout the organization. See “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, Item 7A in this Annual Report on Form 10-K for further information. Risk Management Ambac’s financial guarantee insurance policies expose the Company to the direct credit risk of the assets and/or obligor supporting the guaranteed obligation. In addition, insured transactions expose Ambac to indirect risks that may increase our overall risk, such as credit risk separate from, but correlated with, our direct credit risk; market; model; economic, including the risk of economic recession; natural disaster; pandemic and mortality or other non-credit type risks. Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Guarantees in Force” section below for details on the financial guarantee insured portfolio. The Risk Management Group ("RMG") is primarily responsible for the development, implementation and oversight of loss mitigation strategies, surveillance and remediation of the insured financial guarantee portfolio (including through the pursuit of recoveries in respect of paid claims and commutations of policies). Our ability to execute certain risk management activities may be limited by the restrictions set forth in the Settlement Agreement and the Stipulation and Order and other constraints, potentially including OCI's Runoff Capital Framework. See Note 1. Background and Business Description to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information. Ambac’s RMG has an organizational structure designed around four primary areas of focus: Surveillance, Risk Remediation, Credit Risk Management and Loss Reserving and Analytics. Surveillance Surveillance is focused on the early identification of potential stress and/or credit deterioration and the related analysis of credit exposures in the insured portfolio. Additionally, | Ambac Financial Group, Inc. 3 2022 FORM 10-K Table of Contents , Surveillance evaluates the impact of changes in the economic, regulatory or political environment on the insured portfolio. Analysts perform periodic credit reviews of insured exposures according to a schedule based on the risk profile of the guaranteed obligations or as necessitated by specific credit events or other macro-economic variables. Risk-adjusted surveillance strategies have been developed for each bond type with review periods and scope of review based upon each bond type’s risk profile. The risk profile is assessed regularly in response to our own experience and judgments or external factors such as the economic environment and industry trends. The focus of a credit review is to assess performance, identify credit trends and recommend credit classifications, ratings and changes to a transaction or bond type’s review period and surveillance requirements. Please refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of the various credit classifications utilized by Ambac. If a problem is detected, the Surveillance group will then work with the Risk Remediation group on a loss mitigation plan, as necessary. The insured portfolio contains exposures that are correlated and/or concentrated. RMG's surveillance activities include identifying these types of exposures and identifying the risks that would or could trigger credit deterioration across these related exposures. This is the case with student loans and residential mortgage-backed securities ("RMBS"), for example, which have several correlations including those associated with consumer lending, unemployment and home prices. In the future, Ambac’s portfolio may be subject to similar credit deterioration arising from concentrated and/or correlated risks. Examples of other such risks that could impact our portfolio, and that our surveillance is designed to monitor include the impact of potential municipal bankruptcy contagion, the impact of tax reform on state and municipal bond issuers, the impact of large scale domestic military cutbacks on our privatized military housing portfolio and event risk such as pandemics (e.g., COVID-19), natural disasters or other regional stresses. Most such risks cannot be predicted and may materialize unexpectedly or develop rapidly. Although our surveillance allows us to connect the event and stress to the related exposures and assign an adverse credit classification and estimate losses across the affected credits, when necessary, we may not have adequate resources or contractual rights and remedies to mitigate loss arising from such risks. Risk Remediation Risk Remediation activities are centered on exposure reduction and loss mitigation related to the insured portfolio. In particular, the focus is on reducing exposure to credits that have negative developing trends, the potential for future adverse development or are already adversely classified by, among other things, exercising rights and remedies, which may help to mitigate losses in the event of further deterioration or events of default, or, as available, working with an issuer to refinance, defease or otherwise retire debt. Loss mitigation focuses on the execution of commutation and related claims reduction or workout strategies for policies with potential future claims. For certain adversely classified, survey list and watch list credits (as described in Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K), risk remediation or loss mitigation plans are developed and implemented that may include actions such as working with the issuer, trustee, bond counsel, servicer and other interested parties in an attempt to remediate the problem and minimize AAC’s exposure to potential loss. Other actions could include working with bond holders and other economic stakeholders to negotiate, structure and execute solutions, such as commutations. In addition, reinsurance is used as a remediation tool to reduce exposure to certain targeted policies and large concentrations. Adversely classified, survey list and watch list credits are tracked closely as part of the risk remediation process and are discussed at regularly scheduled Credit Risk Management meetings (see discussion following in “Credit Risk Management”). In some cases, the RMG will engage restructuring or workout experts, attorneys and/or other consultants with appropriate expertise in the targeted loss mitigation area to assist in examining the underlying contracts or collateral, providing industry specific advice and/or executing strategies. Credit Risk Management ("CRM") The CRM function manages the decision process for all material matters that affect credit exposures within the insured portfolio. CRM provides a forum for credit assessment discussions and approvals and drives consistency and timeliness. The scope of credit matters under the purview of CRM includes material amendments, consents and waivers, credit review scheduling, credit classifications, rating designations, review of watch list or adversely classified credits, sector reviews and overall portfolio reviews and risk mitigation updates. Formal plans or transactions that relate to risk remediation, loss mitigation or restructuring may also require AAC Risk Committee approval, as described below in the section entitled, "Enterprise Risk Management." Control Rights In certain domestic and international structured finance transactions, structured public finance transactions, public-private partnerships and other transactions, AAC and Ambac UK may be the control party as a result of insuring a transaction’s senior class or tranche of debt obligations. The control party may direct specified parties, usually the trustee, to take or not take certain actions following contractual defaults or trigger events. Control rights and the scope of direction and remedies vary considerably among our insured transactions. Because AAC and Ambac UK are party to and/or have certain rights in documents supporting transactions in the insured portfolio, they may receive requests for amendments, consents and waivers (“ACW”). Decisions to approve or reject ACWs are made by AAC’s and Ambac UK’s risk management groups based upon certain credit factors, such as the issuer’s ability to repay the bonds and the bond’s security features and structure. Watch List and Adversely Classified Credits Watch list and adversely classified credits are tracked closely by the RMG teams and discussed as part of the CRM process. The review schedule for adversely classified credits is tailored to the | Ambac Financial Group, Inc. 4 2022 FORM 10-K Table of Contents , remediation plan to track and prompt timely action and proper internal and external resourcing. A summary of developments regarding adversely classified credits and credit trends is also provided to AFG’s, AAC’s and Ambac UK's Boards of Directors no less than quarterly. Ambac assigns internal credit ratings to individual exposures as part of the surveillance process. These internal credit ratings, which represent Ambac’s independent judgments, are based upon underlying credit parameters consistent with the exposure type. Loss Reserving and Analytics ("LRA") The LRA function manages the quarterly loss reserving process for insured portfolio credits with projected policy claims. It also supports the development, operation and/or maintenance of various analytical models used in the loss reserving process as well as in other risk management functions. P&C Industry Overview We operate within the $800 billion U.S. P&C insurance market with a particular focus on the commercial MGA/U program market both on an Admitted and Excess & Surplus Lines ("E&S") basis. Admitted and E&S Insurance Insurance carriers sell commercial P&C products in the United States through one of two markets: the Admitted market and the E&S market. The Admitted insurance market, which has highly regulated rates and policy forms, is more consistent in price and coverage. In the E&S market there is increased flexibility in pricing, terms, and conditions in response to evolving market dynamics, and E&S carriers can tailor insurance products to facilitate coverage that would not otherwise be attainable. This unique flexibility lends itself to providing specialist solutions for unique risks, which has driven meaningful growth within the E&S market over the last decade, which has exceeded the growth rate of the Admitted market. According to data from AM Best, the E&S market generated approximately $83 billion of direct written premium in 2021 or 10% of the industry direct premium volume. The E&S market is more heavily focused in commercial lines and accounted for over 20% of total commercial direct written premium for the first time in 2021. For the period of 2011 through 2021 the E&S sector had a compound annual growth rate of 10% compared to 5% for the overall U.S. P&C sector. Everspan presently has five admitted carriers, which are wholly-owned except as indicated below: Everspan Insurance Company; Greenwood Insurance Company; Consolidated National Insurance Company; 21st Century Auto Insurance Company of New Jersey; and Providence Washington Insurance Company, of which it owns 90.1%. Everspan Indemnity Insurance Company ("Everspan Indemnity"), an E&S carrier, which is eligible to write business in all U.S. states and territories, is also part of Everspan. MGA/U Program Market It is estimated that U.S. MGA/Us generate between $70 to $100 billion of direct premiums. We believe there are significant advantages to the MGA/U business model when it comes to capturing the opportunity in the E&S market and propelling profitable growth. MGA/Us are specialized types of insurance agents or brokers that are vested with underwriting authority from an insurer, administering programs and negotiating contracts on their behalf. This is a particularly useful vehicle for P&C insurers as MGA/Us tend to participate in the E&S market where specialized expertise is needed to underwrite policies. Additionally, MGA/Us are cost effective means for an insurer or reinsurer to access or grow a particular class of business they find attractive given the MGA/U already possesses product expertise and distribution capabilities. The MGA/U sector is one of fastest growing segments of the U.S. P&C insurance market, doubling in size between 2011 and 2020, with loss ratios consistently lower than the P&C sector overall. In 2021, the U.S. market was estimated by a leading broker to have over 1,000 MGA/Us with 700 identified in statutory filings and another 350 estimated to fall below the filing threshold. We believe the growth in the MGA/U and program space is likely to continue as the industry continues its move towards increased specialization. Specialty Property and Casualty Insurance Everspan’s strategy as a hybrid insurer is to generate sustainable and profitable, long-term specialty property and casualty program insurance business with a focus on diverse classes of commercial and personal liability risks across an expanding roster of MGA/U partners. As a hybrid insurer Everspan may retain a percentage of the business it underwrites. Everspan's management team has significant years of experience in the program insurance business and has long-standing and broad relationships with MGA/Us, reinsurers, brokers, producers and third-party claims administrators ("TPAs"). Everspan sources business through program administrators and managing general agents, reinsurers, brokers, producers and others. Everspan is developing long-term relationships with its distribution partners. Subject to Everspan's operational oversight, Everspan engages these third parties to market and administer policies and handle claims within defined authorities on Everspan's behalf. Everspan is focused on generating strong underwriting results and program fee income from its participatory fronting business model. For the year ended December 31, 2022, Everspan issued insurance policies generating $146 million of gross written premium, of which Everspan retained approximately 20% with the balance ceded to quota share reinsurers. The following table sets forth our largest lines of business for the year ended December 31, 2022: | Ambac Financial Group, Inc. 5 2022 FORM 10-K Table of Contents , ($ in millions) Year Ended December 31, 2022 2021 Gross written premiums by line of business: Commercial auto liability $ 117.2 $ 12.6 Commercial auto physical damage 12.6 — General liability 6.0 — Excess liability 4.8 0.5 Surety 4.4 — Other 1.3 — Gross written premiums $ 146.4 $ 13.0 Everspan may retain up to 30% of risk on each program and will reinsure the remainder to reinsurers and other providers of risk capital. These reinsurers may be domestic and foreign (re)insurers and institutional risk investors (capacity providers) that want access to specific lines of U.S. property and casualty insurance business that they may not have the required licenses and filings to otherwise insure. Everspan purchases reinsurance to manage its net retention on individual risks and overall exposure to losses, while providing it with the ability to offer policies with sufficient limits to meet producer and policyholder needs. Generally, reinsurance contracts are specific to a program, are purchased on an annual basis, and are subject to renegotiation at renewal. The key contractual provisions include, but are not limited to, those relating to ceding commissions, fronting fees, required reports to reinsurers, responsibility for taxes, arbitration in the event of a dispute and Everspan's termination rights when, among other triggers, a reinsurer defaults (such as by failing to collateralize its obligations when required) or its financial strength falls below an agreed level. Everspan’s ceded reinsurance contracts do not legally discharge Everspan from its primary liability for the full amount of the policies, and Everspan will be required to pay the loss and bear collection risk if a reinsurer fails to meet its obligations under the reinsurance agreement. Everspan mitigates this credit risk by selecting well capitalized, highly rated, authorized capacity providers, or requiring that the capacity provider post collateral, typically in the form of letters of credit issued by NAIC-qualified financial institutions, to secure the reinsured risks. The following graph shows our reinsurance carriers' AM Best rating based on share of ceded premium for the year ending December 31, 2022: (1) NR represents reinsurance carriers not rated by AM Best. Generally, under the terms of reinsurance contracts with such carriers the reinsurer is required to post collateral to Everspan. See Note 8. Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further information on reinsurance recoverables, including the evaluation for credit impairments. Competitive Strengths: Specialty Property and Casualty Insurance is a competitive industry. Everspan believes that it can successfully operate in this industry in part based upon the following competitive strengths. • Experience — Everspan has an experienced leadership team across underwriting, pricing, claims, and business development with an average tenure of over 30 years in the insurance industry. • Underwriting Focused Strategy — Everspan is driven by underwriting performance, which is achieved via comprehensive diligence and monitoring of MGA/U partners from our in-house pricing actuaries, claims executive, and program managers. This underwriting focus also aides in achieving and maintaining support from the reinsurance partners. • Risk Appetite — Everspan may retain up to 30% of the risk it underwrites. This meaningful participation serves to align interests with our reinsurers. • Commitment to Program Distribution — Everspan does not have any direct distribution capability as it is committed to the program market distributed through MGA/Us. As a result, Everspan does not have channel conflicts which would compete with programs partners in underwriting business. • Nimble Platform — A simplified organizational structure which allows Everspan to be efficient and quick in responding to the needs of program partners as well as finding customized solutions. We believe this provides a competitive advantage to the more traditional competitors in the market. | Ambac Financial Group, Inc. 6 2022 FORM 10-K Table of Contents , • Aligned Ownership — Everspan has a stable ownership structure which is equally focused on long-term value creation based on strong underwriting performance. This alignment of interest and strategic vision allows Everspan to leverage resources across the Company and access capital for future initiatives. Competition: Everspan faces competition from program business market participants such as Accelerant Specialty, Accredited America, Benchmark Insurance Company, Clear Blue Insurance Group, Core Specialty, Falls Lake Insurance, Fortegra Insurance Group, Obsidian, Spinnaker, State National, Transverse Insurance Group, and Trisura. Most of these entities have both admitted and E&S carriers. Competition may take the form of lower ceding fees, broader coverages, greater product flexibility, higher coverage limits, greater customer service or higher financial strength ratings by independent rating agencies. Few barriers exist to prevent existing insurers from entering target markets within the property and casualty industry. Market conditions and capital capacity influence the degree of competition at any point in time. During periods of excess underwriting capacity, as defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers. During periods of reduced underwriting capacity, pricing and policy terms and conditions are generally more favorable for insurers. Historically, the performance of the property and casualty insurance industry has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. At any given time, Everspan's portfolio of insurance products could experience varying combinations of these characteristics. This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which Everspan competes than in the standard insurance market. For the last several years the property and casualty industry has been in a period of high premium rates with a shortage of underwriting capacity. While not anticipated to end in the short-term, this cyclical period will eventually end, perhaps unexpectedly. The end of this favorable cycle could have negative consequences for Everspan's growth and profitability prospects. Business Acquisition and Program Partner Selection: With our focus on generating long-term underwriting profitability, we are selective in adding new program partners. We look for program partners that share our vision of underwriting performance and return expectations and consequently are selective about with whom we partner. In 2022 we reviewed over 180 submissions and agreed to contract with nine MGA/Us. As noted above, most of Everspan’s programs are sourced either from MGA/Us or through other third parties, such as reinsurance brokers, that are seeking to provide customized insurance solutions that require a carrier with a high rating from AM Best. Everspan works with MGA/Us that leverage both data and technology to streamline or improve the underwriting process. For each new opportunity that Everspan chooses to evaluate, an initial evaluation of the MGA/U is conducted, including an assessment of its underwriting approach, philosophy, size, quality of management, past performance, future performance targets and, above all, compatibility with Everspan’s operating model, risk appetite, and existing book of business. Everspan conducts substantial due diligence on all program partners led by the Underwriting Risk Committee which is chaired by Everspan’s Chief Underwriting Officer. As part of the diligence process, Everspan works closely with potential MGA/Us to design program underwriting guidelines, ongoing reporting and auditing requirements. Everspan also typically requires the producing partner to retain underwriting risk or otherwise align incentives with program underwriting performance. Additionally, as part of the diligence process for each program, Everspan will perform a review of the claims management function, typically performed by a TPA, which in some cases are managed by the MGA/U or producing partner. Diligence focuses on claims handling and litigation management, compliance, finance, governance, staff and vendor management, data and IT. After due diligence is completed and acceptable reinsurers are identified, each program is presented to the Underwriting Risk Committee for final approval. The Underwriting Risk Committee will consider recommendations made by the credit subcommittee regarding the financial strength of the MGA/Us and/or reinsurers. Ongoing monitoring: For active programs, Everspan authorizes MGA/Us to underwrite and bind coverages in accordance with approved underwriting guidelines and delegates authority to the TPA for claims adjustment and payment. Everspan closely monitors each MGA/U and TPA’s adherence to the agreed upon underwriting and claims guidelines. Everspan will conduct periodic reviews of loss experience, rate levels, reserves and the overall financial health of the MGA/U and TPA and hold monthly underwriting meetings with both the MGA/U and TPA. Underwriting and claims data is provided by the MGA/Us and TPAs monthly. Additionally, Everspan conducts underwriting, claims and accounting audits, generally on-site, at least once a year for MGA/U and TPA partners which administer a material amount of Everspan's business. Everspan maintains the right to terminate relationships with its MGA/Us and TPAs. Reasons to terminate a relationship include an inability to produce targeted underwriting results, writing exposures outside of agreed upon risk tolerances, delinquency in meeting reporting requirements, a change of strategic direction, or failure to meet collateral or other commitments to Everspan. Ratings: Everspan carriers have an AM Best FSR of 'A-' (Excellent) and Financial Strength Category of Class VIII. Risk is shared among the Everspan carriers via a reinsurance agreement and an intercompany pooling agreement (the "Everspan Pool"). We view this rating and financial size category as a competitive advantage in the marketplace. Ratings are an important factor in assessing Everspan’s competitive position, operation capabilities and risk management in the insurance industry. | Ambac Financial Group, Inc. 7 2022 FORM 10-K Table of Contents , Insurance Distribution Ambac’s Insurance Distribution business, Cirrata Group ("Cirrata"), has a strategy to build a diversified portfolio of MGA/Us covering various P&C products. Ambac plans to grow the Insurance Distribution business using several strategies, including (i) organic growth, (ii) additional acquisitions and/or partnerships, and (iii) hiring experienced underwriting teams to incubate start-up MGA/Us. Key criteria include a track record of profitability and a seasoned management team. Insurance underwritten through Ambac's MGA/Us may utilize Everspan as an insurance carrier, but will not be required to do so, depending on strategic and operational considerations. The Insurance Distribution business derives its revenues from commissions, fees, and other non-risk bearing means of compensation. For the years ended December 31, 2022 and 2021, Insurance Distribution generated gross commission revenue of $31 million and $26 million, respectively. The following table sets forth our Premiums Placed by line of business: ($ in millions) Year ended December 31, 2022 2021 Premiums placed by line of business: Employee stop loss $ 72 $ 71 Limited and Short-term medical 48 45 Commercial auto 11 — Other 4 2 Premiums placed $ 135 $ 117 Cirrata's portfolio at December 31, 2022 includes the following entities: Xchange — On December 31, 2020, Ambac acquired a controlling interest in Xchange. Xchange operates through specialty producers in accident and health ("A&H") sectors across the U.S. which are typically not targeted by large direct writers and to whom Xchange can provide customized offerings. Xchange conducts business through approximately ten insurance carriers and dozens of agents and other distributors. Xchange's main products for which it is delegated underwriting authority by insurance carriers include: Employer Stop Loss ("ESL") — provides protection for self-insured employers by serving as a reimbursement mechanism for catastrophic claims, both specific and in aggregate exceeding pre-determined levels. Limited Medical ("LM") — designed for those not covered by traditional Affordable Care Act medical programs and sold primarily through affinity groups, providing a variety of medically related benefits such as inpatient hospital stays, diagnostic services or physician visits. Short-term Medical ("STM") — sold primarily through affinity groups, providing non Affordable Care Act comprehensive medical coverage for short durations (i.e. less than one year). Xchange Re ("MGA/U") / Distribution Re ("Captive") — in January 2023, Xchange launched two new growth initiatives; Xchange Re an A&H reinsurance MGA/U and Distribution Re a protected cell captive insurance company domiciled in Tennessee which will mainly insure high deductible medical stop loss plans. Xchange does not intend to accept or retain any risk from Distribution Re. All Trans — Effective November 1, 2022, Ambac acquired a controlling interest in All Trans. All Trans is a full service managing general underwriter with delegated underwriting authority in commercial automobile insurance for specific "for-hire" auto classes, specifically focused on the private school bus, motor coach, and livery operators. All Trans' track record of performance has allowed the company to maintain a consist panel of insurance carriers with several of the relationships going back over 25 years. Capacity Marine — Effective November 1, 2022, Ambac acquired a controlling interest in Capacity Marine. Capacity Marine is a wholesale and retail brokerage and reinsurance intermediary specializing in more sophisticated marine and international risk in expsoures such as ports, terminals, and stevedores. In addition to existing MGA/Us and acquisitions, de novo MGA/U formations will be a core element of the Insurance Distribution segment's growth strategy. In 2022, Cirrata hired two business leaders with plans to launch MGA/Us in 2023. Cirrata's businesses are compensated for their services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices and, in some cases for managing claims under agency agreements. Commission revenues are usually based on a percentage of the premiums paid by the insured. The businesses are also eligible to receive profit sharing contingent commissions on certain programs based on the underwriting results of the policies they write, which may cause some variability in revenue and earnings recognition. Gross Commission revenues in 2022 were predominantly from Xchange, whose programs are generally underwritten in January and July resulting in revenue and earnings concentrations in the first and third quarters each calendar year. Given the recent acquisitions and de novo launches, this seasonality is likely to become more muted over time. Core expenses at Cirrata include commissions the businesses pay to their independent agents / producers and compensation for their management and staff. Commission expenses are a variable cost as we pay a percentage of premiums written to the agents / producers. Commission revenue and expense growth will be driven by the businesses' continued expansion and diversification of its products across regions, products, and carriers. Competitive Strengths: • Deep specialty domain knowledge — Our Insurance Distribution businesses are anchored by a deep specialty domain knowledge in their respective classes of business. This knowledge is key to generating the underwriting results necessary to maintain long-standing carrier relationships. | Ambac Financial Group, Inc. 8 2022 FORM 10-K Table of Contents , • Long standing carrier relationships — Our MGA/Us strive towards long and durable carrier relationships supported by a focus on underwriting profitability. P&C insurance is a cyclical industry with opportunistic players entering and exiting the business. We believe that growing multi-year carrier relationships are evidence of the value created by our MGA/U, a value which we believe should sustain through routine market cycles. • Strong distribution relationships — Distribution relationships provide value in several ways. First, carrier partners are looking for both underwriting expertise and distribution access when working with MGA/Us. In addition the quality of distribution relationships helps in allowing our MGA/Us access to higher quality risks from the wholesale and retail agents which we believe over time will help produce better underwriting results.. Competition: The MGA/U insurance sector is highly competitive, and firms actively compete with Cirrata's businesses for customers and insurance carrier capacity. • The ESL market is increasing in size as large companies continue to transition from fully insured to self-funded. As the market size increases, capital is flowing into the market, but prices and margins remain stable. Blue Cross, UnitedHealth, CIGNA and Aetna are the largest writers. Competition also comes from large direct writers such as Tokio Marine, HCC and Sun Life as well as smaller carriers such as Gerber Life writing through other MGA/U firms. • For LM and STM, overall market conditions remain stable. The overall market is large as entrepreneurs and the unemployed seek options for individual insurance. Competition for Xchange's business comes from both direct carriers and other intermediaries and, depending on the product, may include Blue Cross, UnitedHealth, CIGNA, Aetna, Tokio Marine, Houston Casualty Company, Sun Life, United Health, Axis, Chubb, and National General. • In the commercial auto "for-hire" classes All Trans competes with a variety of carriers both national and regional. Overall, carriers have been cutting back on their participation and or capacity in commercial auto due to poor underwriting performance, which has benefited All Trans which is focused on narrower niche classes of risk within the larger commercial auto sector. This competitive environment has allowed All Trans to price properly and provide strong underwriting results. All Trans competes with Lancer insurance, National Interstate, Utica, RLI and various other MGA/U companies. ENTERPRISE RISK MANAGEMENT The Company's policies and procedures relating to risk assessment and risk management are overseen by its Board of Directors. The Board of Directors takes an enterprise-wide approach to risk management oversight that is designed to support the Company's business plans at a level of risk considered by the Board to be reasonable. A fundamental part of risk assessment and risk management is not only understanding the risks the Company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The Board of Directors periodically reviews the Company's business plan, factoring risk management into account. It also approves the Company's risk appetite statements, which articulate the Company's tolerance for certain risks and describes the general types of risk that the Company accepts, within certain parameters, or attempts to avoid. While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibilities related to risk assessment and risk management, and management has responsibility for managing the risks to which the Company is exposed and reporting on such matters to the Board of Directors and applicable Board committees. • The Audit Committee oversees the management of risks associated with the integrity of Ambac’s financial statements and its compliance with legal and regulatory requirements. In addition, the Audit Committee discusses policies with respect to risk assessment and risk management, including major financial risk exposures and the steps management has taken to monitor and control such exposures. The Audit Committee reviews with management, internal auditors and independent auditors Ambac's critical accounting policies, Ambac's system of internal controls over financial reporting and the quality and appropriateness of disclosure and content in the financial statements and other external financial communications. • The Compensation Committee oversees the management of risk primarily associated with our ability to attract, motivate and retain quality talent (particularly executive talent) and with setting financial incentives that do not motivate undue risk-taking. • The Governance and Nominating Committee oversees the management of risk primarily associated with Ambac’s ability to attract and retain quality directors, Ambac’s corporate governance programs and practices and our compliance therewith, including integration of ESG and sustainability policies, practices and goals into the Company's business strategy and decision making. Additionally, the Governance and Nominating Committee oversees the processes for evaluation of the performance of the Board of Directors and its committees each year and considers risk management effectiveness as part of its evaluation. This committee also reviews succession plans for Ambac's executive officers, including the Chief Executive Officer. The Governance and Nominating Committee also performs oversight of the business ethics and compliance program, and reviews compliance with Ambac’s Code of Business Conduct. • The Strategy Committee oversees the management of risk and risk appetite primarily with respect to strategic plans and initiatives. The Board of Directors receives quarterly updates from Board committees and the Board provides guidance to individual committee activities, as appropriate. | Ambac Financial Group, Inc. 9 2022 FORM 10-K Table of Contents , In order to assist the Board of Directors in overseeing Ambac’s risk management, Ambac uses enterprise risk management, a company-wide process that involves the Board of Directors, management and other personnel in an integrated effort to identify, assess and manage a broad range of risks (e.g., credit, financial, legal, liquidity, market, model, operational, regulatory, reputational and strategic), that may affect the Company’s ability to execute on its corporate strategy and fulfill its business objectives. The Enterprise Risk Committee (“ERC”), which is a management committee, is comprised of executive and senior level management responsible for assisting in the management of the Company’s risks on an individual and aggregate basis. The ERC produces the relevant risk management information for executive and senior management and the Board of Directors. Ambac management has established other management committees to assist in managing the risks throughout the enterprise. These committees will meet monthly or as needed on an ad hoc basis. • The AAC Risk Committee's objective is to provide oversight of the key risk remediation issues impacting AAC. The purview of the committee is to review and approve risk remediation activities for the financial guarantee insured portfolio. Additionally, the Risk Committee will provide oversight and review new risk remediation structures or approaches in connection with risk remediation plans or anticipated transactions. Members of the Risk Committee include the CEO, Head of Risk Management, CFO and senior managers from throughout risk, corporate services, operations, legal and finance. • The Disclosure Committee's objective is to assist the CEO and CFO in their responsibilities to design, establish, maintain and evaluate the effectiveness of disclosure controls and procedures. Members of the Disclosure Committee include the CEO, CFO, Chief Accounting Officer, General Counsel, Chief Operating Officer, Head of Risk Management and senior managers from finance and legal. • The AAC Reserve Committee's objective is to provide oversight and review of the reserving process at AAC and AUK. The committee reviews and discusses, on at least a quarterly basis, reserve-related developments and key metrics and assumptions, including, but not limited to, credit, economic, interest rates, legal and regulatory. The committee gives approval to proceed with the development of loss estimates and related projections utilized in developing the consolidated quarterly reserves of the legacy financial guarantee business. Members of the Reserve Committee include the CEO, Head of Risk Management, CFO, General Counsel and senior managers throughout risk, legal and finance. • Everspan established an Underwriting Risk Committee in 2021 to provide oversight of the active underwriting operations of Everspan, develop underwriting parameters, and assist the Boards of the Everspan companies in overseeing the integrity and effectiveness of Everspan’s underwriting risk management framework. Members of the committee include the CEO, key members of Everspan management and other senior managers or advisors of Ambac. Additionally, a Reinsurance and Program Administrator Credit Risk sub-committee was established at the direction of the Underwriting Risk Committee to assist with the management of credit risk emanating from ceded reinsurance and program administrators. AVAILABLE INFORMATION Our Internet address is www.ambac.com. We make available through the investor relations section of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission. Our Investor Relations Department can be contacted at Ambac Financial Group, Inc., One World Trade Center, 41st Floor, New York, New York 10007, Attn: Investor Relations, telephone: 212-208-3222 email: ir@ambac.com. The reference to our website address does not constitute inclusion or incorporation by reference of the information contained on our website in this Annual Report on Form 10-K or other filings with the SEC and the information contained on our website is not part of this document. INSURANCE REGULATORY MATTERS AND OTHER RESTRICTIONS Regulatory Matters United States AAC is domiciled in the state of Wisconsin and is therefore subject to the insurance laws and regulations of the State of Wisconsin and regulated by the Wisconsin Office of the Commissioner of Insurance (“OCI”) as a domestic insurer. Everspan Indemnity and its wholly owned subsidiary, Everspan Insurance Company ("Everspan Insurance") are domiciled in the state of Arizona and are therefore subject to the insurance laws and regulations of the State of Arizona and regulated by the Arizona Department of Insurance and Financial Institutions as domestic insurers. The subsidiaries of Everspan Insurance are domiciled in various States and are therefore subject to the insurance laws and regulations of their respective domiciliary States and regulated by the insurance departments of those States as domestic insurers. AAC, Everspan Insurance and its subsidiaries are also subject to the insurance laws and regulations of the other jurisdictions in which they are licensed and operate as foreign insurers in such jurisdictions. See Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further information on regulatory restrictions. Pursuant to the terms of the Settlement Agreement and the Stipulation and Order, AAC must seek prior approval by OCI of certain corporate actions. The Settlement Agreement and Stipulation and Order include covenants which restrict the operations of AAC. The Settlement Agreement will remain in force until the surplus notes issued thereunder have been redeemed, repurchased or repaid in full. The Stipulation and Order will remain in force for so long as OCI determines it to be necessary. Certain of the restrictions in the Settlement | Ambac Financial Group, Inc. 10 2022 FORM 10-K Table of Contents , Agreement may be waived with the approval of the OCI and/or the requisite percentage of holders of AAC's surplus notes. OCI's Runoff Capital Framework is not yet complete and therefore we are not able to predict the results of such and what it may mean for our Legacy Financial Guarantee Strategy, particularly as it relates to deleveraging AAC and distributing capital to AFG. The Insurance Distribution businesses, branded as Cirrata, like other MGA/Us, program administrators and brokers, may be subject to licensing requirements and regulation by insurance regulators in various states in which they conduct business. Cybersecurity and Privacy Regulation Ambac and its subsidiaries are subject to various U.S. Federal and state laws and regulations with respect to privacy, data protection and cybersecurity that require financial institutions, including insurance companies and agencies, to safeguard personal and other sensitive information, and may provide for notice of their practices relating to the collection, disclosure and processing of personal information, disclosure of cybersecurity risk management practices, reporting of cybersecurity incidents, and implementation of governance practices. For example, the National Association of Insurance Commissioners (“NAIC”) adopted the NAIC Insurance Data Security Model Law (#668) (“NAIC Model Law”) that creates rules for insurers and other covered entities addressing data security and the investigation and notification of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. This includes maintaining an information security program based on ongoing risk assessment, overseeing third-party service providers, investigating data breaches and notifying regulators of a cybersecurity event. Legislation based on the NAIC Model Law has been enacted in several states and may be enacted in other states. Certain of our subsidiaries, as insurance companies and agencies licensed in the State of New York, are also required to comply with the New York Department of Financial Services (“NYDFS”) cybersecurity regulation, which establishes requirements for covered financial services institutions to implement a cybersecurity program designed to protect the confidentiality, integrity and availability of information systems of regulated entities, and information stored on those systems. The regulation imposes a governance framework for cybersecurity program, risk based minimum standards for technology systems for data protection, monitoring and testing, third-party service provider reviews, security incident response and reporting to NYDFS of certain security incidents, annual certifications of regulatory compliance to NYDFS, and other requirements. Amendments proposed to the NYDFS cybersecurity regulation will impose additional security requirements and new governance obligations. The California Consumer Privacy Act, went into effect in January 2020, and provides additional privacy rights for California residents, and in November 2020, California further expanded privacy rights for California residents by enacting the California Privacy Rights Act, which became effective January 1, 2023. Colorado, Connecticut, Utah and Virginia have enacted similar privacy laws. We anticipate federal and state regulators to continue to enact legislation related to privacy and cybersecurity, which may require additional compliance investments and changes to policies, procedures and operations. The federal Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (“HIPAA”) impose minimum standards on covered entities, such as health insurers, for the privacy and security of protected health information (“PHI”). The Health Information Technology for Economic and Clinical Health Act, enacted in 2009 (“HITECH”) provides for the extension of certain privacy and security provisions of HIPAA to business associates of covered entities that handle electronic PHI. Xchange specializes in accident and health insurance and is a business associate of the health insurers carriers it partners with, making it subject to compliance with the provisions of HITECH and HIPAA applicable to business associates. United Kingdom The Prudential Regulatory Authority ("PRA") and Financial Conduct Authority ("FCA") (and their predecessor regulator the Financial Services Authority (“FSA”)) exercise significant oversight over Ambac UK. In 2009, the FSA limited Ambac UK’s license to undertaking only run-off related activity. As such, Ambac UK is authorized to run-off its insurance portfolio in the United Kingdom. See Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further information on regulatory restrictions. Regulation of Change in Control Under applicable insurance law, any acquisition of control of AFG, or any other direct or indirect acquisition of control of AAC or one or more members of the Everspan, requires the prior approval (or non-disapproval) of the domiciliary regulator of the acquired company (or, in the case of AFG, the domiciliary regulators of AAC and each member of Everspan). “Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person. Any purchaser of 10% or more of the outstanding voting stock of a corporation is presumed to have acquired control of that corporation and its subsidiaries unless the applicable insurance regulator, upon application, determines otherwise. For purposes of this test, AFG believes that a holder of common stock having the right to cast 10% or more of the votes which may be cast by the holders of all shares of common stock of AFG would be presumably deemed to have control of AAC, Everspan Indemnity, Everspan Insurance and its subsidiaries within the meaning of applicable insurance laws and regulations, although insurance regulators may in their discretion deem control not to exist where, for example, control is disclaimed by a passive investor. The United Kingdom has similar requirements applicable in respect of AFG, as the ultimate holding company of Ambac UK. Dividend Restrictions, Including Contractual Restrictions Due to contractual and regulatory restrictions, AAC has been unable to pay ordinary dividends to AFG since 2008 and will be unable to pay ordinary dividends in 2023. AAC’s ability to pay dividends is restricted by the Settlement Agreement, the Stipulation and Order and the terms of its Auction Market Preferred Shares ("AMPS"), and may be affected by OCI's Runoff Capital Framework when implemented. See Note 9. Insurance Regulatory Restrictions to the Consolidated Financial | Ambac Financial Group, Inc. 11 2022 FORM 10-K Table of Contents , Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further information on dividends. As a result of these restrictions, substantial uncertainty remains as to AAC's ability to pay dividends to AFG and the timing of any such dividends. Pursuant to the Settlement Agreement, AAC may not make any “Restricted Payment” (which includes dividends from AAC to AFG) in excess of $5 million in the aggregate per annum, other than Restricted Payments from AAC to AFG in an amount up to $7.5 million per annum solely to pay operating expenses of AFG. Concurrent with making any such Restricted Payment, a pro rata amount of AAC's surplus notes would also need to be redeemed at par. The Stipulation and Order requires OCI approval for the payment of any dividend or distribution on the common stock of AAC. Under the terms of AAC’s AMPS, dividends may not be paid on the common stock of AAC unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling AFG (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses. If dividends are paid on the common stock as provided in the prior sentence, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS. While the UK insurance regulatory laws impose no statutory restrictions on an insurer’s ability to declare a dividend, the PRA’s and FCA’s rules governing capital extraction by insurance firms in run off require Ambac UK to consider its future capital requirements over a 3 to 5 year period in both base case and downside stress scenarios before declaring a dividend. This typically means that insurers are required to hold a buffer above regulatory capital requirements before dividends can be considered. Further, the FSA amended Ambac UK’s license in 2010 such that the PRA must specifically approve any transfer of value and/or assets from Ambac UK to AAC or any other Ambac group company, other than in respect of certain disclosed contracts between the two parties (such as in respect of a management services agreement between AAC and Ambac UK). As a result, Ambac UK is not expected to pay any dividends to AAC in the near future. Everspan Indemnity, Everspan Insurance and its subsidiaries are also subject to regulatory restrictions on their ability to pay dividends. Everspan Indemnity and Everspan Insurance do not have sufficient earned surplus at this time to pay ordinary dividends under the insurance laws and regulations of Arizona. Furthermore, certain subsidiaries of Everspan Insurance are restricted from paying dividends to Everspan Insurance until 2025 or later, unless otherwise approved by the domestic regulator of the relevant subsidiary, pursuant to the regulatory orders approving the acquisition of those subsidiaries. Ambac's MGA/U subsidiaries are not restricted from paying dividends to their owners, including Cirrata Group, LLC ("Cirrata"), which is 100% owned by AFG. Xchange Benefits has regularly made quarterly distributions to Cirrata. It is expected that All Trans and Capacity Marine will also make regular distributions to their owners, including Cirrata. Cirrata's newly formed MGA/Us are not expected to make regular distributions to their owners until they become profitable. INVESTMENTS AND INVESTMENT POLICY As of December 31, 2022, the consolidated non-VIE investments of Ambac had an aggregate fair value of approximately $2,593 million. Investments are primarily managed by third party investment management firms overseen by internal investment professionals. All investments are made in accordance with the general objectives, policies, and guidelines for investments approved by the Board of Directors of the applicable subsidiary. These policies and guidelines include liquidity, credit quality, diversification and duration objectives and are periodically reviewed and revised as appropriate. Additionally, senior credit personnel monitor the portfolio on a continuous basis. As of December 31, 2022, the AAC and Everspan non-VIE investment portfolios had an aggregate fair value of approximately $1,816 million. The investment objective is to achieve the highest risk-adjusted after-tax return on a diversified investment portfolio consistent with the respective company's risk tolerance while employing active asset/liability management practices to satisfy all operating and strategic liquidity needs. In addition to internal investment policies and guidelines, the investment portfolio of each company is subject to limits on the types and quality of investments imposed by applicable insurance laws and regulations of the jurisdictions in which it is licensed. The Board of Directors of each respective subsidiary approves any changes to the respective investment policies. Within its guidelines, AAC opportunistically purchases and sells AAC and Ambac UK insured securities given their relative risk/reward characteristics. In certain instances, AAC may exceed its established credit rating or concentration limits with appropriate regulatory approval. Changes to AAC’s investment policies are subject to approval by OCI pursuant to covenants made by AAC in the Settlement Agreement and the Stipulation and Order, and may be affected by OCI's Runoff Capital Framework as discussed above in Insurance Regulatory Matters and Other Restrictions . See Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for more information. Such requirements could adversely impact the performance of the investment portfolio. As of December 31, 2022, the non-VIE Ambac UK investment portfolio had an aggregate fair value of approximately $574 million. Ambac UK’s investment policy is designed with the primary objectives of ensuring a reasonable risk-adjusted return over the remaining runoff of the insured portfolio and that Ambac UK is able to meet its financial obligations as they fall due, in particular with respect to policy holder claims. Ambac UK’s investment portfolio is primarily diversified fixed maturity securities and pooled investment funds. The portfolio is subject to internal investment guidelines and may be subject to limits on types and quality of investments imposed by its regulator. The Board of Directors of Ambac UK approves any changes or exceptions to Ambac UK’s investment policy. | Ambac Financial Group, Inc. 12 2022 FORM 10-K Table of Contents , As of December 31, 2022, the non-VIE AFG (parent company only, excluding investments in subsidiaries) investment portfolio had an aggregate fair value of approximately $203 million. The primary investment objective is to preserve capital for strategic uses while maximizing income. The investment portfolio is subject to internal investment guidelines. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits. The following table provide certain information concerning the consolidated investments of Ambac: 2022 2021 Investment Category ($ in millions) December 31, Carrying Value (2) Weighted Average Yield (1) Carrying Value (2) Weighted Average Yield 1) Municipal obligations $ 43 4.6 % $ 340 5.3 % Corporate securities 598 2.6 % 613 2.2 % Foreign obligations 76 1.5 % 87 0.5 % U.S. government obligations 65 1.9 % 60 1.0 % Residential mortgage-backed securities 238 8.3 % 252 7.3 % Commercial mortgage-backed securities 15 5.5 % — — % Asset-backed securities 361 7.0 % 393 5.0 % Short-term investments 572 4.0 % 519 — % Total fixed maturity-available-for-sale 1,966 4.4 % 2,265 2.9 % Fixed maturity securities - trading (3) 59 — % — — % Other investments (4) 568 — % 690 — % Total $ 2,593 4.4 % $ 2,955 2.9 % (1) Yields are stated on a pre-tax basis, based on average amortized cost for both long and short term fixed-maturity investments. (2) Includes investments guaranteed by AAC and Ambac UK ("Ambac insured"). Refer to Note 5. Investments of the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further discussion of Ambac insured securities held in the investment portfolio. (3) Fixed maturity securities held for trading are Puerto Rico municipal obligations received by AAC in connection with the PROMESA restructuring process as described further in Note 8. Insurance Contracts of the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. (4) Other investments consist primarily of interests in pooled investment funds that are either classified as trading securities or are reported under the equity method. Refer to Note 5. Investments of the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further information about Other investments. EMPLOYEES As of December 31, 2022, Ambac had 145 employees in the United States and 10 employees in the United Kingdom. Our 2022 voluntary turnover rate was approximately 7.1%. Ambac considers its employee relations to be satisfactory. Ambac’s focus has been on identifying and retaining key talent through individual development programs following skills assessments. Ambac’s succession planning has identified internal candidates that could fill executive management and senior management positions as the need arises. The Company has established a senior advisory team to work with, and advise, executive management on key initiatives, and has invested in both personal and professional growth programs to identify and prepare individuals for promotion within the Company. The Company continues to rely on compensation components (such as salary, long-term incentive plan awards, deferred cash awards and short-term incentive plan awards) to support employee retention and discourage excessive risk taking. The Company incorporates performance metrics as part of the annual short-term incentive bonus offering with increased bonus potential for exceptional results. We utilize third-party benchmark data to establish market-based compensation levels. We believe that our current compensation and incentive levels reflect high performance expectations as part of our merit pay philosophy. The targeted use of long-term equity incentive plan awards for key talent is an important element of Ambac’s long-term retention strategy. Item 1A. Risk Factors ($ in millions) Capitalized terms used but not defined in this section shall have the meanings ascribed thereto in Part I, Item 1 in this Annual Report on Form 10-K or in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K unless otherwise indicated. Our risk factors are organized in the following sections Page Risks Related to AFG Common Shares 13 Risk Related to the Company's Business 15 Risks Related to Capital, Liquidity and Markets 22 Risks Related to Financial and Credit Markets 24 Risks Related to AFG Common Shares The price per share of AFG's common stock may be subject to a high degree of volatility, including significant price declines. Ambac's legacy financial guarantee business is in run-off and faces significant risks and uncertainties described elsewhere in Part I, Item 1A. Risk Factors. In addition, Ambac's Specialty Property and Casualty Insurance and Insurance Distribution businesses are new and relatively small and therefore are also subject to uncertainties described elsewhere in Part I, Item 1A. Risk Factors. Although AFG's common stock is listed on the New York Stock Exchange ("NYSE"), there can be no assurance as to the liquidity of the trading market or the price at which such shares can be sold. The price of the shares may decline substantially in response to a number of events or circumstances, including but not limited to: • adverse developments in our financial condition or results of operations; • changes in the actual or perceived risk within our Legacy Financial Guarantee ("LFG") insured portfolio; • changes to regulatory status; • changes in investors’ or analysts’ valuation measures for our stock; | Ambac Financial Group, Inc. 13 2022 FORM 10-K Table of Contents , • market perceptions of our success, or lack thereof, in pursuing and implementing our Specialty Property and Casualty Insurance and Insurance Distribution businesses and our new business strategy more generally; • the impact or perceived impact of any acquisition, disposition or other strategic transaction, including entry into a new line of business, on the value or long-term prospects of the Company; • adverse developments in the industries and markets in which we operate, including the property and casualty insurance, underwriting and brokerage industries and the fixed income and equity capital markets; • adverse market and/or economic conditions, such as those caused by a recession or inflation, which increase our risk of loss on insurance polices and depress the value and/or liquidity of our investments and other assets; and • results and actions of other participants in our industries. The price of AFG's shares may also be affected by the risks described below, including risks associated with AAC’s ability to deliver value to AFG. Investments in AFG's common stock may be subject to a high degree of volatility. AFG may not be able to realize value from its LFG businesses. The value of AFG's common stock is partially dependent upon realizing residual value from AAC by means of a full or partial sale and/or the receipt of dividends and the receipt of payments pursuant to the intercompany expense sharing and cost allocation agreement (the "Cost Allocation Agreement"). There can be no assurance that AFG will be able to realize residual value through a sale of or receipt of dividends from AAC, which is in run-off. AFG's ability to realize residual value from AAC will depend upon, amongst other considerations, AAC's ability to satisfy all of its obligations that are senior to AFG's equity interests, including obligations to policyholders, surplus note holders and preferred stock holders. AAC's ability to satisfy all of its obligations that are senior to AFG's equity depends on a number of considerations, including its ability to partially or fully recover losses previously paid; avoid material losses from litigation, mitigate losses from its insured portfolio, which is subject to significant risks and uncertainties, including as a result of varying potential perceptions of the value of AAC’s guarantees and securities; realize material value from its investment in Ambac UK; and repay its indebtedness in a timely manner such that accruing interest costs are manageable. Payments of principal and interest on AAC's surplus notes are subject to the express approval of the Wisconsin OCI. Increased loss development in the LFG insured portfolio or significant losses from litigation or other events or circumstances may prompt OCI to determine that it is in the best interests of policyholders to initiate rehabilitation proceedings with respect to AAC or to issue supervisory orders that impose restrictions on AAC, either preemptively or in response to any such event or circumstance. If OCI were to decide to initiate rehabilitation proceedings with respect to AAC, adverse consequences may result, including, without limitation and absent enforceable protective injunctive relief, the assertion of damages by counterparties, the acceleration of losses based on early termination triggers, and the loss of control rights in insured transactions. Any such consequences may reduce or eliminate any residual value of AAC for AFG. Additionally, the rehabilitator would assume control of all of AAC’s assets and management of AAC. In exercising control, the rehabilitator would act solely for the benefit of policyholders, which may result in material adverse consequences for our security holders. Similar risks would arise if Ambac UK were to become subject to a proceeding to protect the interests of its policyholders, in which case AAC's ability to realize value from Ambac UK (and consequently AFG's ability to realize value from AAC) would diminish. If OCI were to issue supervisory orders imposing restrictions on AAC, AAC's ability to satisfy its obligations to policyholders or creditors, or its ability to deliver value to AFG, may be significantly constrained. Due to the above considerations, as well as applicable legal and contractual restrictions described elsewhere herein, substantial uncertainty remains as to AAC's ability to pay dividends to AFG and the timing of any such dividends. Furthermore, the payments to be made to AFG under the intercompany Cost Allocation Agreement are subject to, in certain instances, OCI approval, making the amount and timing of such payments uncertain. Ambac is planning to further develop and expand its Specialty Property and Casualty Insurance and Insurance Distribution businesses; however, such plans may not be realized, or if realized, may not create value and may negatively impact our financial results. The value of AFG's common stock depends in part upon the ability of Ambac to generate earnings apart from AAC. Ambac is planning to further develop and expand its Specialty Property and Casualty Insurance business and Insurance Distribution business. Such plans may involve additional acquisitions of assets or existing businesses and the development of businesses through new or existing subsidiaries. Currently, it is not possible to fully predict the future prospects or other characteristics of such businesses. While we expect to conduct business, financial and legal due diligence in connection with the evaluation of any future business or acquisition opportunities, there can be no assurance our due diligence investigations will identify every matter that could have a material adverse effect on us. Efforts to pursue certain business opportunities may be unsuccessful or require significant financial or other resources, which could have a negative impact on our operating results and financial condition. To implement our growth strategy, we must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify and hire qualified employees and effectively integrate any acquisitions we make in our effort to achieve growth. No assurance can be given that Ambac will successfully execute its plans for new business, generate any earnings or value from new businesses or be able to successfully integrate any such business into our current operating structure. The failure to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations. Our business performance and growth plans could be negatively affected if we are not able to gain internal efficiencies through | Ambac Financial Group, Inc. 14 2022 FORM 10-K Table of Contents , the application of technology across our businesses or effectively apply technology in facilitating integrated operations and driving value through innovation and technology-based solutions. Conversely, investments in internal systems or innovative product offerings may fail to yield sufficient return to cover their investments. Our ability to successfully manage ongoing organizational changes could impact our business results, where the level of costs and/or disruption may be significant and change over time, and the benefits may be less than we originally expect. Should changes in Ambac’s circumstances or financial condition or in the political, economic and/or legal environment occur, there can be no assurance that all or any part of our strategy and/or initiatives will not be abandoned or amended to take account of such changes. Any such adjustment or abandonment may have a material adverse effect on our securities. Risks Related to the Company's Business Loss reserves for the LFG business may not be adequate to cover potential losses, and changes in loss reserves may result in further volatility of net income and comprehensive income. LFG loss reserves are established when management has observed credit deterioration in its insured credits. Loss reserves established with respect to our LFG insurance policies issued to beneficiaries, including VIEs for which we do not consolidate the VIE, are based upon estimates and judgments by management, including estimates and judgments with respect to the probability of default; the severity of loss upon default; management’s ability to execute policy commutations, restructurings and other loss mitigation strategies; and estimated subrogation and other loss recoveries. The objective of establishing loss reserve estimates is not to, and our loss reserves do not, reflect the worst possible outcomes. While our reserving scenarios reflect a wide range of possible outcomes (on a probability weighted basis), reflecting the significant uncertainty regarding future developments and outcomes, our loss reserves may change materially based on future developments. As a result of inherent uncertainties in the estimates and judgments made to determine loss reserves, there can be no assurance that either the actual losses in our financial guarantee insurance portfolio will not exceed such reserves or that our reserves will not materially change over time as circumstances, our assumptions, or our models change. Catastrophic public health or environmental events, like the COVID-19 pandemic or those associated with natural disasters, that result in material disruption of economic activity, loss of human life or significant property damage, can have a materially negative impact on the financial performance of issuers of obligations insured by AAC and Ambac UK. Such stresses could result in liquidity claims or permanent losses. Public health crises and/or natural disasters can cause economic and financial disruptions that may adversely affect, our business and results of operations. In particular, Ambac insures the obligations of a number of issuers that may be substantially affected by the prolonged economic effects of pandemics (such as COVID-19), other public health crises or environmental events, and natural disasters such as municipalities and securitizations, including those backed by consumer loans such as mortgages or student loans. Municipalities and their authorities, agencies and instrumentalities, especially those dependent on narrow revenue streams flowing from particular economic activities, such as sales taxes, may suffer disproportionately, from depressed revenues due to the lingering negative economic impact brought about by such events. Notably, in response to the COVID-19 pandemic, the U.S. Federal government and State governments and their agencies adopted policies or guidelines to provide emergency relief to consumers, such as limiting debt collection efforts, encouraging or requiring extensions, modifications or forbearance with respect to certain loans and fees, and establishing foreclosure and eviction moratoriums. This or similar types of emergency responses to future events may cause Ambac to experience higher losses in its insured portfolio. Future environmental or other public health events and natural disasters can result in significant potential liabilities for issuers, that increase the potential for default on obligations insured by AAC and Ambac UK. The ultimate impact of a catastrophic public health event or a catastrophic environmental event on issuers and their obligations, and the economy in general, is by its very nature uncertain, and will be determined by a number of factors including, but not limited to, the depth and duration of a particular crisis; the extent to which affected consumers, businesses, municipal entities and other debtors or sources of revenues recover from depressed economic circumstances, and the timelines for such recoveries; the level and efficacy of government intervention or support for municipal entities, consumers, businesses and the financial markets via emergency relief measures; the availability of insurance; the availability of cost-effective financing; management of public health crisis remediation efforts; the effectiveness of other public or private crisis management efforts, mitigation measures or support; and certain socio-economic variables, such as unemployment levels. Consequently, if issuers affected by such catastrophic events do not have sufficient resources or financial flexibility, receive adequate measures of support or realize the appropriate level of economic recovery, their ultimate ability to service the debt insured by AAC and Ambac UK could be materially impaired and AAC and Ambac UK could suffer material permanent losses and therefore may have an adverse effect on our results of operations and financial condition. AAC and Ambac UK are subject to credit and other risks in their insured portfolios; we are also subject to risks associated with adverse selection as our insured portfolios run off. Performance of our insured FG transactions, including (but not limited to) those backed by municipal, utility, sovereign/sub-sovereign, military housing and consumer risk, can be adversely affected by general economic conditions, such as recession, federal budget cuts, decisions of governmental authorities about utilizing assets or facilities, inflation, unemployment levels, underemployment, home price depreciation, increasing foreclosure rates, unavailability of consumer credit, mortgage product attributes, borrower and/or originator fraud or | Ambac Financial Group, Inc. 15 2022 FORM 10-K Table of Contents , misrepresentations, and asset servicer performance and financial health. While deterioration in the performance of transactions insured by AAC and Ambac UK, including mortgage and student loan securitizations may occur, the timing, extent and duration of any future deterioration of the credit markets is unknown, as is the impact on potential claim payments and ultimate losses on the securities within our insured FG portfolio. In addition, there can be no assurance that any governmental or private sector initiatives designed to address such credit deterioration in the markets will be successful or inure to the benefit of the transactions we insure. For example, servicer settlements with governmental authorities regarding foreclosure or servicing irregularities are generally designed to protect borrowers and may increase losses on securities we insure. In particular, the student loan industry and, specifically, trusts with securities insured by AAC have been subject to heightened Consumer Finance Protection Bureau ("CFPB") scrutiny and enforcement action over servicing and collections practices and potential chain of title issues and, consequently, any settlements, orders or penalties resulting from CFPB actions, or any failure on the part of servicers or other parties asserting claims against delinquent borrowers to establish title to the loans, could lead to increased losses on securities we insure. Issuers of public finance obligations insured by AAC have reported, or may report, budget shortfalls, significantly underfunded pensions or other fiscal stresses that imperil their ability to pay debt service or will require them to significantly raise taxes and/or cut spending in order to satisfy their obligations. Furthermore, over time, the consequences of poor public policy decisions by state and local governments or increases in tax burdens can impact demographic trends, such as out-migration from one state or municipality to another, that may negatively impact the creditworthiness of related issuers. Some issuers of obligations insured by AAC have declared payment moratoriums, defaulted or filed for bankruptcy or similar debt adjustment proceedings, raising concerns about their ultimate ability or willingness to service the debt insured by AAC and AAC's ability to recover claims paid in the future. If the issuers of the obligations in the public finance portfolio are unable to raise taxes, cut spending, or receive federal or state assistance, or if such issuers default or file for bankruptcy under Chapter 9 or for similar relief under other laws that allow for the adjustment of debts, AAC may experience liquidity claims and/or ultimate losses on those obligations, which could adversely affect the Company's business, financial condition and results of operations. Issuers in Chapter 9 or similar proceedings may obtain judicial rulings and orders that impair creditors' rights or their ability to collect on amounts owed. In certain cases, judicial decisions may be contrary to AAC's expectations or understanding of the law or its rights thereunder, which may lead to worse outcomes in Chapter 9 or similar proceedings than anticipated at the outset. As the runoff of the insured portfolio continues, the proportion of exposures we rate as below investment grade relative to the aggregate insured portfolio is likely to increase, leaving the portfolio increasingly concentrated in higher risk exposures and heightening risks associated with large single risk exposures to particular issuers, losses caused by catastrophic events (including public health crises, terrorist acts and natural disasters), and losses in respect of different, but correlated, credit exposures.These risks may result in greater volatility or have adverse effects on the Company's results from operations and on our financial condition. We may not be able to effectively reduce LFG insured exposures; measures taken to reduce risks may have an adverse effect on the Company's operating results or financial position. In pursuing the objective of improving our financial position, we are seeking to terminate, commute, reinsure or otherwise reduce FG insured exposures. De-risking transactions may not be feasible or economically viable. We cannot provide any assurance that any such transaction will be consummated in the future, or if it is, as to the timing, terms or conditions of any such transaction. Even if we consummate one or more of such transactions, doing so may ultimately prove to be unsuccessful in creating value for any or all of our stakeholders and may negatively impact our operating results or financial position. Our credit risk management policies and practices may not adequately identify significant risks. As described in Part I, Item 1, “Risk Management” in this Annual Report on Form 10-K, we have established risk management policies and practices which seek to mitigate our exposure to credit risk in our legacy financial guarantee insured portfolio. Ongoing surveillance of credit risks in our legacy financial guarantee insured portfolio is an important component of our risk management process. These policies and practices in the past have not insulated us from risks that were unforeseen and which had unanticipated loss severity, and such policies and practices may not do so in the future. There can be no assurance that these policies and practices will be adequate to avoid future losses. If we are not able to identify significant risks, we may not be able to timely mitigate such risks, thereby increasing the amount of losses to which we are exposed. An inability to identify significant risks could also result in the failure to timely establish loss reserves that are sufficient in relation to such risks. The Settlement Agreement, Stipulation and Order and potentially OCI's Runoff Capital Framework may impair AAC's ability to pursue its business strategies. Pursuant to the terms of the Settlement Agreement and Stipulation and Order, AAC must seek prior approval by OCI of certain corporate actions. The Settlement Agreement and Stipulation and Order also include covenants that restrict the operations of AAC which (i) in the case of the Settlement Agreement, remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full, and (ii) in the case of the Stipulation and Order, remain in place until the OCI decides to relax such restrictions. Certain of these restrictions may be waived with the approval of holders of surplus notes and/or OCI. If we are unable to obtain the required consents under the Settlement Agreement and/or the Stipulation and Order, AAC may not be able to execute its planned business strategies. In addition, while OCI's Runoff Capital Framework is not complete and we cannot predict the results and implications thereof, it is possible that OCI's Runoff Capital Framework and | Ambac Financial Group, Inc. 16 2022 FORM 10-K Table of Contents , decisions based thereon may affect AAC's ability to reduce financial leverage at AAC or to pay dividends to AFG. OCI has certain enforcement rights with respect to the Settlement Agreement and Stipulation and Order, and retains full discretion about the design of OCI's Runoff Capital Framework and the implications thereof. Disputes may arise over the interpretation of such agreements or instruments, the exercise or purported exercise of rights thereunder, the determinations made thereunder, or the performance of or failure or purported failure to adhere to the terms thereof. Any such dispute could have material adverse effects on AAC, and the Company more broadly, whether through litigation, administrative proceedings, supervisory orders, failure to execute transactions sought by management, interference with corporate strategies, objectives or prerogatives, inefficient decision-making or execution, forced realignment of resources, increased costs, distractions to management, strained working relationships or otherwise. Such effects would also increase the risk that OCI would seek to initiate rehabilitation proceedings or issue supervisory orders against AAC. We use analytical models and tools to help project performance of our insured LFG obligations and our investment portfolio but actual results could differ materially from model and tool outputs and related analyses. We rely on internally and externally developed complex financial models, including default models related to RMBS and a waterfall tool provided by a nationally recognized vendor for RMBS and student loan exposures, to project performance of our insured LFG obligations and similar securities in our investment portfolio. These models and tools assume various conditions, probability scenarios, facts and circumstances, and there can be no assurance that such models or tools accurately predict or measure the quantum of losses, loss reserves and timing of losses. Differences in the models and tools that we employ, uncertainties or flaws in these financial models and tools, or faulty assumptions inherent in these financial models and tools or those determined by management could lead to material changes in projected outcomes, and could include increased losses, loss reserves and/or credit impairments on the investment portfolio. Moreover, estimates of transaction performance depend in part on the interpretation of contracts and other bases of our legal rights. Such interpretations may prove to be incorrect or different interpretations may be employed by bond trustees and other transaction participants and, ultimately courts, which could lead to increased losses, loss reserves and/or investment impairments. We are subject to the risk of litigation and the outcome of proceedings we are or may become involved in could have a material adverse effect on our business, operations, financial position, profitability or cash flows. AAC is defending or otherwise involved in various lawsuits relating to its LFG business. Please see Note 20. Commitments and Contingencies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for information on various proceedings. It is not possible to predict the extent to which additional suits involving AFG, AAC or one or more other subsidiaries will be filed, and it is also not possible to predict the outcome of litigation. It is possible that there could be unfavorable outcomes in these or other proceedings. Management is unable to make a meaningful estimate of the amount or range of loss that could result from unfavorable outcomes or of the expenses that will be incurred in connection with such lawsuits. Under some circumstances, adverse results in any such proceedings and/or the incurring of significant litigation or other expenses could be material to our business, operations, financial position, profitability or cash flows. Everspan may be subject to disputes with policyholders regarding the scope and extent of coverage offered under Everspan's policies; be required to defend claimants in suits against its policyholders for covered liability claims; or enter into commercial disputes with its reinsurers, MGA/Us or TPAs regarding their respective contractual obligations and rights. Under some circumstances, the results of such disputes or suits may lead to liabilities beyond those which are anticipated or reserved. Political developments may materially adversely affect our legacy financial guarantee insured portfolio. Our insured financial guarantee exposures and our results of operations can be materially affected by political developments at the federal, state and/or local government levels. Government shutdowns, trade disputes, political turnover, judicial decisions, adverse changes in federal funding, or poor public policy decision making could disrupt the national and local economies where we have insured financial guarantee exposures. In addition, we are exposed to correlation risk as a result of the possibility that multiple credits may concurrently and/or consecutively experience losses or increased stress as a result of any such event or series of events. We operate in in a highly regulated industry and our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in government laws and regulations or if government laws and regulations impair our business or increase our costs. Our U.S. LFG and Specialty Property and Casualty Insurance subsidiaries are highly regulated as insurance carriers in the States of their domicile and the jurisdictions in which they are licensed. Our owned MGA/Us and insurance brokerage subsidiaries are also required to maintain certain entity-level licenses as well as licenses of individual officers or representatives that are essential to their ability to conduct business. Each of the foregoing must also comply with laws generally applicable to insurance entities, including those relating to governance, capital, and operational requirements. Government laws and regulations applicable to our businesses develop and change rapidly in response to consumer demands and public policies. State legislatures and insurance departments place increasing burdens on insurance carriers and producers with respect to matters such as cybersecurity, data privacy, management of technology, corporate governance, environmental and social issues, and enterprise risk | Ambac Financial Group, Inc. 17 2022 FORM 10-K Table of Contents , management. Such laws and regulations require substantial resources to ensure that the Company has appropriate and effective compliance programs in place. If we are unable to keep pace with changes in applicable law and regulations, or if we otherwise fail in our compliance efforts, the Company may be subject to fines, sanctions, governmental orders or modifications to business practices that individually or collectively impair our business or increase our costs, possibly materially. In addition, the Company from time to time receives various regulatory inquiries and requests for information, and its insurance carrier subsidiaries are subject to examination by regulatory authorities. It is not possible to predict the extent to which additional regulatory inquiries or requests for information will be made, nor the outcome of inquiries, requests for information or examination, which exposes the Company to potential fines, sanctions, governmental orders or modifications to business practices that individually or collectively impair our business or increase our costs, possibly materially. Actions of the PRA and FCA could reduce the value of Ambac UK realizable by AAC, which would adversely affect our securityholders. Ambac’s international business is operated by Ambac UK, which is regulated by the Prudential Regulation Authority (“PRA”) for prudential purposes and the Financial Conduct Authority (“FCA”) for conduct purposes. The terms of Ambac UK’s regulatory authority are now restricted and Ambac UK is in run-off. Among other things, Ambac UK may not write any new business, and, with respect to any entity within the Ambac group of affiliates, commute, vary or terminate any existing financial guaranty policy, transfer certain assets, or pay dividends, without the prior approval of the PRA and FCA. The PRA and FCA act generally in the interests of Ambac UK policyholders and will not take into account the interests of AAC or the securityholders of Ambac when considering whether to provide any such approval. Accordingly, determinations made by the PRA and FCA, in their capacity as Ambac UK’s regulators, could potentially result in adverse consequences for our securityholders and also reduce the value realizable by AAC for Ambac UK. Regulatory uncertainty in relation to Ambac UK’s capital position could adversely affect the value of Ambac UK and affect our securityholders. Ambac UK is required to meet certain minimum capital requirements under applicable regulatory capital rules ("Solvency II"). Ambac UK exceeded the required capital thresholds as of December 31, 2022. However, there remains a risk that market movements impacting its investments or adverse credit developments impacting loss reserving requirements within its insured portfolio could result in the capital position becoming deficient once again. The PRA supervisory statement SS7/15 “Supervision of firms in difficulty or run-off” notes that “there are many circumstances in which a run-off strategy is in the best interests of policyholders” and notes that the PRA will review such firms and that they “may be permitted to continue activities necessary to carry out existing contracts in a manner, and for so long as, the PRA considers necessary in order to afford an appropriate degree of protection to policyholders”. If Ambac UK were to return to a capital deficit position then its run-off would become subject to the PRA taking no action in relation to that capital deficit and related Solvency II requirements. Alternative courses of action open to the PRA could adversely impact the anticipated run-off trajectory of Ambac UK and impact its value. Everspan may not be successful in executing its business plans or may experience greater than expected insurance underwriting losses and/or reinsurance counterparty losses, which could result in losses material to Everspan's capital position, a downgrade of its AM Best rating and a loss of its franchise value. Such events could have a material adverse impact on the value of AFG's shares. Everspan is in the early stage of the specialty insurance program business. Its business plan entails establishing programs with program administrators, managing general agents and managing general underwriters ("MGA/Us"), with claims handled by TPAs. The success of these programs is dependent upon the quality of insurance risk underwritten by the MGA/Us, the quality of underwriting and operational oversight of the MGA/Us and TPAs by Everspan, the quality and creditworthiness of reinsurance obtained with respect to the underlying risks, loss experience over time, premium levels, competition and other factors, some of which are outside Everspan's control. Should Everspan fail in executing its business plans or experience greater than expected losses due to operational issues, poor risk selection, default or failure to perform by reinsurers, failure to timely realize ultimate loss exposure or other factors, Everspan may suffer losses that are material to its capital position, a downgrade in its AM Best rating and/or a loss of its franchise value. Any such outcomes could have a material adverse impact on the value of AFG's shares. A downgrade in the AM Best financial strength rating of Everspan may negatively affect our business. The financial strength of Everspan is evaluated by AM Best, which issues a financial strength ratings ("FSR"), an important factor in establishing the competitive position of Everspan. The FSR reflects AM Best’s opinion of Everspan's financial strength, operating performance, strategic position and ability to meet obligations to policyholders, and are not evaluations directed to investors. Everspan's FSR is subject to periodic review, and the criteria used in the rating methodologies are subject to change. All of the insurance companies that comprise Everspan Group are rated "A-" (Excellent). A downgrade in Everspan's FSR could make it more difficult to sell insurance policies and Everspan's distribution channels may cease to transact with them, which would adversely affect our business, financial condition and results of operations. Failure of Everspan's Program Partners to properly market, underwrite or administer policies could adversely affect us. The marketing, underwriting, claims administration and servicing of policies in our Specialty Property and Casualty Insurance business have been contracted to t he MGA/Us with | Ambac Financial Group, Inc. 18 2022 FORM 10-K Table of Contents , which Everspan transacts. Any failure to properly handle these functions could result in liability to us. Even though t he MGA/Us and TPAs with which Everspan transacts may be required to indemnify Everspan for any such liability or monetary losses, there are risks for which indemnity may be insufficient or entirely unavailable if, for example, the relevant program partner becomes insolvent or is otherwise unable to pay us. Furthermore, any failure to properly handle the marketing, underwriting, claims administration and servicing of policies in our Specialty Property and Casualty Insurance business could also create regulatory issues or harm our reputation, which could materially a nd adversely affect our business, financial condition and results o f operations. If in our Specialty Property and Casualty Insurance business we are unable to accurately underwrite risks and charge competitive yet profitable rates to our clients and policyholders, our business, financial condition and results of operations may be adversely affected. In general, the premiums for our specialty property and casualty insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. Like other property and casualty insurance companies, Everspan relies on estimates and assumptions in setting its premium rates. Establishing adequate premium rates is necessary, together with investment income, to generate sufficient revenue to offset losses, loss adjustment expenses, acquisition costs and general and administrative expenses in order to earn a profit. If Everspan does not accurately assess the risks that it assumes, it may not charge adequate premiums to cover its losses and expenses, which would adversely affect our results of operations and our profitability. Alternatively, Everspan could set its premiums too high, which could reduce its competitiveness and lead to lower policyholder retention, resulting in lower revenues. Pricing is a highly complex exercise involving the acquisition and analysis of historical loss data and the projection of future trends, loss costs, expenses, and inflation trends, among other factors, for each of Everspan's products in multiple risk tiers and many different markets. Everspan seeks to implement its pricing accurately in accordance with its assumptions. Everspan's ability to undertake these efforts successfully and, as a result, to accurately price its policies, is subject to a number of risks and uncertainties, including insufficient or unreliable data; incorrect or incomplete analysis of available data; uncertainties generally inherent in estimates and assumptions; failure to implement appropriate actuarial projections and ratings formulas or other pricing methodologies; regulatory constraints on rate increases; failure to accurately estimate investment yields and the duration of liabilities for losses and loss adjustment expenses; disagreements with reinsurers or the MGA/Us with whom Everspan transacts as to the adequacy of pricing assumptions; and unanticipated court decisions, legislation or regulatory action. If Everspan is unable to obtain reinsurance coverage at reasonable prices or on terms that adequately protect it, we may be required to bear increased risks or reduce the level of our underwriting commitments. Everspan purchases reinsurance as part of its overall risk management strategy. While reinsurance does not discharge our insurance subsidiaries from their obligations to pay claims for losses insured under their insurance policies, it does make the reinsurer liable to them for the reinsured portion of the risk. At the inception of a new program, Everspan acts as an issuing carrier and reinsures a majority of such risk to third parties in contracts that are generally subject to term limitations or termination rights. Everspan may be unable to maintain its current reinsurance arrangements or to obtain other reinsurance in adequate amounts and at favorable rates, particularly if reinsurers become unwilling or unable to support our specialty property and casualty business in the future. Additionally, market conditions beyond our control may impact the availability and cost of reinsurance and could have an adverse effect on our business, financial condition and results of operations. A decline in the availability of reinsurance may increase the cost of reinsurance and materially and adversely affect our business prospects. Everspan may, at certain times, be forced to incur additional costs for reinsurance or may be unable to obtain sufficient reinsurance on acceptable terms or from reinsurers which satisfy Everspan's criteria as acceptable security. In the latter case, Everspan would have to accept an increase in exposure to risk, reduce the amount of business written by it or seek alternatives in line with Everspan's risk limits, all of which could adversely affect our business, financial condition and results of operations. Our insurance carrier subsidiaries are subject to reinsurance counterparty credit risk. Their reinsurers may not pay on losses in a timely fashion, or at all. Our insurance carrier subsidiaries purchase reinsurance to transfer part of the risk they have assumed to reinsurance companies in exchange for part of the premium they receive in connection with the risk. Although reinsurance makes reinsurers liable to our carriers for the risk transferred or ceded to the reinsurers, it does not relieve our insurance carrier subsidiaries of their liabilities to policyholders. Accordingly, our insurance carrier subsidiaries are exposed to credit risk with respect to their reinsurers, especially to the extent reinsurance receivables are not sufficiently secured by collateral or do not benefit from other credit enhancements. Our insurance carrier subsidiaries also bear the risk that they are unable to receive, or there is a substantial delay in receiving, the reinsurance recoverable for any reason, including that the terms of the reinsurance contract do not reflect the intent of the parties to the contract; there is a disagreement between the parties as to their intent; the terms of the contract cannot be legally enforced; the terms of the contract are interpreted by a court or arbitration panel differently than intended by our insurance carrier subsidiaries; the reinsurance transaction performs differently than our insurance carrier subsidiaries anticipated due to a flawed design of the reinsurance structure, terms or conditions; or changes in law and regulation, or in the interpretation of laws and regulations, affects a reinsurance transaction. These risks my be exacerbated to the extent that our insurance carrier subsidiaries' reinsurance recoverables are overly concentrated with one or a small subset of reinsurers. The insolvency of one or more of our insurance carrier subsidiaries' reinsurers, or their inability or unwillingness to make timely payments if and when required under the terms of reinsurance contracts, could adversely affect our business, financial condition and results of operations. | Ambac Financial Group, Inc. 19 2022 FORM 10-K Table of Contents , If actual claims exceed claims and claim adjustment expense reserves for Everspan, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes in the legal/ tort, regulatory and economic environments in which Everspan operates, our financial results could be materially and adversely affected. Further elevated social inflation trends are likely to continue, which have been amplified by the COVID-19 crisis and civil unrest events in the US over the last 12-36 months. These risks, which include increased litigation, changes in social norms, and an erosion of the public sentiment towards insurers’ interpretation of coverage levels and limits, may make it more difficult to estimate losses by Everspan from events, establish adequate product pricing, and maintain a strong competitive position with consumers. Moreover, the impact of catastrophic events may not be adequately reflected in claims reserves and, accordingly, could adversely impact results. Catastrophic losses are caused by wind and hail, wildfires, tornadoes, hurricanes, tropical storms, earthquakes, severe freeze events, volcanic eruptions, terrorism, cyber attacks, civil unrest, and industrial accidents and other such events. Our ability to grow Everspan will depend in part on the addition of new Program Partners, and our inability to effectively onboard such new Program Partners could have an adverse effect on our business, financial condition and results of operations. Our ability to grow Everspan will depend in part on the addition of new MGAUs. If Everspan does not effectively and timely source, evaluate and onboard new MGA/Us, including assisting such MGA/Us to quickly resolve any post-onboarding matters and provide effective ongoing support, Everspan's ability to add new MGA/Us and its relationships with its existing Program Ppartners could be adversely affected. Additionally, Everspan's reputation with potential new MGA/Us could be damaged if it fails to effectively onboard MGA/Us with whom it has signed definitive legal agreements. Such reputational damage could make it more difficult for Everspan to attract new and retain existing program partners, which could have an adverse effect on our business, financial condition and results of operations. We compete with a large number of companies in the property and casualty insurance industry for underwriting premium. We compete with a large number of companies in the property and casualty insurance industry for underwriting premium. During periods of intense competition for premium, in particular, our specialty property and casualty insurance and insurance distribution businesses may be challenged to maintain competitiveness with other companies that may seek to write policies without the same regard for risk and profitability targeted by our specialty property and casualty insurance and insurance distribution businesses. During these times, it may be difficult for Everspan or our MGA/Us to grow or maintain premium volume without lowering underwriting standards, sacrificing income, or both. In addition, our Specialty Property and Casualty Insurance and Insurance Distribution businesses face competition from a wide range of specialty insurance companies, underwriting agencies and intermediaries, as well as diversified financial services companies that are significantly larger than our specialty property and casualty insurance and insurance distribution businesses are and that have significantly larger financial, marketing, management and other resources. Some of these competitors also have longer standing and better established market recognition than Everspan does. The greater resources or market presence that these competitors possess may enable them to avoid or defray particular costs, employ greater pricing flexibility, have a higher tolerance for risk or loss, or exploit other advantages that may make it more difficult for us to compete. We may incur increased costs in competing for underwriting revenues in this environment. If we are unable to compete effectively in the markets in which our specialty property and casualty insurance and managing general agency/underwriting businesses operate or expand into, our underwriting revenues may decline, as well as overall business results. Impairment of intangible assets and goodwill, resulting from acquisitions, could adversely affect our results of operations. In connection with Ambac’s acquisition of certain insurance carriers and insurance distribution businesses (MGA/U and brokers), Ambac recorded the fair value of identifiable intangible assets (primarily related to distribution relationships) and goodwill. The intangible assets will be amortized over their remaining useful lives. The Company will test intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable. Goodwill will be tested for impairment annually or whenever events occur or circumstances change that may indicate impairment. Intangible asset and goodwill impairments are driven by a variety of factors, which could include, among other things, declining future cash flows of the acquired business as addressed in other risk factors related to the Insurance Distribution Business. Any intangible asset or goodwill impairment could adversely affect the Company's operating results and financial condition. Our Insurance Distribution businesses derive a significant portion of their commission revenues from a limited number of insurance companies, the loss of any of which could result in lower commissions or loss of business production. The commissions of our MGA/Us and insurance broker were derived from insurance policies underwritten by a limited number of insurance companies. Should one or more of these insurance companies terminate its arrangements with our Insurance Distribution businesses or otherwise decrease the number of insurance policies underwritten for it, we may lose significant commission revenues or lose significant business production while seeking other insurance companies to underwrite the business. Our Insurance Distribution businesses, results of operation, financial condition and liquidity may be | Ambac Financial Group, Inc. 20 2022 FORM 10-K Table of Contents , materially adversely affected by certain potential claims or proceedings. Our owned MGA/Us and insurance brokerage operating subsidiaries are subject to various potential claims and other proceedings, including those relating to alleged errors and omissions in connection with the placement or servicing of insurance and/or the provision of services in the ordinary course of business, of which we cannot, and likely will not be able to, predict the outcome with certainty. Because our MGA/Us and insurance brokerage operating subsidiaries often assist customers with matters involving substantial amounts of money, including the placement of insurance and the handling of related claims that customers may assert, errors and omissions, claims against it may arise alleging potential liability for all or part of the amounts in question. Also, the failure of an insurer with whom our MGA/Us and insurance brokerage operating subsidiaries place business could result in errors and omissions claims against it by its customers, which could adversely affect Ambac’s results of operations and financial condition. Claimants may seek large damage awards, and these claims may involve potentially significant legal costs and damages. In addition, regardless of monetary costs, these matters could have a material adverse effect on our reputation and cause harm to carrier, customer or employee relationships, or divert personnel and management resources. The current market share of our Insurance Distribution businesses may decrease because of increased competition from insurance companies, technology companies and the financial services industry, as well as the shift away from traditional insurance markets. The insurance distribution business is highly competitive and we actively compete with numerous firms for customers and insurance companies, many of which have relationships with insurance companies or have a significant presence in niche insurance markets that may give them an advantage. Other competitive concerns may include pricing, the entrance of technology companies into the insurance distribution business and the direct-to-consumer insurance carriers that do not utilize third party agents and brokers as production sources. Additionally, the insurance industry may experience consolidation, and therefore we may experience increased competition from insurance companies and the financial services industry, as a growing number of larger financial institutions increasingly, and aggressively, offer a wider variety of financial services, including insurance distribution services. While we collaborate and compete in these segments on a fee-for-service basis, we cannot be certain that such alternative markets will provide the same level of insurance coverage or profitability as traditional insurance markets. Technological changes to the way insurance is distributed, underwritten, and administered also present competitive risks. For example, our competitive position could be impacted if we are unable to cost-effectively deploy technology, such as machine learning and artificial intelligence, which collects and analyzes large sets of data to make underwriting or other decisions, or if our competitors collect and use data which we do not have the ability to access or use. In addition, usage-based methods of determining premiums (e.g., telematics) can impact product pricing and design and are becoming an increasingly important competitive factor. The landscape of law and regulation governing these areas presents additional risk to the extent we are unable to timely adapt to ensure compliance. Changes in law or in the functioning of the healthcare market could significantly impair Xchange’s business and therefore negatively impact Ambac’s financial condition and results of operation. Adoption of a single payer healthcare system or a public health insurance option would likely adversely impact the entire healthcare industry. While Xchange has historically demonstrated an ability to adjust its products to major changes in the healthcare industry, given its focus on Accident and Health products, Xchange would likely be adversely impacted by such a material change in the U.S. healthcare system particularly if private health insurance is eliminated, materially limited, or is rendered noncompetitive. Material adverse developments to Xchange's business would have a negative impact on Ambac's financial condition and results of operations which could be material. Our Insurance Distribution businesses and their results of operation and financial condition may be adversely affected by conditions that result in reduced insurer capacity. Our Insurance Distribution business results of operations depend on the continued capacity of insurance carriers to underwrite risk and provide coverage, which depends in turn on those insurance companies’ ability to procure reinsurance. Capacity among insurance carriers and reinsurers may diminish because of our performance or due to factors outside our control. For example, capacity could be reduced by insurance companies failing or withdrawing from writing certain coverages that our Insurance Distribution businesses offer to their customers. To the extent that reinsurance becomes less widely available or significantly more expensive, we may not be able to procure the amount or types of coverage that our customers desire and the coverage we are able to procure for our customers may be more expensive or limited. Variations in commission income that results from the timing of policy renewals and the net effect of new and lost business production may have unexpected effects on our results of operation. Commission income can vary quarterly or annually due to the timing of policy renewals and the net effect of new and lost business production. We do not control the factors that cause these variations. Specifically, customers’ demand for insurance products can influence the timing of renewals, new business and lost business (which includes policies that are not renewed), and cancellations. Quarterly and annual fluctuations in revenues based upon increases and decreases associated with the timing of new business, policy renewals and payments from insurance companies may adversely affect our financial condition, results of operations and cash flows. Profit-sharing contingent commissions are paid by insurance companies based upon the profitability of the business placed with such companies. In the past these commissions have accounted for a significant amount of total commissions and fees. Due to, among other things, the inherent uncertainty of loss and changes in underwriting criteria | Ambac Financial Group, Inc. 21 2022 FORM 10-K Table of Contents , by insurance companies, there will be a level of uncertainty related to the payment of profit-sharing contingent commissions. System security risks, data protection breaches and cyber-attacks could adversely affect our business and results of operations. We and our vendors and contractual counterparties rely on our information technology systems for many enterprise-critical functions and a prolonged failure or interruption of these systems for any reason could cause significant disruption to our operations and have a material adverse effect on our business, financial condition and operating results. Our information technology and application systems, as well as those of our vendors and contractual counterparties, may be vulnerable to threats from computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions. Computer hackers may be able to penetrate our network’s system security, or the network's security system of a vendor or contractual counterparty, and misappropriate or compromise confidential information, create system disruptions or cause shutdowns. In addition to our own confidential information, we and our our vendors and contractual counterparties sometimes receive and are required to protect confidential information obtained from third parties (including us in the case of a vendor or contractual counterparty) and personally identifiable information of individuals. To the extent any disruption or security breach results in a loss or damage to our data (or the data of a vendor or contractual counterparty on which we rely), or inappropriate disclosure of our confidential information or that of others, or personally identifiable information of individuals, it could cause significant financial losses that are either not, or not fully, insured against, cause damage to our reputation, affect our relationships with third parties, lead to claims against us, result in regulatory action, or otherwise have a material adverse effect on our business or results of operations. In addition, we may be required to incur significant costs to mitigate the damage caused by any security breach, or to protect against future damage. Moreover, although we have incident response, disaster recovery and business continuity plans in place, we may not be able to adequately execute these plans in a timely fashion in the event of a disruption to our information technology and application systems. We may be adversely affected by failures in services or products provided by third parties. We outsource and may further outsource certain technology and business process functions, and rely upon third-party vendors and contractual counterparties for other essential services and information, such as the provision of data used in setting loss reserves. If we do not effectively develop, implement and monitor our vendor and contractual counterparty relationships, if third party providers do not perform as anticipated, if we experience technological or other problems with a transition, or if vendor or other contractual relationships relevant to our business process functions are terminated, we may not realize expected productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business . A material failure by an external service or information provider or a material defect in the products, services or information provided thereby could adversely affect our financial condition and results of operations. Our outsourcing of certain technology and business process functions to third parties may expose us to increased risk related to data security, service disruptions or the effectiveness of our control system. These risks could increase as vendors increasingly offer cloud-based software services rather than software services which can be run within our data centers or as we choose to move additional functions to the cloud. Our ability to attract and retain qualified executives, senior managers and other employees or the loss of any of these personnel could negatively impact our business. Our ability to execute on our business strategies depends on the retention and recruitment of qualified executives and other professionals. We rely substantially upon the services of our current executive and senior management teams. In addition to these officers, we rely on key staff with insurance, underwriting, business development, credit, risk management, structured finance, investment, accounting, finance, legal, technology and other technical and specialized skills. The market for qualified executives, senior managers and other employees has become very competitive. As a result of the run-off status of AAC and the early-stage status of AFG's other businesses, we may experience higher employee turnover and finding qualified replacements may be more difficult. The loss of the services of members of our executive and/or senior management teams or our inability to hire and retain other talented personnel could delay or prevent us from succeeding in executing our strategies, which could negatively impact our business. Our business could be negatively affected by actions of stakeholders whose interests may not be aligned with the broader interests of our stockholders. Ambac could be negatively affected as a result of actions by stakeholders whose interests may not be aligned with the broader interests of our stockholders, and responding to any such actions could be costly and time-consuming, disrupt operations and divert the attention of management and employees. Such activities could interfere with our ability to execute on our strategic plans. Risks Related to Capital, Liquidity and Markets AAC has substantial indebtedness, which could adversely affect our financial condition, operational flexibility and our ability to obtain financing in the future. AAC is highly leveraged. AAC’s ability to make payments on and/or refinance its surplus notes and to fund its operations will depend on its ability to generate substantial operating cash flow and on the performance of the LFG insured portfolio. AAC’s cash flow generation will depend on receipt of premiums, investment returns, and receipts from subsidiaries, offset by policyholder claims, commutation payments, reinsurance premiums, costs and potential losses from litigation, operating and loss adjustment expenses, and interest expense, which will be subject to prevailing economic conditions and to financial, business and other factors, many of which are beyond our control and many of which are event-driven. There is substantial risk that AAC may not have the financial resources necessary to pay its surplus notes in full due to risks associated | Ambac Financial Group, Inc. 22 2022 FORM 10-K Table of Contents , with its cash flow, insured portfolio, and other liabilities, as discussed elsewhere in these Risk Factors. If AAC cannot pay its obligations from operating cash flow, it will have to take actions such as selling assets, restructuring or refinancing its surplus notes or seeking additional capital. Any of these remedies may not, if necessary, be effected on commercially reasonable terms, or at all. The value of assets to be sold, will depend on market and economic conditions, the availability of buyers, the requirements and conditions of local law, including regulatory restrictions, and other factors that may result in AAC or a party enforcing rights against AAC to be unable to receive proceeds sufficient to discharge AAC's obligations. Furthermore, the ability of creditors or claimants to realize upon any assets, may also be subject to bankruptcy and insolvency law limitations or similar limitations applicable in insurance company rehabilitation or liquidation proceedings. Because of these and other factors beyond our control, AAC may be unable to pay or discharge the principal or interest on its surplus notes, which would impair AAC's value and the value of AFG. Surplus note principal and interest payments are subject to the sole approval of the OCI, and OCI's determinations about whether and when to authorize surplus note payments could materially impact the Company's financial position. Ambac can provide no assurance as to when surplus note principal and interest payments will be made. If OCI does not approve payments on or the acquisition of surplus notes over time the ongoing accretion of interest on the notes may impair AAC's ability to extinguish the notes in full. Surplus notes are subordinated in right of payment to policyholder and other claims. AAC's substantial indebtedness could have other significant consequences for our financial condition and operational flexibility. For example, it could: • increase our vulnerability to general adverse economic, competitive and industry conditions; • limit our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes on satisfactory terms or at all; • require AAC to dedicate a substantial portion of its cash flow from operations to the payment of surplus notes, thereby reducing the funds available for operations and to fund the execution of key strategies, including the return of capital to AFG; • limit or restrict AFG from making strategic acquisitions or cause us to make non-strategic divestitures; • limit AAC's ability, or increase the costs, to refinance surplus notes or repay surplus notes due to ongoing interest accretion; and • limit our ability to attract and retain key employees. Despite current indebtedness levels, we may incur additional debt. While restrictive covenants in certain of our contracts may limit the amount of additional indebtedness AAC may incur, we may obtain waivers of those restrictions and incur additional indebtedness in the future. In addition, if Ambac incurred indebtedness, its ability to make scheduled payments on, or refinance, any such indebtedness may depend on the ability of our subsidiaries to make distributions or pay dividends, which in turn will depend on their future operating performance and contractual, legal and regulatory restrictions on the payment of distributions or dividends to which they may be subject. There can be no assurance that any such dividends or distributions would be made. This could further exacerbate the risks associated with AAC's substantial leverage. Our inability to realize the expected recoveries included in our financial statements could adversely impact our liquidity, financial condition and results of operations and the value of our securities. We expect to recover material amounts of claims payments through remediation measures, as well as through cash flows in the securitization structures of transactions that AAC insures. Realization of such expected recoveries is subject to various risks and uncertainties, including the rights and defenses of other parties with interests that conflict with AAC’s interests, the performance of the collateral and assets backing the obligations that AAC insures, and the performance of servicers involved in securitizations in which AAC participates as insurer. Additionally, our ability to realize recoveries in insured transactions may be impaired if the continuing orders of the court that oversaw the rehabilitation of the Segregated Account of AAC are not effective. Adverse developments with respect to any of the factors described above may cause our recoveries to fall below expectations, which could have a material adverse effect on our financial condition, including our capital and liquidity, and may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations, particularly its surplus notes and preferred stock obligations; the initiation of rehabilitation proceedings against AAC; eliminating or reducing the possibility of AAC delivering value to AFG, through dividends or otherwise; and a significant drop in the value of securities issued or insured by AFG or AAC. Revenues and cash flow will be adversely impacted by a decline in realization of installment premiums. A significant percentage of our FG premium revenue is attributable to installment premiums. The amount of installment premiums we collect is declining along with the insured portfolio. The amount of installment premiums we actually realize could be further reduced due to factors such as early termination of insurance contracts, new reinsurance transactions, accelerated prepayments of underlying obligations or insufficiency of cash flows (by the premium paying entity). The reduction in installment premiums will result in lower revenues and cash flow in the future. We may have future capital needs and may not be able to obtain third-party financing or raise additional third-party capital on acceptable terms, or at all. An inability to obtain third-party debt financing or raise additional third-party capital, when required by us or when business conditions warrant, could have a material adverse effect on our business, financial condition and results of operations. Our financial condition, the risks described | Ambac Financial Group, Inc. 23 2022 FORM 10-K Table of Contents , elsewhere in Part I, Item 1A in this Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as other factors, may constrain our financing abilities. Our ability to secure third-party financing will depend upon our future operating performance, regulatory conditions, the availability of credit generally, economic conditions and financial, business and other factors, many of which are beyond our control. The market conditions and the macroeconomic conditions that affect our business could have a material adverse effect on our ability to secure third-party financing on favorable terms, if at all. If third-party financing is not available when needed, or is available on unfavorable terms, we may be unable to take advantage of business opportunities, respond to competitive pressures or effectively and efficiently manage our balance sheet, any of which could have a material adverse effect on our business, financial condition and results of operations. The composition of the securities in our investment portfolio may expose us to greater risk than before we invested in alternative assets. Each of AAC and Ambac UK maintains a portion of its investment portfolio in below investment grade securities, equities and/or alternative assets, such as hedge funds, with the objective to increase risk-adjusted portfolio returns. Investments in below investment grade securities, equities and alternative assets could expose AAC and/or Ambac UK to greater earnings volatility, increased losses and decreased liquidity in the investment portfolio. Risks Related to the Financial and Credit Markets Changes in prevailing interest rate levels and market conditions could adversely impact our business results and prospects. Increases in prevailing interest rate levels can adversely affect the value of our investment portfolio and, therefore, our financial strength. In the event that investments must be sold in order to pay claims, to pay debt obligations, to meet collateral posting requirements or to meet other liquidity needs, such investments would likely be sold at discounted prices. Additionally, increasing interest rates would have an adverse impact on the legacy financial guarantee insured portfolio. For example, increasing interest rates could result in higher claim payments in respect of defaulted obligations that bear floating rates of interest. Higher interest rates can also lead to increased credit stress on consumer asset-backed transactions (as the securitized assets supporting a portion of these exposures are floating rate consumer obligations), slower prepayment speeds and resulting “extension risk” relative to such consumer asset-backed transactions in our insured and investment portfolios, and decreased refinancing activity. Decreasing interest rates could result in early terminations of FG insurance policies in respect of which AAC and Ambac UK are paid on an installment basis and do not receive a termination premium, thus reducing premium earned for these transactions. Decreases in prevailing interest rates may also limit growth of, or reduce, investment income and may adversely impact interest rate swap values. Our investment portfolio may also be adversely affected by credit rating downgrades, ABS and RMBS prepayment speeds, foreign exchange movements, spread volatility, and credit losses. Our risk to changes in interest rates and market conditions could be magnified in the event that the US or UK were to enter into an economic recession. While interest rates may decline during a recession, credit and liquidity risks would be expected to increase which may cause us to experience losses in our investment portfolios and insured portfolios. These losses may have a material adverse affect on our results of operations and financial condition, particularly if any economic rescission were prolonged. Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences. In 2017, the U.K. Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate ("LIBOR"), announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. On November 30, 2020, the ICE Benchmark Administration and the FCA announced that most tenors of U.S. Dollar ("USD") LIBOR are expected to be published only through June 2023. However, Non-USD LIBOR, certain less common tenors of USD-LIBOR and certain other indices which are utilized as benchmarks ceased to be published at the end of 2021. AAC and Ambac UK therefore no longer insure any obligations linked to Non-USD LIBOR. AAC and/or Ambac UK insure securities, own assets and are party to certain derivative contracts that reference USD LIBOR. In 2021, New York State passed legislation addressing the cessation of USD LIBOR and specified a recommended benchmark replacement based on the Secured Overnight Financing Rate (“SOFR”) for certain legacy transactions. Similar federal legislation was passed into law in March 2022 and the Federal Reserve's Board of Governors adopted the final rules for implementing this legislation in December 2022. While regulators and market participants continue to promote the creation and functioning of post-LIBOR (primarily SOFR) indices, the ultimate impact of the discontinuance and replacement of LIBOR is uncertain. It is not currently possible to know with certainty what the effect of changes to benchmark rates may have on the financial markets for LIBOR-linked financial instruments for the periods preceding and following LIBOR's cessation. Differences in contractual provisions of certain legacy assets and liabilities and other factors may cause the consequences of the discontinuance of LIBOR to vary by instrument. While the enacted legislation is intended to address issues with respect to legacy LIBOR-linked assets and liabilities, it is unclear whether they will completely address the issues associated with legacy transactions. Nevertheless, the value of our assets and derivatives; costs to operate our business; and the losses associated with our insured portfolio may be affected in a way that may ultimately materially adversely impact Ambac’s results of operations and financial condition. In addition, Ambac may experience adverse | Ambac Financial Group, Inc. 24 2022 FORM 10-K Table of Contents , tax and accounting impacts, system and model disruption, and increased liquidity demands in connection with the transition away from LIBOR that may have adverse operational consequences resulting in further adverse impacts on Ambac’s results of operations and financial condition. Ambac continues to actively monitor developments surrounding the transition from LIBOR-based indices and evaluate the potential impact. In addition to reviewing several hundred transactions involving various LIBOR-based indices, Ambac has made, and is in the process of making, adjustments to its reporting and analytical infrastructures to facilitate the transition from LIBOR. Item 1B. Unresolved Staff Comments — No matters require disclosure. Item 2. Properties The executive office of Ambac is located at One World Trade Center, New York, New York 10007, and consists of 46,927 square feet of office space, under a sublease agreement that expires in January 2030. Ambac continues to hold a lease at One State Street Plaza, New York that expires in December 2029 (25,871 square feet) that has been sublet through its expiration date. Ambac maintains a disaster recovery site ("DR Site") in Kingston, New York, County of Ulster which consists of 12,374 square feet. During a disaster event, the site would allow employees an alternative office location. In June 2022, the Ulster County Controller reported that the owner of the property where the DR Site is located was delinquent in payment of taxes, interest and penalties, and recommended that the county move forward with foreclosure on the property. The County of Ulster foreclosed on the property in November 2022 and acquired title to the property in January 2023. Ambac has begun discussions with the County of Ulster on continued occupancy of the DR Site located at the property, and is also evaluating alternative locations for the DR Site. The lease signed by Ambac prior to the foreclosure had a stated expiration of March 2024. Operations of each of our segments are carried out either in our executive office at One World Trade Center or in other leased offices under operating leases in New Jersey, New York, Indiana and London England. The lease terms typically do not exceed ten years in length. In the opinion of the Company’s management, the Company’s properties are adequate and suitable for its business as presently conducted and are adequately maintained. Item 3. Legal Proceedings Refer to Notes to the Consolidated Financial Statements—Note 20. Commitments and Contingencies included in Part II, Item 8 in this Annual Report on Form 10-K for a discussion on legal proceedings against Ambac. Item 4. Mine Safety Disclosures — Not applicable. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Since February 3, 2020, the Company 's common stock and warrants have been trading on the NYSE under the symbols “AMBC" and "AMBC WS", respectively. Prior to being listed on the NYSE, the Company's common stock and warrants were listed on NASDAQ under the symbols “AMBC” and "AMBCW," respectively. Holders On February 24, 2023, there were 16 stockholders of record of AFG’s common stock and 50 holders of record of AFG's warrants. Dividends The Company did not pay cash dividends on its common stock during 2022 and 2021. Information concerning restrictions on the payment of dividends from Ambac's insurance subsidiaries is set forth in Item 1 above under the caption “Dividend Restrictions, Including Contractual Restrictions" and in Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. Purchases of Equity Securities By the Issuer and Affiliated Purchasers The following table summarized Ambac's share purchases during the fourth quarter of 2022. When restricted stock unit awards issued by Ambac vest or settle, they become taxable compensation to employees. For certain awards, shares may be withheld to cover the employee's portion of withholding taxes. In the fourth quarter of 2022, Ambac purchased shares from employees that settled restricted stock units to meet employee tax withholdings. On March 29, 2022, our Board of Directors approved a share repurchase program authorizing up to $20 million in share repurchases, with an expiration date of March 31, 2024, which may be terminated at any time. From April 1, 2022, through December 31, 2022, AFG repurchased 1,605,316 shares for $14.2 million at an average purchase price of $8.86 per share. On May 5, 2022, the Board of Directors authorized an additional $15 million share repurchase bringing the total unused authorized amount to $20.8 million. Shares purchased from employees to satisfy withholding taxes, as described above, do not count towards utilization under the Company's share repurchase program. | Ambac Financial Group, Inc. 25 2022 FORM 10-K Table of Contents , October 2022 November 2022 December 2022 Fourth Quarter 2022 Total Shares Purchased (1) — 1,425 — 1,425 Average Price Paid Per Share $ — $ 13.56 $ — $ 13.56 Total Number of Shares Purchased as Part of Publicly Announced Plan — — — — Maximum Dollar Value That may Yet be Purchased Under the Plan $ 21 $ 21 $ 21 $ 21 (1) There were no other repurchase of equity securities made during the three months ended December 31, 2022. Warrants Ambac has 4,877,617 warrants outstanding. Each warrant represents the right to purchase one share of AFG common stock. The warrants are exercisable at any time on or prior to April 30, 2023, at an exercise price of $16.67 per share. The warrants may be exercised for cash or net share settled. On June 30, 2015, the Board of Directors of AFG authorized the establishment of a warrant repurchase program that permits the repurchase of up to $10 million of warrants. On November 3, 2016, the Board of Directors of AFG authorized an additional $10 million to the warrant repurchase program. The remaining aggregate authorization at December 31, 2022, is $11.9 million. Stock Performance Graph The following graph compares the performance of an investment in our common stock from the close of business on December 29, 2017, through December 31, 2022, with the Russell 2000 Index and S&P Completion Index. The graph assumes $100 was invested on December 29, 2017, in our common stock at the closing price of $15.98 per share and at the closing price for the Russell 2000 Index and S&P Completion Index. It also assumes that dividends (if any) were reinvested on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication of future performance. ` December 31, 2017 2018 2019 2020 2021 2022 Ambac Financial Group, Inc. $100 $108 $135 $96 $101 $109 Russell 2000 Index $100 $88 $109 $129 $147 $115 S&P Completion Index $100 $89 $112 $147 $164 $119 | Ambac Financial Group, Inc. 26 2022 FORM 10-K Table of Contents , Item 6. Selected Financial Data — Reserved Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our consolidated financial statements with the following: • A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results; • Context to the consolidated financial statements; and • Information that allows assessment of the likelihood that past performance is indicative of future performance. The following discussion should be read in conjunction with our consolidated financial statements in Item 8 of this Report and the matters described under Item 1A. Risk Factors in this Annual Report on Form 10-K for the year ended December 31, 2022. Refer to Item 1. Description of the Business and Note 1. Background and Business Description for a description of our business and our key strategies to achieve our primary goal to maximize shareholder value. Organization of Information MD&A includes the following sections: Page Executive Summary 27 Critical Accounting Estimates 30 Financial Guarantees in Force 32 Results of Operations 38 Liquidity and Capital Resources 44 Balance Sheet 46 Accounting Standards 52 Ambac Assurance Statutory Basis Financial Results 52 Ambac UK Financial Results under UK Accounting Principles 54 Non-GAAP Financial Measures 54 EXECUTIVE SUMMARY ($ in millions) AFG Net Assets: AFG has the following net assets to support its goals and strategies, including the development and growth of its Specialty Property and Casualty Insurance and Insurance Distribution businesses, acquisitions and capital management. AFG does not have any commitment or other obligation to provide capital or liquidity to AAC, whose financial guarantee business has been in run-off since 2008. As of December 31, 2022, AFG's stand alone net assets, excluding its equity investments in subsidiaries, were $223. ($ in millions) Cash and short-term investments $ 178 Other investments (1) 28 Other net assets 17 Total $ 223 (1) Includes strategic minority investments in insurance services businesses of $24, including investments of $5 made during 2022. From April 1, 2022, through December 31, 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. Specialty Property and Casualty Insurance Segment The key value metrics for the Specialty Property and Casualty Insurance segment for the years ended December 31, 2022 and 2021 were as follows: Year ended December 31, 2022 2021 Gross premiums written $ 146 $ 13 Net premiums written 29 3 Pretax income (loss) $ (6) $ (8) Earnings before interest, taxes, depreciation and amortization (6) (8) Loss ratio 65.4 % 71.4 % Stockholders Equity (1) $ 110 $ 109 (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 three admitted carriers (the "21st Century Companies") from a national insurance group that has a Financial Strength Rating of “A” (Excellent) from AM Best. The 21st Century Companies collectively possess certificates of authority in thirty-nine states. All legacy liabilities remain with affiliates of the sellers through reinsurance and contractual indemnities. 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. | Ambac Financial Group, Inc. 27 2022 FORM 10-K Table of Contents , Insurance Distribution Segment The key value metrics for the Insurance Distribution segment for the years ended December 31, 2022 and 2021 were as follows: Year ended December 31, 2022 2021 Premiums placed $ 135 $ 117 Commission income 31 26 Sub-producer commission expense 18 15 Net commissions 13 12 Pretax income (loss) $ 5 $ 4 Earnings before interest, taxes, depreciation and amortization 6 5 Stockholders Equity (1) $ 93 $ 66 (1) Represents Ambac's stockholders equity in the Insurance Distribution segment, including intercompany eliminations. Effective November 1, 2022, Ambac acquired controlling interests in All Trans Risk Solutions, LLC ("All Trans") and Capacity Marine Corporation ("Capacity Marine"), adding approximately $60 of annual premiums placed to the Insurance Distribution segment, for a collective purchase price of $26. Refer to Note 4. Business Combination to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K 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 years ended December 31, 2022 and 2021 were as follows: Year ended December 31, 2022 2021 Net premiums earned $ 42 $ 46 Net investment income 12 138 Net gains on derivative contracts 128 22 Net realized gains on extinguishment of debt 81 33 Litigation recoveries 126 — Loss and lossadjustment expenses (benefit) (406) (89) General and administrative expenses 102 77 Interest expense 168 187 Pretax income (loss) $ 540 $ 20 Stockholders Equity (1) $ 826 $ 684 Adversely Classified Credit Net Par Outstanding $ 4,735 $ 6,361 (1) Represents Ambac's stockholders equity in the Legacy Financial Guarantee Insurance segment, including intercompany eliminations and insurance intangible assets of $266. A key strategy for Ambac is to increase the value of its investment in AAC by actively managing its assets and liabilities. Asset management primarily entails maximizing the risk-adjusted return on non-VIE invested assets and managing liquidity to help ensure resources are available to meet operational and strategic cash needs. These strategic cash needs include activities associated with Ambac's liability management and loss mitigation programs. Settlement of RMBS Litigations and Redemption of Secured Notes: In October 2022, AAC entered into a Settlement Agreement and Release (the “BOA 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 “BOA Settlement Payment”). In connection with the Settlement Payment, as required under the terms of AAC's secured debt, AAC utilized $1,431 of the BOA Settlement Payment to redeem a majority of the principal and accrued interest of its secured debt. On December 29, 2022, AAC entered into a Settlement Agreement and Release (the “Nomura Settlement Agreement”) with Nomura Credit & Capital, Inc. (“Nomura”) to settle its RMBS litigation against Nomura. As a result, Nomura paid AAC $140 million (the "Nomura Settlement Payment") in January 2023. AAC used all proceeds of the Nomura Settlement Payment plus cash on hand to repay the remaining outstanding balance of Tier 2 Notes (as described in Note 13. Long-Term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K). The settlements with the BOA Parties and Nomura brought to closure all of AAC's legacy litigation against RMBS sponsors. These settlement receipts materially exceeded the amount of subrogation recovery recorded on Ambac’s consolidated GAAP financial statements. Refer to Note 1. Background and Business Description in Part II, Item 8 in this Annual Report on Form 10-K for further details of the BOA Settlement Agreement and the Nomura Settlement Agreement and related impacts on Ambac's Statement of Comprehensive Income. Asset Management Investment portfolios are subject to internal investment guidelines as well as restrictions imposed by insurance laws and regulations which limit the types and quality of investments a carrier may acquire. In the case of AAC, the Wisconsin Office of the Commissioner of Insurance ("OCI") has the right to approve changes to the investment guidelines pursuant to the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC. The investment portfolios of AAC and Ambac UK hold fixed maturity securities and various pooled investment funds. Refer to Note 5. Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for further details of fixed maturity investments by asset category and pooled investment funds by investment type. At December 31, 2022 and 2021, Ambac and its subsidiaries owned $286 and $609, respectively, of distressed AAC and Ambac UK-insured bonds, including significant concentrations of insured RMBS bonds and, in 2021, insured Puerto Rico bonds. As a result of the Puerto Rico restructurings discussed under "Liability and Insured Exposure Management" below, | Ambac Financial Group, Inc. 28 2022 FORM 10-K Table of Contents , there are no AAC-insured Puerto Rico bonds held in the investment portfolio as of December 31, 2022. Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase or sell AAC and Ambac UK-insured securities, surplus notes and/or other AAC issued securities, and may consider opportunities to exchange securities issued by AAC for other securities issued by AFG or AAC. Liability and Insured Exposure Management AAC's Risk Management Group focuses on the implementation and execution of risk reduction, defeasance and loss recovery strategies. Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of loss mitigation or remediation strategies in order to target and prioritize policies, or portions thereof, for commutation, reinsurance, refinancing, restructuring or other risk reduction strategies. For targeted policies, analysts will engage with issuers, bondholders and other economic stakeholders to negotiate, structure and execute such strategies. During 2022, Ambac completed risk reduction transactions consisting of refinancings and commutations of $2,707, of which, $806 related to Puerto Rico. Refer below to the Financial Guarantees In Force section of the Management Discussion and Analysis for Results of Operations, Financial Guarantees in Force for additional details of the Puerto Rico restructuring. The following table provides a comparison of total, adversely classified ("ACC") and watch list (as described in Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K) credit net par outstanding in the insured portfolio at December 31, 2022 and 2021. Net par exposure within the U.S. public finance market includes capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds. ($ in billions) December 31, 2022 2021 Variance Total $ 22,613 $ 28,020 $ (5,407) (19) % ACC $ 4,735 $ 6,361 $ (1,626) (26) % Watch List $ 3,044 $ 3,824 $ (780) (20) % The decrease in total, ACC and watch list credit net par outstanding resulted from active de-risking (including AAC's exposures to Puerto Rico), and strengthening of the USD versus the GBP and EURO, as well as scheduled maturities, amortizations, refundings and calls. Russia and Ukraine Conflict The current conflict between Russia and Ukraine and the related sanctions and other penalties imposed by countries across the globe against Russia are creating substantial uncertainty in the global economy. We do not have operations in Russia or Ukraine or any insured exposures in those countries. Ambac's investment portfolio exposure to Russian issuers is not meaningful. Given our insignificant exposure, we have not experienced, and do not expect this conflict to have, a material adverse impact on our results of operations, financial condition or cash flows. However, as the conflict continues and if it were to escalate, the global economy and capital markets may be adversely impacted in ways that we cannot predict and therefore we are unable to estimate the ultimate impact that this conflict may have on our future financial condition, results of operations, and cash flows. Financial Statement Impact of Foreign Currency The impact of foreign currency as reported in Ambac's Consolidated Statement of Total Comprehensive Income (Loss) for the years ended December 31, 2022 and 2021 included the following: ($ in millions) December 31, 2022 2021 Net income (1) $ 11 $ (7) Gain (losses) on foreign currency translation (net of tax) (85) (8) Unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax) 11 3 Impact on total comprehensive income (loss) $ (63) $ (12) (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 Consolidated Statement of Total Comprehensive Income (Loss). Refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report in Form 10-K for further details on transaction gains and losses. Future changes to currency rates, may adversely affect our financial results. Refer to Part II, Item 7A "Quantitative and Qualitative Disclosures about Market Risk" for further information on the impact of future currency rate changes on Ambac's financial instruments. LIBOR Sunset Ambac continuously monitors regulatory and industry developments related to the transition from LIBOR to alternative reference rates. In 2021, New York State passed legislation addressing the cessation of U.S. Dollar ("USD") LIBOR and specified a recommended benchmark replacement based on the Secured Overnight Financing Rate ("SOFR") for certain legacy transactions. Similar federal legislation was passed into law in March 2022 and the Federal Reserve's Board of Governors adopted the final rules for implementing this legislation in December 2022. 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. See the Risk Factor entitled "Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences" found in Part I, Item 1A of this Annual Report on Form 10-K. SEC Proposed Rules on Climate Related Information On March 21, 2022, the Securities and Exchange Commission (“SEC”) proposed rule amendments that would require public | Ambac Financial Group, Inc. 29 2022 FORM 10-K Table of Contents , 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. These new requirements, if adopted, would at the earliest take effect in fiscal year 2024 and begin to apply to SEC filings in 2025. Ambac is reviewing the Proposed Rule and assessing related compliance obligations and other effects on our operations. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Ambac's Consolidated Financial Statements have been prepared in accordance with GAAP. This section highlights accounting estimates management views as critical because they are most important to the portrayal of the Company's financial condition; and require management to make difficult and subjective judgments regarding matters that are inherently uncertain and subject to change. These estimates are evaluated on an on-going basis considering historical developments, political events, market conditions, industry trends and other information. There can be no assurance that actual results will conform to estimates and that reported results of operations will not be materially adversely affected by the need to make future accounting adjustments to reflect changes in these estimates from time to time. Management has identified the following critical accounting policies and estimates: (i) valuation of financial guarantee loss and loss adjustment expense reserves, (ii) valuation of certain financial instruments and (iii) valuation of deferred tax assets. Management has discussed each of these critical accounting policies and estimates with the Audit Committee, including the reasons why they are considered critical and how current and anticipated future events impact those determinations. Additional information about these policies can be found in Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K. Valuation of Financial Guarantee Losses and Loss Expense Reserves (including Subrogation Recoverables) The loss and loss adjustment expense reserves and subrogation recoverable assets (collectively defined as "loss reserves") discussed in this section relate only to Ambac’s non-derivative financial guarantee insurance policies issued to beneficiaries, including unconsolidated VIEs. A loss reserve is recorded on the balance sheet on a policy-by-policy basis at the present value ("PV") of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates. The estimate for future net cash flows consider the likelihood of all possible outcomes that may occur from missed principal and/or interest payments on the insured obligation. This estimate also considers future recoveries related to remediation strategies and other contractual or subrogation-related cash flows. The evaluation process for expected future net cash flows is subject to certain estimates and judgments regarding the probability of default by the issuer of the insured security, probability of negotiation or settlement outcomes (which may include commutation, litigation and other settlements, and/or a refinancing), probability of a restructuring outcome (which may include payment moratoriums, debt haircuts and/or subsequent recoveries) and the expected loss severity of credits for each insurance contract. As the probability of default for an individual credit increases and/or the severity of loss given a default increases, our loss reserve for that insured obligation will also increase. Political, economic, credit or other unforeseen events could have an adverse impact on default probabilities and loss severities. The loss reserves for many transactions are derived from the issuer’s creditworthiness. For public finance issuers, loss reserves will consider not only creditworthiness but also political dynamics and economic status and prospects. The loss reserves for transactions which have no direct issuer support, such as most structured finance exposures, including RMBS and student loan exposures, are derived from the default activity and the estimated loss given default of the underlying collateral supporting the transactions. In addition, many transactions have a combination of issuer/entity and collateral support. Loss reserves reflect our assessment of the transaction’s overall structure, support and expected performance. Loss reserve volatility will be a direct result of the credit performance of our insured portfolio, including the number, size, bond types and quality of credits included in our loss reserves; our ability to execute workout strategies and commutations; economic and market conditions; and management's judgments with regards to the current performance and future developments within the insured portfolio. The number and severity of credits included in our loss reserves depend to a large extent on transaction specific attributes, but will generally increase during periods of economic stress and decline during periods of economic prosperity. Reinsurance contracts mitigate our loss reserves but since Ambac currently has minimal exposure ceded to reinsurers on financial guarantee credits with loss reserves, the existing reinsurance contracts are unlikely to have a significant effect on loss reserve volatility. Loss reserve volatility will also be materially impacted by changes in interest rates from period to period. | Ambac Financial Group, Inc. 30 2022 FORM 10-K Table of Contents , The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac’s Financial Guarantee loss and loss adjustment expense reserves at December 31, 2022 and 2021: Gross Par Outstanding (1) (2) Gross Loss and Loss Adjustment Expense Reserves (1) (3) (4) December 31, 2022 Structured Finance $ 2,050 $ 358 Domestic Public Finance 1,215 75 Other 782 3 Loss expenses — 8 Totals $ 4,047 444 December 31, 2021 Structured Finance $ 2,371 (1,178) Domestic Public Finance 2,742 562 Other 1,189 17 Loss expenses — 45 Totals $ 6,302 (554) (1) Ceded par outstanding on policies with loss reserves and ceded loss and loss adjustment expense reserves are $472 and $33 respectively, at December 31, 2022, and $784 and $24, respectively at December 31, 2021. Ceded loss and loss adjustment expense reserves are included in Reinsurance recoverable on paid and unpaid losses. (2) Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond. (3) Loss and Loss Adjustment Expense reserves at December 31, 2022, of $444 are included in the balance sheet in the following line items: Loss and loss adjustment expense reserves: $715 and Subrogation recoverable: $(271). Loss and Loss Adjustment Expense reserves at December 31, 2021, of $(554) are included in the balance sheet in the following line items: Loss and loss adjustment expense reserves: $1,538 and Subrogation recoverable: $(2,092). (4) Ambac records as a component of its loss and loss adjustment expense reserves, estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties. Ambac has recorded gross estimated recoveries of $140 and $1,730 at December 31, 2022 and 2021, respectively. See the Balance Sheet section of this Management's Discussion and Analysis of Financial Condition and Results of Operations below for a discussion on the reasons for changes to Gross Loss and Loss Adjustment Expense Reserves during 2022. See Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for a description of the cash flow and statistical methodologies used to develop loss reserves. The majority of our large loss reserves utilize the cash flow method of reserving. Various cash flow scenarios are developed to represent the range of possible outcomes and resultant future claim payments and timing. Scenarios and probabilities of each are adjusted regularly to reflect changes in status, outlook and our analysis and views. Significant judgment is used to develop the cash flow assumptions and related probabilities, and there can be no certainty that the scenarios or probabilities will not deviate materially from ultimate outcomes. • In some cases, such as RMBS and student loans, cash flow projections include the modeling of a securitization's cash flows to determine the resources available to pay debt service on our insured obligations. Key assumptions impacting RMBS cash flow models include borrower credit characteristics, projected home price appreciation, interest rates and mortgage loan modification activity. Key assumptions impacting student loan cash flow models include projected loan defaults, recoveries and interest rates. • In other cases, such as many public finance exposures, we consider the issuer's overall ability and willingness to pay as it relates to the existing fiscal, economic, legal, restructuring and/or political framework relevant to a particular exposure or group of exposures. We then develop multiple scenarios where issuer debt service is paid, missed and/or haircut with claims paid then factor in any projected recovery amount (and potential variability of the recovery amount) and the timing thereof. There is no certainty our assumptions as to scenarios or probabilities will not be subject to material changes as developments occur. • In estimating loss reserves, we may also incorporate scenarios which represent the potential outcome of remediation strategies. Remediation scenarios could include (i) a potential refinancing of the transaction by the issuer; (ii) the issuer’s ability to redeem outstanding securities at a discount, thereby increasing the structure’s ability to absorb future losses; and (iii) our ability to terminate, restructure or commute the policy in whole or in part. The remediation scenarios and the related probabilities of occurrence vary by policy depending on ongoing and expected discussions and negotiations with issuers and/or investors. In addition to commutation negotiations that are underway with various counterparties in various forms, our reserve estimates may also include scenarios which incorporate our ability and/or expectation to commute additional exposure with other counterparties. Valuation of Certain Financial Instruments The Fair Value Measurement Topic of the ASC requires financial instruments to be classified within a three-level fair value hierarchy. The fair value hierarchy, the financial instruments classified within each level, our valuation methods, inputs, assumptions and the review and validation procedures over quoted and modeled pricing are further detailed in Note 6. Fair Value Measurements to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. The level of judgment in estimating fair value is largely dependent on the amount of observable market information available to fair value a financial instrument, which is also determinative of where the financial instrument is classified in the fair value hierarchy. Level 3 instruments are valued using models which use one or more significant inputs or value drivers that are unobservable and therefore require significant judgment. Level 3 financial instruments which are material include certain | Ambac Financial Group, Inc. 31 2022 FORM 10-K Table of Contents , invested assets, uncollateralized interest rate swaps and investments and loan receivables of consolidated VIEs. Model-derived valuations of Level 3 financial instruments incorporate estimates of the effects of Ambac's own credit risk and/or counterparty credit risk, which can be complex and judgmental. Furthermore, Level 3 investments and loan receivables of consolidated VIEs incorporate estimates of Ambac's financial guarantee cash flows, including future premiums and losses. Such cash flow estimates require judgments regarding prepayments of VIE debt, loss probabilities and loss severities, all of which are inherently uncertain. All models and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based on improvements in information and modeling techniques. The re-evaluation process includes a quarterly meeting of senior Finance personnel to review and approve changes to models and key assumptions. As a result of the significant judgment for the above-described instruments, the actual trade value of the financial instrument in the market, or exit value of the financial instrument owned by Ambac, may be significantly different from its recorded fair value. Valuation of Deferred Tax Assets Our provision for taxes is based on our income, statutory tax rates and tax planning opportunities available to us in the jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions. We review our tax positions quarterly and adjust the balances as new information becomes available. Deferred tax assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss ("NOL"). More specifically, deferred tax assets represent a future tax benefit that results from losses recorded under GAAP in a current period which are only deductible for tax purposes in future periods and NOL carry forwards. Valuation allowances are established to reduce deferred tax assets to an amount that “more likely than not” will be realized. Management considers all available evidence, both positive and negative, when determining whether to establish and/or maintain a valuation allowance against deferred tax assets, with significant weight given to evidence that can be objectively verified. Positive evidence includes reduced potential for material loss as a result of settling RMBS representation and warranty litigation and resolving exposure to Puerto Rico, Everspan's receipt of an 'A-'' Financial Strength Rating from AM Best, the launch of a specialty program property and casualty insurance business, AFG's acquisition of majority interests in MGA/U businesses and AAC's reduction of material amounts of debt. Negative evidence includes the potential for unrecognized future insurance tax losses; cumulative pre-tax losses, adjusted for nonrecurring one-time events, for the last three years; the legacy financial guarantee business remains in run-off; and material amounts of debt remain at AAC. The level of deferred tax asset recognition is influenced by management’s assessment of future expected taxable income, which depends on the existence of sufficient taxable income within the carry forward periods available under the tax law. As a result of the above-described risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover part or all the U.S. federal deferred tax asset and therefore has a full valuation allowance. To the extent such risks and uncertainties are resolved, Ambac may have the ability to establish a history of making reliable estimates of future income which could ultimately result in a reduction to the deferred tax asset valuation allowance. See Note 17. Income Taxes to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for additional information on the Company's deferred income taxes. FINANCIAL GUARANTEES IN FORCE ($ in millions) Financial guarantee products were sold in three principal markets: U.S. public finance, U.S. structured finance and international finance. The following table provides a breakdown of guaranteed net par outstanding by market at December 31, 2022 and 2021. Net par exposures within the U.S. public finance market include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds. Guaranteed net par outstanding includes the exposures of policies insuring variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC . Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and for 2021 excludes exposure of the policy insuring the Sitka Senior Secured Notes as defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. December 31, 2022 2021 Public Finance (1) (2) $ 10,547 $ 12,360 Structured Finance 3,612 4,904 International Finance 8,454 10,756 Total net par outstanding $ 22,613 $ 28,020 (1) Includes $5,400 and $5,490 of Military Housing net par outstanding at December 31, 2022 and 2021, respectively. (2) Includes $244 and $1,054 of Puerto Rico net par outstanding at December 31, 2022 and 2021, respectively. Below we will discuss the significant exposures in our insured portfolio relating to each of the three markets. See Note 7. Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for exposures by bond type. U.S. Public Finance Insured Portfolio AAC’s portfolio of U.S. public finance exposures totaled $10,547 in net par outstanding, representing 47% of Ambac’s net par outstanding as of December 31, 2022, and a 15% reduction from the amount outstanding at December 31, 2021. | Ambac Financial Group, Inc. 32 2022 FORM 10-K Table of Contents , This reduction in exposure was due to the Puerto Rico restructuring transactions, other active de-riskings, scheduled paydowns, and early terminations (calls, refundings and pre-refundings). Ambac’s U.S. public finance portfolio consists of municipal bonds such as general obligation, revenue, and lease and tax-backed obligations of state and local government entities, and also includes several non-municipal types of bonds, such as financings with public and private elements, which generally finance infrastructure, housing and other public interests, the largest sector of which is U.S. military housing which accounts for approximately 51% of AAC's U.S. Public Finance Insured Portfolio. Municipal Bonds Municipal bonds are generally supported directly or indirectly by the issuer’s taxing authority or by public sector fees and assessments which may or may not be specifically pledged. Risk factors in these transactions derive from the municipal issuer, including its fiscal management, politics, and economic position, as well as its ability and willingness to continue to pay its debt service. Municipal bankruptcies and similar proceedings, while still relatively uncommon, have occurred, exposing Ambac to the risk of liquidity claims and ultimate losses if issuers cannot successfully adjust their liabilities without impairing creditors. Non-Municipal Bonds Public/private transactions are generally structured to achieve their targeted public interest objective without direct support from the public sector. Some examples of this type of financing include affordable housing, private education, and privatized military housing. Protections within these financings provided to Ambac usually include the strength of the financed asset’s essentiality and public purpose and may include financial covenants, collateral and control rights. Risk factors include financial underperformance, event risk and a shift in the asset’s mission or essentiality. Military Housing Bonds AAC's largest concentration of non-municipal bonds is U.S. military housing. Ambac insures $5,400 net par of privatized military housing debt. The debt was issued to finance the construction and/or renovation of housing units for military personnel and their families on domestic U.S. military bases. Debt service is not directly paid or guaranteed by the U.S. Government. Rather, the bonds are serviced from the cash flow generated in most cases by rental payments deposited by the military directly into lockbox accounts as part of each service personnel’s Basic Allowance for Housing (BAH). In typically small percentages, rental payments can also come from civilians, including retired service personnel and US Department of Defense contractors living on a particular base. Collateral for these transactions includes the BAH payments as well as an interest in the ground lease. Risk factors affecting these transactions include ongoing base essentiality, military deployments, the U.S. government’s commitment to fund the BAH, marketability/attractiveness of the on-base housing units versus off-base housing, construction completion, environmental remediation, natural disasters, excessive utility and other operating costs and housing management. Ambac's exposure to privatized military housing debt is a growing concentration given the long-dated maturity profile of the exposure relative to other parts of Ambac's insured portfolio. As of December 31, 2022, privatized military housing represented approximately 24% of net par outstanding as compared to 19.6% as of December 31, 2021. U.S. Structured Finance Portfolio Ambac’s portfolio of U.S. structured finance exposures is $3,612 in net par outstanding, representing 16% of Ambac’s net par outstanding as of December 31, 2022, and a 26% reduction from the amount outstanding at December 31, 2021. This reduction in exposure was primarily related to (i) RMBS policies, which continued to prepay as well as incur claims, (ii) de-risking activity and (iii) scheduled paydowns. Current insured exposures primarily include securitizations of mortgage loans, home equity loans and student loans, in each case where the majority of the underlying collateral risk is situated in the United States. At December 31, 2022, RMBS represented approximately 9% of net par outstanding. Structured finance securitization exposures generally entail three forms of risk: (i) asset risk, which relates to the amount and quality of the underlying assets; (ii) structural risk, which relates to the extent to which the transaction’s legal structure and credit support provide protection from loss; and (iii) servicer risk, which is the risk that poor performance at the servicer or manager level contributes to a decline in cash flow available to the transaction. AAC seeks to mitigate and manage these risks through its risk management practices. International Finance Insured Portfolio Ambac’s portfolio of international finance insured exposures is $8,454 in net par outstanding, representing 37% of Ambac’s net par outstanding as of December 31, 2022, and a 21% reduction from the amount outstanding at December 31, 2021. This reduction in exposure was primarily the result of commutations and a strengthening of the US dollar versus the British pound and the Euro. Ambac’s international finance insured exposures include a wide array of obligations in the international markets, including infrastructure financings, utility obligations, whole business securitizations (e.g., securitizations of substantially all of the operating assets of a corporation) and sub-sovereign credits. At December 31, 2022, sub-sovereign and investor-owned and public utilities represented approximately 18% and 11% of net par outstanding, respectively. Ambac has no insured exposure related to emerging markets. When underwriting transactions in the international markets, Ambac considered the specific risks related to the particular country and region that could impact the credit of the issuer. These risks include the legal and political environment, capital markets dynamics, foreign exchange issues and the degree of governmental support. Ambac continues to assess these risks through its ongoing risk management. Ambac UK, which is regulated in the United Kingdom (“UK”), was AAC’s primary vehicle for directly issuing financial guarantee policies in the UK and the European Union with $8,194 net par outstanding at December 31, 2022. The portfolio of insured exposures underwritten by Ambac UK is financially supported exclusively by the assets of Ambac UK and no capital support arrangements are in place with any other Ambac affiliate. | Ambac Financial Group, Inc. 33 2022 FORM 10-K Table of Contents , Ambac's international net par exposures are principally in the United Kingdom ($7,223); however, we also have exposures with credit risk based in various EU member states, including Austria, France, Germany and Italy ($971). Ambac does not guarantee any sovereign bonds of the above EU countries. Largest Insured Exposures: The table below shows Ambac’s ten largest exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at December 31, 2022 (in millions): Sector Co. Bond Kind Country-Bond Type Ambac Ratings (1) Ultimate Maturity Year Net Par Outstanding % of Total Net Par Outstanding IF AUK Investor Owned Utility Gas - unsecured UK-Utility BBB+ 2037 $ 805 3.6 % IF AUK Other Asset Securitizations UK-Asset Securitizations BBB 2033 744 3.3 % IF AUK PFI - Accommodation UK-Infrastructure A- 2040 723 3.2 % IF AUK PFI - Hospitals UK-Infrastructure A- 2046 688 3.0 % IF AUK Investor Owned Utility Other - unsecured UK-Utility A- 2035 598 2.6 % IF AUK Sub-Sovereign Italy-Sub-Sovereign BIG 2035 591 2.6 % IF AUK Investor Owned Utility Electric - unsecured UK-Utility BBB+ 2036 556 2.5 % PF AAC US State Lease/Appropriation US-Lease and Tax-backed Revenue BBB- 2036 489 2.2 % IF AUK PFI - Accommodation UK-Infrastructure BBB+ 2038 472 2.1 % PF AAC Military Housing US-Housing Revenue BBB- 2052 450 2.0 % Total $ 6,116 27.1 % PF = Public Finance, SF = Structured Finance, IF = International Finance AAC = Ambac Assurance, AUK = Ambac UK (1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG denotes credits deemed below investment grade. Net par related to the top ten exposures reduced $1,209 from December 31, 2021. Exposures are impacted by commutations, changes in foreign exchange rates ($575 reduction during 2022), certain indexation rates linked to inflation measures in the United Kingdom (RPI) and Australia (CPI), and scheduled and unscheduled paydowns. As a result of recent increases in inflation, such indexation-linked exposures have increased at a faster pace than they have historically. The concentration of net par amongst the top ten (as a percentage of net par outstanding) increased slightly to 27.1% at December 31, 2022, from 26.2% at December 31, 2021. Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $30 per single risk, with insured exposures ranging up to $386 and a median net par outstanding of $5. Given that Ambac has not written any new insurance policies since 2008, the risk exists that the insured portfolio becomes increasingly concentrated to large and/or below investment grade exposures. Puerto Rico Our exposure to Puerto Rico (the "Commonwealth") consisted of several different issuing entities (all below investment grade and whereby AAC has paid substantial claims since 2016) that have been part of the debt restructuring process under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), a U.S. federal law enacted in 2016 that, among other things, established a financial oversight board (the “FOMB”) and provided for a process for restructuring debt that roughly follows U.S. Bankruptcy laws. As of December 6, 2022, all AAC-insured Puerto Rico obligations have been restructured under PROMESA via court-approved plans of adjustment or qualifying modifications. The following table outlines Ambac's insured net par outstanding to each Commonwealth of Puerto Rico issuer. Net Par Outstanding ($ in millions) December 31, 2022 2021 PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) (1) $ 178 $ 394 PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA) 66 73 PR Highways and Transportation Authority (1968 Resolution - Highway Revenue) — 4 PR Infrastructure Financing Authority (Special Tax Revenue) — 403 PR Convention Center District Authority (Hotel Occupancy Tax — 86 Commonwealth of Puerto Rico - General Obligation Bonds — 11 PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico — 83 Total Net Exposure to The Commonwealth of Puerto Rico and Related Entities $ 244 $ 1,054 Total Net P&I Exposure to The Commonwealth of Puerto Rico and Related Entities $ 884 $ 2,423 | Ambac Financial Group, Inc. 34 2022 FORM 10-K Table of Contents , (1) As of February 16, 2023, net par of $136 has been reduced through acceleration and redemption payments consistent with AAC's plan to further de-risk its exposure to Puerto Rico. Commonwealth Plan of Adjustment (Title III Case) On January 18, 2022, Judge Laura Taylor Swain, U.S. District Court for the District of Puerto Rico, entered an order confirming the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al. ("Eighth Amended POA") together with the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively). On March 15, 2022, the Eighth Amended POA, the PRIFA QM and CCDA QM became effective, restructuring approximately $33,000 of debt across various Commonwealth instrumentalities, including obligations insured by AAC, and approximately $50,000 in pension obligations. The Eighth Amended POA, among other things, incorporated the settlement reflected in the PRIFA Related Plan Support Agreement (“PRIFA PSA”) that was signed on July 27, 2021, by the FOMB, 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 FOMB, 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 GO / PBA On the Eight Amended POA effective date, AAC-insured GO and PBA bondholders who elected commutation of their insurance received: i) their respective shares of GO/PBA plan consideration available under the Eighth Amended POA, and ii) cash from Ambac. Ambac’s obligations to the bondholders under the Ambac insurance policies who elected this option were deemed to be fully satisfied. On the plan effective date, about 50% and 27% of the outstanding par of the Ambac-insured GO and PBA bonds, respectively, totaling about $28 of insured par was commuted. The AAC-insured GO and PBA bondholders who failed to elect commutation received payment, in cash, of the outstanding principal amount of the bondholders’ insured bonds plus the accrued and unpaid interest thereon as of the effective date (the “Ambac Acceleration Price.”). Pursuant to this option, bondholders received the Ambac Acceleration Price in full and final discharge of Ambac’s obligations under the Ambac insurance policies. As of the effective date, all the remaining outstanding AAC-insured GO and PBA bonds were satisfied and eliminated via commutation or acceleration. PRIFA / CCDA On the Eight Amended POA effective date, AAC-insured PRIFA and CCDA bondholders who elected commutation of their insurance received: 1) their respective shares of PRIFA or CCDA plan consideration available under the Eighth Amended POA and the PRIFA QM, or CCDA QM, as applicable, and 2) cash from Ambac. Ambac’s obligations to the bondholders under the Ambac insurance policies who elected this option were deemed to be fully satisfied. The AAC-insured PRIFA and CCDA bondholders who failed to elect commutation had their bondholders’ respective shares of consideration available under the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable, deposited into a trust. On the plan effective date, about 39% and 19% of the outstanding par of the AAC-insured PRIFA and CCDA bonds, respectively, totaling about $172 of insured par was commuted with the remainder totaling about $317 of insured par deposited into the trusts. During the second quarter of 2022, the remainder of those PRIFA and CCDA bonds belonging to bondholders who elected not to commute their AAC Insurance Policies and were deposited into trusts together with such policies were all accelerated, satisfying and eliminating all of the AAC-insured PRIFA and CCDA bonds. PRHTA Plan of Adjustment (Title III Case) On October 12, 2022, Judge Swain entered an order confirming the Fifth Amended Title III Plan of Adjustment of The Puerto Rico Highways and Transportation Authority (" PRHTA POA"). On December 6, 2022, the PRHTA POA became effective, restructuring approximately $6,400 of PRHTA claims, including obligations insured by AAC. The PRHTA POA, among other things incorporated the settlement reflected in the PRHTA/CCDA PSA. PRHTA / CCDA PSA AAC signed a joinder to the PRHTA/CCDA PSA on July 15, 2021. The PRHTA/CCDA PSA, originally executed on May 5, 2021, provided for certain consideration for holders of bonds issued by certain Commonwealth instrumentalities, PRHTA and CCDA on account of their claims against the Commonwealth arising from such bonds ("Clawback" claims). Under the PRHTA/ CCDA PSA, PRHTA creditors shared $389 of cash proceeds that was paid on July 8, 2022, once the PRHTA distribution condition was met pursuant to the Eighth Amended POA (the “Interim Distribution”). In addition, PRHTA creditors received an approximately 69% share of the Clawback contingent value instrument ("CVI"), subject to a lifetime nominal cap of about $3,698, which was also paid as part of the Interim Distribution. The PRHTA Clawback CVI is subject to a PRHTA-specific waterfall: holders of PRHTA ’68 bonds will receive the first dollars of Clawback CVI, followed by holders of PRHTA ’98 bonds PRHTA bondholders also received new PRHTA bonds with a face amount of $1,245. Of the $1,245 in new bonds, approximately $646.4 was allocated to holders of PRHTA '68 bonds and approximately $598.6 was allocated to holders of PRHTA '98 bonds. In addition, AAC and other PRHTA creditors received restriction fees and consummation costs that were payable at the effective date of the PRHTA POA. PRHTA 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 under the Eighth Amended POA. The Interim Distribution to AAC totaled approximately $19 of cash and $295 maximum notional value of Clawback CVI, which had been recorded as cash and fixed maturity securities - trading (at fair value), respectively, on the Consolidated Balance Sheet. On the PRHTA POA effective date, a portion of the cash and Clawback CVI were: (i) | Ambac Financial Group, Inc. 35 2022 FORM 10-K Table of Contents , distributed to PRHTA '98 commuting bondholders together with the new PRHTA bonds in connection with the PRHTA POA and a commutation payment from AAC in full satisfaction of and 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 in connection with the PRHTA POA. PRHTA Effective Date Transactions On the PRHTA effective date, 1) all remaining outstanding AAC-insured PRHTA '68 bonds were fully satisfied and eliminated via acceleration, and 2), pursuant to bondholder election, AAC-insured PRHTA '98 bondholders who elected commutation of their insurance received (i) their share of PRHTA plan consideration under the PRHTA POA and the interim distribution under the Eighth Amended POA, and (ii) cash from AAC. AAC’s obligations to the bondholders under the Ambac insurance policies who elected this option were deemed to be fully satisfied and eliminated. The AAC-insured PRHTA '98 bondholders who failed to elect commutation had their bondholders’ share of plan consideration under the PRHTA POA and the interim distribution under the Eighth Amended POA deposited into a trust. On the plan effective date, about 21% of the outstanding par of the AAC-insured PRHTA 98 bonds, totaling about $83 of net par outstanding was commuted with the remainder totaling about $312 of net par outstanding being deposited into the trusts. Following the effective date, subsequent redemptions of trust units via the pass through of plan consideration proceeds and AAC acceleration payments further reduced AAC-insured PRHTA '98 net par exposure to $178 as of December 31, 2022. Since year-end, AAC-insured PRHTA exposure has been further reduced through redemptions of trusts units via the pass through of plan consideration proceeds, interest on plan consideration, and AAC acceleration payments. Additional Insured Portfolio Information Average Life of Insured Portfolio Ambac estimates that the average life of its guarantees on par in force at December 31, 2022, is approximately 10 years. The average life is determined by applying a weighted average calculation, using the remaining years to expected maturity of each guaranteed bond, and weighting them on the basis of the remaining net par guaranteed. Except for RMBS policies, no assumptions are made for non-contractual reductions, refundings or terminations of insured issues. RMBS policies incorporate assumptions on expected prepayments over the remaining life of the insured obligation. The following table depicts amortization of existing guaranteed net par outstanding: Net Par Outstanding Amortization (1) ($ in millions) Estimated Net Amortization 2023 $ 1,251 2024 1,505 2025 1,252 2026 1,208 2027 1,014 2023 - 2027 $ 6,230 2028 - 2032 5,172 2033 - 2037 6,597 2038 - 2042 2,040 After 2042 2,574 Total $ 22,613 (1) Depicts amortization of existing guaranteed portfolio, assuming no advance refundings, as of December 31, 2022. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay guaranteed obligations. Exposure Currency The table below shows the distribution by currency of Ambac's existing guaranteed net par outstanding as of December 31, 2022: Currency ($ in millions) Net Par Amount Outstanding in Base Currency Net Par Amount Outstanding in U.S. Dollars Percentage of Net Par Amount Outstanding U.S. Dollars $ 14,350 $ 14,350 63 % British Pounds £ 5,842 7,048 31 % Euros € 894 956 4 % Australian Dollars A$ 380 259 1 % Total $ 22,613 100 % See Note 7. Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Annual Report on Form 10-K, for geographic detail by location of risk as of December 31, 2022. Ratings Distribution The following charts provide a rating distribution of existing net par outstanding based upon internal Ambac credit ratings at December 31, 2022 and 2021, and a distribution of Ambac's below investment grade ("BIG") net par exposures at December 31, 2022 and 2021. BIG is defined as those exposures with an internal credit rating below BBB-: | Ambac Financial Group, Inc. 36 2022 FORM 10-K Table of Contents , Note: AAA is less than 1% in both periods. (1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. Summary of Below Investment Grade Exposure: Bond Type Net Par Outstanding December 31, 2022 2021 Public Finance: Military Housing $ 366 $ 370 Puerto Rico 244 1,054 Other 213 317 Total Public Finance 823 1,741 Structured Finance: RMBS 1,841 2,170 Student loans 275 302 Total Structured Finance 2,117 2,472 International Finance: Sovereign/sub-sovereign 701 774 Transportation 310 389 Other 2 62 Total International Finance 1,013 1,225 Total $ 3,953 $ 5,438 The net decline in below investment grade exposures is primarily due to de-risking activities, including the Puerto Rico restructuring, and foreign exchange rates of $71. 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 continue to increase in the future. Ceded Reinsurance AAC has reinsurance in place pursuant to surplus share treaties and facultative agreements. As a primary financial guarantor, AAC is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations under these reinsurance agreements. AAC's reinsurers all have applicable ratings of A of better. As of December 31, 2022, the aggregate amount of insured par ceded by AAC to reinsurers under reinsurance agreements was $4,938, with the largest reinsurer accounting for $2,187 or 7.9% of gross par outstanding at December 31, 2022. | Ambac Financial Group, Inc. 37 2022 FORM 10-K Table of Contents , The following table shows the distribution, by bond type, of AAC’s ceded guaranteed portfolio at December 31, 2022: Bond Type Ceded Par Amount Outstanding December 31, 2022 2021 Public Finance: General obligation $ 1,265 $ 1,458 Lease and tax-backed revenue 1,169 1,618 Housing revenue 910 922 Transportation revenue 699 749 Other 555 612 Total Public Finance 4,598 5,359 Structured Finance: Investor-owned utilities 174 222 Structured insurance — 313 Other 136 185 Total Structured Finance 310 720 Total Domestic 4,908 6,079 International Finance: Total International Finance 30 23 Total $ 4,938 $ 6,102 Percentage of Gross Par Ceded 18 % 18 % RESULTS OF OPERATIONS ($ in millions) The following discussion should be read along with the financial statements included in this Annual Report on Form 10-K, as well as Part II, "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K for the year ended December 31, 2021, which provides additional information on comparisons of years 2021 and 2020. Net income attributable to common stockholders for the year ended December 31, 2022, was $522 compared to a net loss attributable to common stockholders of $17 for the year ended December 31, 2021. The net income variance was primarily driven by: (i) a higher benefit through loss and loss adjustment expenses, (ii) a litigation recovery, (iii) higher gains on derivative contracts, (iv) higher net gains on extinguishment of debt, and (v) lower interest expense, partially offset by lower returns from the investment portfolio. A summary of our financial results is shown below: Year Ended December 31, 2022 2021 2020 Revenues: Net premiums earned $ 56 $ 47 $ 54 Commission income 31 26 — Program fees 3 — — Net investment income 17 139 122 Net investment gains (losses), including impairments 31 7 22 Net gains (losses) on derivative contracts 129 22 (50) Net realized gains on extinguishment of debt 81 33 — Income (loss) on variable interest entities 21 7 5 Other income 10 1 3 Litigation recoveries 126 — — Expenses: Losses and loss adjustment expenses (benefit) (396) (88) 225 Amortization of deferred acquisition costs, net 3 1 — Commission expense 18 15 — General and administrative expenses 141 111 92 Intangible amortization 47 55 57 Interest expense 168 187 222 Provision (benefit) for income taxes 2 18 (3) Net income (loss) 522 (16) (437) Less: net (gain) loss attributable to noncontrolling interest (1) (1) — Net income (loss) attributable to common stockholders $ 522 $ (17) $ (437) Ambac's results for the year ended December 31, 2022 were significantly impacted by the following: • As of December 6, 2022, all AAC-insured Puerto Rico obligations were restructured under PROMESA via court-approved plans of adjustment or qualifying modifications. As a result of these successful restructurings, Ambac's 2022 consolidated financial results included a net benefit of $180 in losses and gains of $37 on the consolidation of newly established variable interest entities; partially offset by net losses of $23 from sales and changes to the fair value of securities received by AAC in the restructurings, losses of $17 on the VIEs after initial consolidation and accelerated amortization of the insurance intangible asset. | Ambac Financial Group, Inc. 38 2022 FORM 10-K Table of Contents , • On October 6, 2022, AAC entered into a Settlement Agreement and Release with Bank of America Corporation and certain affiliates thereof (the "BOA Parties") whereby the parties settled all RMBS litigation brought by AAC against the BOA Parties and AAC received $1,840. On December 29, 2022, AAC entered into a Settlement Agreement and Release with Nomura Credit & Capital, Inc. whereby the parties settled all RMBS litigation brought by AAC against Nomura and AAC received $140 on January 3, 2023. AAC used the proceeds from these settlements (net of reinsurance) plus approximately $6 of cash on hand to fully redeem all debt obligations secured by the net proceeds of litigations brought by AAC against RMBS sponsors. The settlements with the BOA Parties and Nomura brought to closure all of AAC's legacy litigation against RMBS sponsors. See Note 1. Background and Business Description in Part II, Item 8 in this Annual Report on Form 10-K for further information. During 2022, AAC recorded a gain of $123 million in loss and loss adjustment expenses and litigation recoveries of $126, offset by net realized losses on extinguishment of debt of $53 related to the above-mentioned settlement agreements. The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for 2022 and 2021. Gross Premiums Written. Gross premiums written increased $125 for the year ended December 31, 2022, compared to the same periods in the prior year, as shown by segment below. Year Ended December 31, 2022 2021 2020 Legacy Financial Guaranty Insurance $ (20) $ (11) $ (1) Specialty Property & Casualty Insurance 146 13 — Total $ 127 $ 2 $ (1) Legacy Financial Guarantee Insurance gross written premiums were negative from de-riskings, pre-payments and other changes in expected cash flows of insured transactions. See gross premiums written by line of business for the Specialty Property & Casualty Insurance business located in the Business section of Part I, Item 1 in this Annual Report on Form 10-K. Net Premiums Earned. Net premiums earned for the year ended December 31, 2022 increased by $9 or 20% as compared to net premiums earned for the year ended December 31, 2021, as shown below. Year Ended December 31, 2022 2021 2020 Legacy Financial Guaranty Insurance $ 42 $ 46 $ 54 Specialty Property and Casualty Insurance 14 1 — Total 56 47 54 The reduction in Legacy Financial Guarantee Insurance segment net premiums earned was primarily due to de-risking activities, run-off of the insured portfolio, and the impact from the strengthening of the US dollar relative to the British Pound Sterling. The increase in Specialty Property & Casualty Insurance net premiums earned was driven by the growth in net premiums written. Commission Income. Commission income was $31 compared to $26, for the years ended December 31, 2022 and 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 as well as premiums placed by All Trans and Capacity Marine since their acquisition in November 2022. Commission expense will largely track changes in gross commission. For the year ended December 31, 2022 commissions expenses were $18 compared to $15 for the year ended December 31, 2021, representing approximately 58% of commission income in both periods. Program Fees. Program fee revenues were $3 compared to less than $1 for the years December 31, 2022 and 2021, respectively. Program fee revenues represent the recognition of ceding commissions in excess of direct acquisition costs received from reinsurers and minimum fees received from MGA/Us until the related program reaches a certain level of premium. Program fees are typically charged as a percentage of premiums ceded to reinsurers as a component of total ceding commissions. 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. Fixed maturity securities include investments in Ambac-insured securities that are made opportunistically based on their risk/reward and asset-liability management characteristics. Investments in pooled investment funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method. These funds and other investments are reported in Other investments on the Consolidated Balance Sheets. For further information about investment funds held, refer to Note 5. Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K. Net investment income for the periods presented were driven by the Legacy Financial Guarantee Insurance segment, other segments' results were not significant. Net investment income from Ambac-insured securities, available-for-sale securities other than Ambac-insured and Other investments is summarized in the table below: Year Ended December 31, 2022 2021 2020 Securities available-for-sale: Ambac-insured (including secured notes) $ 24 $ 45 $ 62 Securities available-for-sale and short-term other than Ambac-insured 42 29 41 Other investments (includes trading securities) (49) 66 19 Net investment income $ 17 $ 139 $ 122 | Ambac Financial Group, Inc. 39 2022 FORM 10-K Table of Contents , Net investment income decreased $123 for the year ended December 31, 2022, compared to 2021. As described further below, the variance was primarily driven by 2022 fair value losses within fund investments and on fixed maturity investments classified as trading, and the impact of the LSNI Secured Note redemption in July 2021. • Other investments results decreased $115 in 2022, compared to the prior year, including losses of $23 on securities received in the Puerto Rico restructurings which are classified as trading. Pooled fund investments produced a net loss of $26 in 2022, a decrease of $92 compared to 2021. The decrease was driven by net losses in most fund categories compared to generally strong performance in 2021, with the largest declines being in hedge funds, equities, high-yield and leveraged loan funds and real estate. Investments in pooled funds may be volatile, but are generally expected to produce higher returns than traditional fixed maturity investments. • Investment income from Ambac-insured securities decreased $21 in 2022, compared to 2021, due primarily to lower levels of secured note holdings, the impact of the March 15, 2022 and December 6, 2022 Puerto Rico restructurings and continued runoff of AAC-insured RMBS. • Net investment income from available-for-sales securities other than Ambac-insured securities increased $13 in 2022, compared to the prior year, due to higher portfolio yields. Net Investment Gains (Losses), including Impairments. The following table provides a breakdown of net investment gains, for the periods presented: Year Ended December 31, 2022 2021 2020 Net realized gains on securities sold or called $ 18 $ 11 $ 26 Net foreign exchange gains (losses) 14 (5) (4) Credit impairment — — — Intent / requirement to sell impairments — — — Total net investment gains, including impairments $ 32 $ 7 $ 22 Net investment gains on securities sold or called during the year ended December 31, 2022, included a recovery of $9 from a class-action settlement relating to certain RMBS securities previously held in the investment portfolio, $4 from the distribution of residual assets of a legacy financial guarantee student loan restructuring vehicle and $5 from the mandatory redemption of Sitka Senior Secured Notes over their amortized cost value. Realized gains in 2021 included $4 on the sale of AFG's equity interest in the Corolla Trust in connection with the Corolla Note Exchange (as such terms are defined in Note 1. Background and Business Information to the Consolidated Financial Statements included in this Annual Report). Other net realized gains on securities sold or called in 2022 and 2021 are primarily from sales in connection with routine portfolio management. Credit impairments are recorded as an allowance for credit losses with changes in the allowance recorded through earnings. Any non-credit related impairment amounts on the securities are recorded in other comprehensive income. If management either: (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 are primarily from the Company's interest rate derivatives portfolio, which is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee insurance and investment portfolios. Net gains (losses) on interest rate derivatives generally reflect mark-to-market gains (losses) in the portfolio caused by increases (declines) in forward interest rates during the periods, the carrying cost of the portfolio, and the impact of counterparty credit adjustments as discussed below. Results from other non-VIE derivatives were not significant to the periods presented. Net gains on interest rate derivatives for the year ended December 31, 2022, were $128, compared to a net losses of $22 for the year ended December 31, 2021. The net gain for the year ended December 31, 2022, reflects 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 year ended December 31, 2022, resulted from significant interest rate increases combined with favorable portfolio positioning and the impact of 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. In periods when credit spreads are stable, counterparty credit adjustments will generally have a proportionate offsetting impact to gains or losses on derivative assets, relative to fully collateralized assets. In addition to the impact of interest rates on the underlying derivative asset values, the changes in counterparty credit adjustments are driven by movement of credit spreads. 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 $8 and $5 for the years ended December 31, 2022 and 2021, respectively. The lower counterparty credit adjustments for both periods reflected lower underlying asset values with the further impact of credit spread widening in 2022 and narrowing in 2021. Net Realized Gains on Extinguishment of Debt. Net realized gains on extinguishment of debt was $81 for year ended December 31, 2022. Gains were recognized due to repurchases of surplus notes below their carrying values, partially offset with losses recognized on the redemption of the Sitka AAC Note (as defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K) above its carrying value. | Ambac Financial Group, Inc. 40 2022 FORM 10-K Table of Contents , AAC repurchased $266 million current par of surplus notes from third party holders between the second and fourth quarters of 2022. Net realized gains on extinguishment of debt was $33 for the year ended December 31, 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 this Annual Report on Form 10-K for further discussion of the 2021 Surplus Notes Exchanges. Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase surplus notes and may consider opportunities to exchange securities issued by it from time to time for other securities issued by it. Income (Loss) on Variable Interest Entities. Included within Income (loss) on variable interest entities are income statement amounts relating to FG-VIEs consolidated under the Consolidation Topic of the ASC as a result of Ambac's variable interest arising from financial guarantees written by Ambac's subsidiaries, including gains or losses attributable to consolidating or deconsolidating FG-VIEs during the periods reported. Generally, the Company’s consolidated VIEs are entities for which Ambac has provided financial guarantees on all of or a portion of its assets or liabilities. In consolidation, assets and liabilities of the FG-VIEs are initially reported at fair value and the related insurance assets and liabilities are eliminated. However, the amount of FG-VIE net assets (liabilities) that remain in consolidation generally result from the net positive (negative) projected cash flows from (to) the VIEs which are attributable to Ambac’s insurance subsidiaries in the form of financial guarantee insurance premiums, fees and losses. In the case of VIEs with net negative projected cash flows, the net liability is generally to be funded by Ambac’s insurance subsidiaries through insurance claim payments. Differences between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated FG-VIE’s net assets or liabilities are recorded through income at the time of consolidation. Additionally, terminations or other changes to Ambac's financial guarantee insurance policies that impact projected cash flows between a consolidated FG-VIE and Ambac could result in gains or losses, even if such policy changes do not result in deconsolidation of the FG-VIE. Income (loss) on variable interest entities was $21 and $7 for the years ended December 31, 2022 and 2021, respectively. Results for the year ended December 31, 2022, related primarily to three VIE trusts created in connection with the Puerto Rico restructurings in 2022. The year ended December 31, 2022, included the initial $37 gain upon consolidation, losses of $9 from changes to fair value of these VIEs' assets, and losses of $7 from these VIEs driven by interest costs. Results for the year ended December 31, 2021, were due primarily to gains on higher valuation of net assets of VIEs, together with realized gains of $2 on sales of assets from the COFINA Trust. Refer to Note 12. Variable Interest Entities to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on the accounting for VIEs. Litigation Recoveries. In connection with the settlement agreement with Bank of America Corporation and certain affiliates, the BOA Settlement Payment included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties. Management allocated the BOA Settlement Payment to each of the litigations based on previously developed valuations of each individual litigation. The portion of the BOA Settlement Payment allocated to fraud litigation recoveries has been recorded as a litigation recovery in the Statement of Comprehensive Income (Loss). Losses and Loss Adjustment Expenses (Benefit). Losses and loss adjustment expenses include the financial guarantee and specialty property and casualty businesses. Loss and loss adjustment expenses decreased $308 for the year ended December 31, 2022, compared to the prior year. Legacy financial guarantee loss and loss adjustment expenses (benefit) were $(406) and $(89) for the years ended December 31, 2022 and 2021, respectively. Specialty Property and Casualty Insurance loss and loss adjustment expenses were $9 and $— for the years ended December 31, 2022 and 2021, respectively LFG Losses and loss expenses (benefit) for 2022, were driven by favorable RMBS development due to the impact of the settlement agreements with Bank of America Corporation and certain affiliates thereof and Nomura Credit and Capital, Inc.of $123 and the positive impact of discount rates, and favorable loss development in domestic public finance (primarily due to the Puerto Rico restructurings of $180). LFG Losses and loss expenses for 2021 were largely driven by favorable loss development in domestic public finance, primarily related to Puerto Rico, and structured finance, primarily related to improved credit in RMBS, partially offset by the negative impact of discount rates, and loss expenses incurred. General and Administrative Expenses ("G&A"). The following table provides a summary of G&A expenses for the periods presented: ($ in millions) Year Ended December 31, 2022 2021 2020 Compensation $ 66 $ 62 $ 51 Non-compensation 75 49 41 Total 141 111 92 G&A expenses for the year ended December 31, 2022 are $141, an increase of $30 from G&A expenses for the year ended December 31, 2021. The increase was primarily due to the following: • Higher compensation costs primarily due to a net increase in staffing from additions in the Specialty Property and Casualty Insurance and Insurance Distribution segments, partially offset by reductions in staffing in the Legacy Financial Guaranty segment, and the impact of performance factor adjustments on incentive compensation expense. • Higher non-compensation costs primarily related to Legacy Financial Guarantee Insurance segment defensive litigation expenses of $26 and Specialty Property and Casualty Insurance segment costs associated with growth of the business. These items were partially offset by a reduction in advisory fees associated with Legacy Financial | Ambac Financial Group, Inc. 41 2022 FORM 10-K Table of Contents , Guarantee Insurance stemming from the 2021 secured note refinancing. Intangible Amortization. Insurance intangible amortization was $44 and $52 for the years ended December 31, 2022 and 2021, respectively. The decrease in amortization for the year ended December 31, 2022, compared to 2021, is primarily due to run-off of the insured portfolio and de-risking activity. Other intangible amortization was $3 and $3 for the years ended December 31, 2022 and 2021 relating to the acquisitions within the Insurance Distribution segment. Interest Expense. Interest expense includes accrued interest on the LSNI Ambac Note (as defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K), Sitka AAC Note, Tier 2 Notes, surplus notes and other debt obligations. Additionally, interest expense includes discount accretion when the debt instrument carrying value is at a discount to par. The following table provides details by type of obligation for the periods presented: Year Ended December 31, 2022 2021 2020 Surplus Notes (1) $ 78 $ 77 $ 85 LSNI Ambac Note — 50 107 Sitka AAC Note 63 32 — Tier 2 Notes 26 27 28 Other 1 1 1 Total interest expense $ 168 $ 187 $ 222 (1) Includes interest on Junior Surplus Notes that were acquired and retired in 2021. The decrease in interest expense for the year ended December 31, 2022, compared to the year ended December 31, 2021, reflects the impact of the 2021 refinancing and 2022 redemption of secured notes as described further under "Secured Note Refinancing" and "Redemption of Notes" in Note 1. Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K. These transactions resulted in lower debt outstanding and a lower coupon interest rate on the Sitka AAC Note relative to the LSNI Ambac Note. Interest expense for 2022 also declined as a result of purchases of surplus notes throughout the year. These benefits were partially offset by the effects of interest compounding on surplus notes and the Tier 2 Notes. Surplus note principal and interest payments require the approval of OCI. In May 2022, OCI declined the request of AAC to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the then next scheduled payment date of June 7, 2022. As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, was extended until OCI grants approval to make the payment. Interest will accrue, compounded on each anniversary of the original scheduled payment date or scheduled maturity date, on any unpaid principal or interest through the actual date of payment, at 5.1% per annum. Holders of surplus notes will have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount. The interest on the outstanding surplus notes 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 was $427 at December 31, 2022. Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments. Provision for Income Taxes. The provision for income taxes for the year ended December 31, 2022 and 2021, was a expense of $2 and $18, respectively. Income taxes for the year ended December 31, 2022 and 2021, includes provisions for income tax due in respect of Ambac UK of $3 and $16, respectively. At December 31, 2022, the Company had approximately $3,454 of U.S. Federal net ordinary operating loss carryforwards, including approximately $1,630 at AFG and $1,824 at AAC. Results of Operations by Segment Legacy Financial Guarantee Insurance Year Ended December 31, 2022 2021 Revenues: Net premiums earned $ 42 $ 46 Net investment income 12 138 Net investment gains (losses), including impairments 32 3 Net gains (losses) on derivative contracts 128 22 Net realized gains on extinguishment of debt 81 33 Other income 30 8 Litigation recoveries 126 — Total 451 250 Expenses: Losses and loss adjustment expenses (benefit) (406) (89) General and administrative expenses 102 77 Total (303) (12) Earnings before interest, taxes, depreciation and amortization (1) 754 262 Interest expense 168 187 Depreciation 2 2 Intangible amortization 44 52 Pretax income (loss) $ 540 $ 20 Stockholders equity (2) $ 826 $ 684 (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 earned, investment income, operating expenses and intangible amortization. The variability in the financial results are primarily driven by changes in loss and loss adjustment expenses resulting from, amongst other items, litigation settlements, credit developments and de-risking transactions. Additionally, the segment results are impacted by changes in interest rates as they impact net gains on derivative contracts and | Ambac Financial Group, Inc. 42 2022 FORM 10-K Table of Contents , interest expense on the floating rate Sitka AAC Note (prior to its redemption in 2022). Key variances not discussed above in the Consolidated Results section are as follows: Net premiums earned. Net premiums earned decreased $4 for the year ended December 31, 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 $4 and $8 for the years ended December 31, 2022 and 2021, respectively. • 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, were $8 and $1 for the years ended December 31, 2022 and 2021, respectively. Losses and Loss Adjustment Expenses (Benefit). Losses and loss adjustment expenses are based upon estimates of the aggregate losses inherent in the non-derivative portfolio for insurance policies issued to beneficiaries, excluding consolidated VIEs. Ambac recorded as a component of its loss reserve estimate subrogation recoverables related to securitized loans in RMBS transactions with respect to which AAC pursued claims for breaches of representations and warranties. Ambac has recorded representation and warranty ("R&W") subrogation recoverables, net of reinsurance, of $140 and $1,704 at December 31, 2022 and 2021, respectively. The decrease in these recoverables was primarily attributable to the settlement agreement with Bank of America Corporation and certain affiliates. On December 29, 2022, AAC entered into a Settlement Agreement and Release with Nomura Credit & Capital, Inc. whereby the parties settled all RMBS litigation brought by AAC against Nomura and AAC received $140 on January 3, 2023 bringing to a close all of AAC's legacy litigation against RMBS sponsor. The following provides details for losses and loss expenses (benefit) incurred for the periods presented: Year Ended December 31, 2022 2021 Structured Finance $ (207) $ (20) Domestic Public Finance (192) (73) Other (6) 4 Totals (1) $ (406) $ (89) (1) Includes loss expenses incurred of $29, $55 and $103 for the year ended December 31, 2022, 2021 and 2020, respectively. Losses and loss expenses (benefit) for 2022, were driven by favorable RMBS development due to the impact of the settlement agreements with Bank of America Corporation and certain affiliates thereof and Nomura Credit and Capital, Inc. of $123 and the positive impact of discount rates, and favorable loss development in domestic public finance (primarily due to the Puerto Rico restructurings of $180). Legacy financial guarantee losses and loss expenses for 2021 were largely driven by favorable loss development in domestic public finance, primarily related to Puerto Rico, and structured finance, primarily related to improved credit in RMBS , partially offset by the negative impact of discount rates , and loss expenses incurred. G&A Expenses. The increase in operating expenses during the year ended December 31, 2022, as compared to the year ended December 31, 2021, is driven primarily by additional costs related to defensive litigation of $26. Compensation cost benefits relative to 2021 from headcount reductions in the segment were more than offset by the impact of incentive compensation performance factor adjustments and severance charges. Specialty Property and Casualty Insurance Year Ended December 31, 2022 2021 Gross premiums written $ 146 $ 13 Net premiums written 29 3 Revenues: Net premiums earned $ 14 $ 1 Net investment income 2 1 Net investment gains (losses), including impairments — — Program fees 3 — Total 18 2 Expenses: Losses and loss adjustment expenses (benefit) 9 — Amortization of deferred acquisition costs, net 3 — General and administrative expenses 13 9 Net (gain) loss attributable to noncontrolling interest — — EBITDA (6) $ (8) Pretax income (loss) $ (6) $ (8) Loss and LAE Ratio 65.4 % NM Combined Ratio 158.1 % NM Ambac's stockholders equity (1) $ 110 $ 109 (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. Fourteen programs were authorized to issue policies as of December 31, 2022. The growth in both the number and size of these programs has contributed to the increase in gross and net premiums written, net premiums earned and net loss and loss adjustment expenses incurred. Loss and loss adjustment expenses incurred may be adversely impacted by increasing economic and social inflation, particularly within the commercial auto business. The impact of inflation on ultimate loss reserves is difficult to estimate, particularly in light of recent disruptions to the judicial system, supply chain and labor markets. Going forward, we may not be able to offset the impact of inflation on our loss costs with sufficient price increases. The estimation of loss reserves may also be more difficult during extreme events, such as a | Ambac Financial Group, Inc. 43 2022 FORM 10-K Table of Contents , pandemic, or during the persistence of volatile or uncertain economic conditions, due to, amongst other reasons, unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses. Due to the inherent uncertainty underlying loss reserve estimates, the final resolution of the estimated liability for loss and loss adjustment expenses will likely be higher or lower than the related loss reserves at the reporting date. In addition, our estimate of losses and loss expenses may change. These additional liabilities or increases in estimates, or a range of either, could vary significantly from period to period. 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 losses and loss expenses from this event is not material. Segment pre-tax net income was favorably impacted by underwriting income driven by growth in earned premium and program fees relative to loss and loss adjustment expenses for the year ended December 31, 2022, compared to the year ended December 31, 2021. General and Administrative expenses for the year ended December 31, 2022 increased as compared to the year ended December 31, 2021 primarily driven by costs associated with the increase in Everspan's operations including changes in staffing. Costs associated with the acquisition of additional shell insurance companies, as we continued to ramp up Everspan's operations, impacted pre-tax income for the year ended December 31, 2022 by approximately $1, relative to the year ended December 31, 2021. Insurance Distribution Year Ended December 31, 2022 2021 Premiums placed $ 135 $ 117 Commission income $ 31 $ 26 Commission expense 18 15 Net commissions 13 12 Expenses: General and administrative expenses 6 5 Net (gain) attributable to noncontrolling interest (1) (1) EBITDA 6 5 Depreciation (1) — — Intangible amortization 3 3 Pretax income (loss) $ 5 $ 4 Ambac's stockholders equity (2) $ 93 $ 66 (1) The Consolidated Statements of Comprehensive Income includes this in General and Administrative Expenses. (2) Represents the share of Ambac stockholders equity for each subsidiary within the Insurance Distribution segment, including intercompany eliminations. Ambac's Insurance Distribution segment, Cirrata Group "Cirrata", currently includes Xchange Benefits, a P&C MGA specializing in accident and health products; All Trans, a full service managing general underwriter with delegated underwriting authority in commercial automobile insurance for specific "for-hire" auto classes; and Capacity Marine, a wholesale and retail brokerage and reinsurance intermediary specializing in marine and international risk. The Insurance Distribution business is typically compensated for its services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices and, in some cases, the managing of claims under an agency agreement. Commission revenues are usually based on a percentage of the premiums placed. Cirrata 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. Cirrata business placed premiums for its carriers of approximately $135 for the year ended December 31, 2022, up $18 or 15% as compared to the year ended December 31, 2021. The growth was primarily driven by premiums placed by All Trans and Capacity Marine since their acquisition in November 2022. Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which result in revenue and earnings concentrations in the first and third quarters each calendar year, however, we expect this to become less pronounced over time as Cirrata continues to grow and diversify into other classes of business. G&A Expenses. General and Administrative expenses for the year ended December 31, 2022 increased slightly as compared to the year ended December 31, 2021 as a result of employees hired to support the ESL renewal rights acquisition that occurred on April 29, 2022 and operating costs at All Trans and Capacity Marine since their acquisition in November 2022. LIQUIDITY AND CAPITAL RESOURCES ($ in millions) Holding Company Liquidity AFG is organized as a legal entity separate and distinct from its operating subsidiaries. AFG is a holding company with no outstanding debt. AFG’s liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $223 as of December 31, 2022, and secondarily on distributions and expense sharing payments from its operating subsidiaries. • Under an inter-company cost allocation agreement, AFG is reimbursed by AAC for a portion of certain operating costs and expenses and, if approved by OCI, entitled to an additional payment of up to $4 per year to cover expenses not otherwise reimbursed. The $4 reimbursement for 2021 expenses was approved by OCI and paid to AFG in April 2022. • Substantial uncertainty remains as to AAC's ability to pay dividends to AFG and the timing of any such dividends. • Everspan's ability to make future dividend payments will mostly depend on its future profitability relative to its capital needs to support growth. Everspan is not expected to pay dividends in the near term. | Ambac Financial Group, Inc. 44 2022 FORM 10-K Table of Contents , • Cirrata does not have any regulatory restrictions on its ability to make distributions. AFG received distributions from Cirrata of $6 and $6 during the years ended December 31, 2022 and 2021. AFG's principal uses of liquidity are: (i) the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which may include illiquid investments and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses; such capital investments include investments in technology to support the efficient operation of our Specialty Property and Casualty and Insurance Distribution businesses. AFG may also provide short-term financial support, primarily in the form of loans, to its operating subsidiaries to support their operating requirements. AFG supported the development of the Specialty Property and Casualty Insurance business, and its acquisitions, with cash contributions of $15 and $92 to the Everspan group of companies during the years ended December 31, 2022 and 2021, respectively. In the opinion of the Company’s management the net assets of AFG are sufficient to meet AFG’s current liquidity requirements. However, events, opportunities or circumstances could arise that may cause AFG to seek additional capital (e.g. through the issuance of debt, equity or hybrid securities). Operating Companies' Liquidity Insurance: Sources of liquidity for the Company’s insurance subsidiaries are through funds generated from premiums, recoveries of prior claim payments, reinsurance recoveries, fees, investment income and maturities and sales of investments. • See Note 8. Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8, in this Annual Report on Form 10-K for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK. Termination of financial guarantee policies on an accelerated basis may adversely impact AAC’s liquidity. Cash provided from these sources is used primarily for claim payments and commutations, loss expenses, acquisition costs (Specialty Property and Casualty Insurance segment only), debt service (Legacy Financial Guarantee segment only), operating expenses, reinsurance payments and purchases of securities and other investments. • 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. 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. • As further described in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K: (i) effective October 29, 2022, AAC wholly redeemed the Sitka AAC Note and partially redeemed Tier 2 Notes and (ii) effective January 15, 2023, AAC fully redeemed the remaining Tier 2 Notes. Additionally, in the second and fourth quarters of 2022, AAC repurchased $334 current par of surplus notes (including $67 from AFG). Following these redemptions and repurchases, current principal outstanding on AAC's long-term debt consisted of $519 of surplus notes. AAC's future interest obligations on long-term debt after giving effect to these redemptions include $447 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. • Ambac Financial Services ("AFS") uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as a partial economic hedge against the effects of rising interest rates elsewhere in the Legacy Financial Guarantee segment. AFS's derivatives also include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings. AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and operating expenses. Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI. Insurance subsidiaries manage their liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times. It is the opinion of the Company’s management that the insurance subsidiaries’ near term liquidity needs will be adequately met from the sources described above. Insurance Distribution: The liquidity requirements of our Insurance Distribution subsidiaries are met primarily by funds generated from commission receipts (both base and profit commissions). Base commissions are generally received monthly, whereas profit commissions are received only if the business underwritten is profitable. Cash provided from these sources is used primarily for commissions paid to sub-producers, operating expenses and distributions to AFG and other members. Consolidated Cash Flow Statement Discussion The following table summarizes the net cash flows for the periods presented. Year Ended December 31, 2022 2021 2020 Cash provided by (used in): Operating activities $ 1,335 $ (131) $ (175) Investing activities 866 776 432 Financing activities (1) (2,163) (657) (303) Effect of foreign exchange on cash and cash equivalents (1) — — Net cash flow $ 38 $ (12) $ (46) (1) During the 2022, AAC made payments of $476 to accelerate AAC-insured PRIFA, CCDA and HTA bonds that were not commuted and were deposited into trusts established under the Puerto Rico restructurings. Also during 2022, AAC received $165 for redemption of PRIFA trust units held in its investment portfolio. Because these trusts are consolidated VIEs, this net cash activity of | Ambac Financial Group, Inc. 45 2022 FORM 10-K Table of Contents , $311 is reflected as payments of VIE liabilities in financing activities for the year ended December 31, 2022. Operating activities The following represents the significant cash operating activities during the years ended December 31, 2022 and 2021: • Cash provided by (i) gross premiums (net of commissions paid) were $139 and $38 for the years ended December 31, 2022 and 2021, respectively; (ii) non-VIE interest rate derivatives were $84 and $(1) for the years ended December 31, 2022 and 2021, respectively; (iii) VIE derivative payments were $(326) and $(24) for the years ended December 31, 2022 and 2021, respectively; (iv) non-VIE investment portfolio income was $82 and $80 for the years ended December 31, 2022 and 2021, respectively; and (v) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts were $47 for the year ended December 31, 2022. • Payments for non VIE debt service and accreted interest on redemptions and debt repurchases of the Sitka AAC Note, Tier 2 Notes and Surplus Notes were $59, $70 and $154, respectively, for the year ended December 31, 2022. Debt service payments on the LSNI Ambac Note and Sitka AAC Note were $51 and $30, respectively, for the year ended December 31, 2021. • Payments related to (i) operating expenses we re $94 and $83 for the years ended December 31, 2022 and 2021, respectively; and (ii) reinsurance premiums paid were $66 and $26 for the years ended December 31, 2022 and 2021, respectively • Net Legacy Financial Guarantee Insurance loss and loss adjustment expenses paid (recovered), including commutation payments, during the years ended December 31, 2022 and 2021 are detailed below: Year Ended December 31, 2022 2021 Net loss and loss adjustment expenses paid (recovered): Net losses paid $ 298 $ 103 Net subrogation received (1) (1,951) (121) Net loss expenses paid 48 77 Net cash flow $ (1,605) $ 59 (1) Includes the majority of the recoveries from the BOA Settlement Payment except for the portion allocated to fraud litigation recoveries. The fraud litigation recoveries were $126 and are also included in cash flows from operations. Future operating cash flows will primarily be impacted by net premium collections, investment coupon receipts, fee and net commission revenues, operating expenses, net claim and loss expense payments and debt interest payments. Financing Activities Financing activities for the year ended December 31, 2022, included payments for repurchase of surplus notes of $191, redemption of Sitka AAC Note of $1,210, partial redemption of Tier 2 Notes of $143, share repurchases of $14, repurchases of auction market preferred shares of $8 and paydowns and maturities of VIE debt obligations of $591 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring). Financing activities for the year ended December 31, 2021, include paydowns of the LSNI Ambac Note of $1,641 and paydowns and maturities of VIE debt obligations of $170. Net cash used in financing activities was partially offset by net proceeds from issuance of the Sitka AAC Note of $1,163. Future financing activities will include additional accelerations and redemptions of the VIE trusts created from the Puerto Rico restructuring, including $136 through February 16, 2023. Collateral AFS hedges a portion of the interest rate risk in the Legacy Financial Guarantee Insurance segment and investment portfolios, along with legacy customer interest rate swaps, with standardized derivative contracts, including financial futures contracts, which contain collateral or margin requirements. Under these hedge agreements, AFS is required to post collateral or margin to its counterparties and futures commission merchants to cover unrealized losses. In addition, AFS is required to post collateral or margin in excess of the amounts needed to cover unrealized losses. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral or margin posting or a termination have been triggered. If terminations were to occur, AFS would be required to make termination payments but would also receive a return of collateral or margin in the form of cash or U.S. Treasury obligations with market values equal to or in excess of market values of the swaps and futures contracts. AFS may look to re-establish hedge positions that are terminated early, resulting in additional collateral or margin obligations. The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced. All collateral and margin obligations are currently met. Collateral and margin posted by AFS totaled $70 (cash and securities, at fair value, of $6 and $64 respectively), including independent amounts, under these contracts at December 31, 2022. BALANCE SHEET ($ in millions) Total assets decreased by approximately $4,330 from December 31, 2021 to $7,973 at December 31, 2022, primarily due to the reduction in asset values of VIEs of $2,162 and subrogation recoverables of $1,821. The decline in VIEs 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. The decline in subrogation recoverables was largely due to receipts under the settlement agreement with Bank of America Corporation and certain affiliates. Additional declines in total assets were the result of (i) the payment of loss and loss adjustment expenses, interest and operating expenses, (ii) declines in invested asset values, (iii) lower derivative assets caused by rising interest rates, (iv) repurchases of Ambac common stock and AAC surplus notes and (v) lower premium receivables and intangible assets from | Ambac Financial Group, Inc. 46 2022 FORM 10-K Table of Contents , the continued runoff of the financial guarantee insurance portfolio. Total liabilities decreased by approximately $4,540 from December 31, 2021, to $6,647 as of December 31, 2022, primarily due to reductions in the value of VIEs liabilities of $1,996 based on consistent factors as noted above in assets. Additional liability declines driven by (i) the significant reduction in gross loss reserves from the Puerto Rico restructuring; (ii) the impacts of the redemption of secured notes of $1,352 described in Note 1. Background and Business Description in this Annual Report on Form 10-K located in Part II. Item 8, (iii) repurchases of AAC surplus notes during 2022 with a carrying value of principal and interest of $461 at December 31, 2021, and (iv) lower derivative liabilities caused by rising interest rates. As of December 31, 2022, total stockholders’ equity was $1,305, compared with total stockholders’ equity of $1,098 at December 31, 2021. This increase was primarily due to a Total Comprehensive Income during 2022 primarily driven by the net income attributable to common stockholders for the year ended December 31, 2022, of $522, partially offset by unrealized losses on investments of $225 and translation losses on the consolidation of AFG's foreign subsidiaries.of $85. Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan, Ambac UK and AFG. Refer to "Description of the Business — Investments and Investment Policy" in this Annual Report on Form 10-K located in Part I. Item 1, for further description of Ambac's investment policies and applicable regulations. Refer to Note 5. Investments to the Consolidated Financial Statements in this Annual Report on Form 10-K located in Part II. Item 8 for information about Ambac's consolidated investment portfolio. Ambac's investment polices and objectives do not apply to the assets of VIEs consolidated as a result of financial guarantees written by its insurance subsidiaries. Investment Portfolio The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at December 31, 2022 and 2021: Legacy Financial Guarantee Insurance Specialty Property and Casualty Insurance Insurance Distribution Corporate & Other Consolidated December 31, 2022 Fixed maturity securities $ 1,281 $ 102 $ — $ 12 $ 1,395 Fixed maturity securities - trading 59 — — — 59 Short-term 303 29 — 175 507 Other investments 552 — — 16 568 Fixed maturity securities pledged as collateral 64 — — — 64 Total investments (1) $ 2,259 $ 131 $ — $ 203 $ 2,593 December 31, 2021 Fixed maturity securities $ 1,630 $ 72 $ — $ 28 $ 1,730 Fixed maturity securities - trading — — — — — Short-term 258 32 — 124 414 Other investments 679 — — 11 690 Fixed maturity securities pledged as collateral 120 — — — 120 Total investments (1) $ 2,687 $ 104 $ — $ 164 $ 2,955 (1) Includes investments denominated in non-US dollar currencies with a fair value of £296 ($357) and €39 ($42) as of December 31, 2022 and £341 ($462) and €38 ($43) as of December 31, 2021. Ambac invests in various asset classes in its fixed maturity securities portfolio. Other investments include diversified equity interests in pooled funds. Refer to Note 5. Investments to the Consolidated Financial Statements in this Annual Report on Form 10-K located in Part II. Item 8 for information about fixed maturity securities and pooled funds by asset class. | Ambac Financial Group, Inc. 47 2022 FORM 10-K Table of Contents , The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at December 31, 2022 and 2021. (1) Ratings are based on the lower of Moody’s or S&P ratings. If ratings are unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating. (2) Below investment grade and not rated bonds insured by Ambac represented 19% and 32% of the 2022 and 2021 combined fixed maturity investment portfolios, respectively. The decrease is primarily due to the impact of the settlement of insured Puerto Rico bonds described above, under Financial Guarantees in Force. Premium Receivables. Ambac's premium receivables decreased to $269 at December 31, 2022, from $323 at December 31, 2021. As further discussed in Note 8. Insurance Contracts to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II. Item 8, the decrease is due to premium receipts and adjustments for changes in expected and contractual cash flows on financial guarantee insurance contracts, partially offset by decreases to the allowance for credit losses, accretion of the financial guarantee premium receivable discount and increases to premium receivables on the Specialty Property and Casualty Insurance business due to increased volume of policy issuances. Premium receivables by payment currency were as follows: Currency (Amounts in millions) Premium Receivable in Payment Currency Premium Receivable in U.S. dollars U.S. Dollars $ 184 $ 184 British Pounds £ 59 71 Euros € 13 14 Total $ 269 Reinsurance Recoverable on Paid and Unpaid Losses. Ambac has reinsurance in place pursuant to quota share, surplus share treaty and facultative agreements. To minimize its exposure to losses from reinsurers, Ambac (i) monitors the financial condition of its reinsurers; (ii) is entitled to receive collateral from its reinsurance counterparties under certain reinsurance contracts; and (iii) has certain cancellation rights that can be exercised in the event of rating agency downgrades of a reinsurer (among other events and circumstances). For those reinsurance counterparties that do not currently post collateral, Ambac’s reinsurers are well capitalized, highly rated, authorized capacity providers. Ambac benefited from letters of credit and collateral amounting to approximately $116 from its reinsurers at December 31, 2022. As of December 31, 2022 and 2021, reinsurance recoverable on paid and unpaid losses were $115 and $55, respectively. Special Property and Casualty Insurance amounted to $82 and $32 at December 31, 2022 and 2021, respectively. Legacy Financial Guarantee amounted to $33 and $23 at December 31, 2022 and 2021, respectively. The increase was primarily a result of the growth of the Special Property and Casualty Insurance business. Intangible Assets. Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities, (ii) intangible assets established as part of the acquisition of Xchange in 2020, (iii) indefinite-lived intangible assets established as part of the acquisition of admitted carriers in both 2021 and 2022, and (iv) intangible assets established as part of the acquisition of All Trans and Capacity Marine in 2022. Refer to Note 4. Business Combination to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II. Item 8 for further information relating to the acquisitions of Xchange, All Trans and Capacity Marine. As of December 31, 2022 and 2021, the net intangible asset was $326 and $362, respectively. The decline is driven by amortization and translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK), partially offset by the new assets established in 2022. Derivative Assets and Liabilities. The interest rate derivative portfolio is positioned to benefit from rising rates as a partial hedge against interest rate exposure in the financial guarantee and investment portfolios. Derivative assets and | Ambac Financial Group, Inc. 48 2022 FORM 10-K Table of Contents , liabilities on the balance sheet primarily reflect the portion of the portfolio that is not subject to daily cash variation margin payments. Derivative assets decreased from $76 at December 31, 2021, to $27 as of December 31, 2022. Derivative liabilities decreased from $95 at December 31, 2021, to $38 as of December 31, 2022. The decreases resulted primarily from higher interest rates during the year ended December 31, 2022, with the decline in assets partially offset by lower counterparty credit adjustments. Loss and Loss Adjustment Expense Reserves and Subrogation Recoverable. Loss and loss adjustment expense reserves are based upon estimates of the ultimate aggregate losses inherent in the non-derivative portfolio for insurance policies issued to beneficiaries, including unconsolidated VIEs. The evaluation process for determining the level of reserves is subject to certain estimates and judgments. Refer to the "Critical Accounting Policies and Estimates" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2. Basis of Presentation and Significant Accounting Policies and Note 8. Insurance Contracts, respectively, to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for further information on loss and loss adjustment expenses. The loss and loss adjustment expense reserves net of subrogation recoverables and before reinsurance as of December 31, 2022 and 2021 were $534 and $(522), respectively. Loss and loss adjustment expense reserves are included in the Consolidated Balance Sheets as follows: Specialty Property and Casualty Legacy Financial Guarantee Present Value of Expected Net Cash Flows Unearned Premium Revenue Gross Loss and Loss Expense Reserves (2) Balance Sheet Line Item Gross Loss and Loss Expense Reserves Claims and Loss Expenses Recoveries (1) December 31, 2022: Loss and loss adjustment expense reserves $ 90 $ 787 $ (44) $ (28) $ 805 Subrogation recoverable — 5 (276) — (271) Totals $ 90 $ 791 $ (319) $ (28) $ 534 December 31, 2021: : Loss and loss adjustment expense reserves $ 32 $ 1,749 $ (155) $ (56) $ 1,570 Subrogation recoverable — 88 (2,180) — (2,092) Totals $ 32 $ 1,837 $ (2,335) $ (56) $ (522) (1) Present value of future recoveries include R&W subrogation recoveries of $140 and $1,730 at December 31, 2022 and 2021, respectively. Legacy Financial Guarantee Insurance. Ambac has exposure to various bond types issued in the debt capital markets. The bond types that have experienced significant claims, including through commutations, are RMBS, student loan securities and public finance securities. These bond types represent 91% of our ever-to-date insurance claims recorded with RMBS comprising 63%. The table below indicates gross par outstanding and the components of gross loss and loss adjustment expense reserves related to policies in Ambac’s gross loss and loss adjustment expense reserves at December 31, 2022 and 2021: | Ambac Financial Group, Inc. 49 2022 FORM 10-K Table of Contents , Present Value of Expected Net Cash Flows Unearned Premium Revenue Gross Loss and Loss Expense Reserves (1)(2) ($ in millions) Gross Par Outstanding (1) Claims and Loss Expenses Recoveries December 31, 2022: Structured Finance $ 2,050 $ 664 $ (296) $ (10) $ 358 Domestic Public Finance (3) 1,215 96 (11) (10) 75 Other 782 23 (12) (8) 3 Loss expenses — 8 — — 8 Totals $ 4,047 $ 791 $ (319) $ (28) $ 444 December 31, 2021: Structured Finance $ 2,371 $ 852 $ (2,018) $ (12) $ (1,178) Domestic Public Finance 2,742 905 (312) (31) 562 Other 1,189 35 (5) (13) 17 Loss expenses — 45 — — 45 Totals $ 6,302 $ 1,837 $ (2,335) $ (56) $ (554) (1) Ceded par outstanding on policies with loss reserves and ceded loss and loss adjustment expense reserves were $472 and $33, respectively, at December 31, 2022 and $784 and $24, respectively at December 31, 2021. Ceded loss and loss adjustment expense reserves are included in Reinsurance recoverable on paid and unpaid losses. (2) Loss reserves are included in the balance sheet as loss and loss adjustment expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position. (3) As a result of the Puerto Rico restructuring and the subsequent acceleration of the AAC insured PRIFA and CCDA bonds gross par outstanding was reduced by $593. Additionally, as a result of the Puerto Rico restructuring and subsequent consolidation of VIE's of AAC insured HTA bonds gross par outstanding was reduced by $410. The table below reflects the timing of expected financial guarantee claim payments based on deal specific cash flows, excluding expected recoveries. These deal specific cash flows are based on the expected cash flows of the underlying transactions with the majority of these payments expected at or close to the final maturity of the related insurance policy. The timing of expected claim payments for credits with reserves that were established using our statistical loss reserve method is determined based on the weighted average expected life of the exposure. Refer to the Loss Reserves section in Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further discussion of our statistical loss reserve method. The timing of these payments may vary significantly from the amounts shown above, especially for credits that are based on our statistical loss reserve method. Payments Due by Period ($ in millions) Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More Than 5 Years Claim payments $ 1,279 $ 26 $ 51 $ 46 $ 1,156 Variability of Expected Losses and Recoveries Ambac’s management believes loss reserves (present value of expected cash flows, net of recoveries) are adequate to cover future claim payments, but there can be no assurance that the ultimate liability will not be higher than such estimates. While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions. Accordingly, it is possible that our estimated loss reserves, gross of reinsurance, for financial guarantee insurance policies could be understated. We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded. The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at December 31, 2022, and assumes an inability to execute any commutation transactions with issuers and/or investors. Such stress scenarios are developed based on management’s view about all possible outcomes relating to losses and recoveries. In arriving at such view, management makes considerable judgments about the possibility of various future events. Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases. See “Risk Factors” in Part I, Item 1A in this Annual Report on Form 10-K as well as the descriptions of "Structured Finance Variability," "Public Finance Variability," and "Other Credits, including Ambac UK, Variability," below for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes appearing below. | Ambac Financial Group, Inc. 50 2022 FORM 10-K Table of Contents , The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for Ambac, including (without limitation) impairing the ability of AAC to honor its financial obligations, particularly its outstanding surplus note and preferred stock obligations; the initiation of rehabilitation proceedings against AAC; decreased likelihood of AAC delivering value to AFG, through dividends or otherwise; and a significant drop in the value of securities issued or insured by AFG or AAC. Structured Finance RMBS: Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the effect of a weakened economy characterized by growing unemployment and wage pressures. We utilize a model to project losses in our RMBS exposures and changes to reserves, either upward or downward, are not unlikely if we used a different model or methodology to project losses. In the case of both first and second-lien exposures, the possible stress case assumes a lower housing price appreciation projection, which in turn drives higher defaults and severities. Student Loans: Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other factors, including the economic impact from public health crises and/or natural or other catastrophic events. Such factors may include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by the Consumer Finance Protection Bureau. Structured Finance Variability: Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at December 31, 2022, could be approximately $15. Additionally, loss payments are sensitive to changes in interest rates, increasing as interest rates rise. For example, an increase in interest rates of 1% could increase our estimate of expected losses by approximately $25. There can be no assurance that losses may not exceed such amounts. Due to the uncertainties related to risks associated with structured finance credits, there can be no assurance that losses may not exceed our stress case estimates. Public Finance Ambac’s U.S. public finance portfolio consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities; however, the portfolio also includes a wide array of non-municipal types of bonds, including transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests, the largest sector of which is U.S. military housing. It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends. Additionally, our loss reserves may be under-estimated because of the local, regional or national economic impact from public health crises and/or natural or other catastrophic events. Our experience with the city of Detroit's bankruptcy and Commonwealth of Puerto Rico's Title III proceedings as well as other municipal bankruptcies demonstrates the preferential treatment of certain creditor classes, especially the public pensions. 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 others. Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors. Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer. In the case of the Puerto Rico COFINA sales tax bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings, AAC and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds. 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. 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. We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent. Moreover, issuers in Chapter 9 or similar proceedings may obtain judicial rulings and orders that impair creditors' rights or their ability to collect on amounts owed. In certain cases, judicial decisions may be contrary to AAC's expectations or understanding of the law or its rights thereunder, which may lead to worse outcomes in Chapter 9 or similar proceedings than anticipated at the outset. Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as changes in tax law that could reduce certain municipal investors' appetite for tax-exempt municipal bonds or put pressure on issuers in states with high state and local taxes. These factors could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations. | Ambac Financial Group, Inc. 51 2022 FORM 10-K Table of Contents , Following the December 6, 2022, consummation of the PRHTA POA all of Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities have now been restructured and AAC's exposures to Puerto Rico has been reduced to $244 of net par outstanding at December 31, 2022. AAC has further reduced its Puerto Rico exposure since year-end through accelerations and redemptions. However, some uncertainty remains as it relates to the extent and timing to which exposure management strategies, such as commutation and acceleration, will be executed to further reduce exposure to Puerto Rico, and, to a lesser extent, market conditions such as interest rate movements, credit spread changes on remaining plan consideration supporting AAC-insured Puerto Rico exposure in trusts, such as COFINA bonds and PRHTA '98 CVI instruments. 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 December 31, 2022, the possible increase in loss reserves could be approximately $115 and there can be no assurance that losses may not exceed our stress case estimates. Other Credits, including Ambac UK, Variability It is possible our loss reserves on other types of credits, including those insured by Ambac UK, may be under-estimated because of various risks that vary widely, including the risk that we may not be able to recover or mitigate losses through our remediation processes. For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $295 greater than the loss reserves at December 31, 2022. There can be no assurance that losses may not exceed our stress case estimates. Long-term Debt. The carrying value of each of these as of December 31, 2022 and 2021 is below: December 31, 2022 2021 Surplus Notes $ 477 $ 729 LSNI Ambac Note — — Sitka AAC Note — 1,154 Tier 2 Notes 146 333 Ambac UK Debt 16 15 Total Long-term Debt $ 639 $ 2,230 The decrease in long-term debt from December 31, 2021 resulted from repurchases of surplus notes and the impact of the redemption of secured notes in 2022, described further in Note 1. Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, partially offset by accretion on the carrying value of surplus notes and Ambac UK debt, and paid-in-kind interest on Tier 2 Notes. Redeemable Noncontrolling Interest . The increase during 2022 was the result the acquisition of All Trans and Capacity Marine partially offset by the remeasurement of the redemption value of the put option provided to the minority owners (noncontrolling interest holders) of Xchange as if it were exercisable on December 31, 2022. Refer to Note 4. Business Combination for further information relating to Ambac's acquisitions. ACCOUNTING STANDARDS Please refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report Form 10-K for a discussion of the impact of recent accounting pronouncements on Ambac’s financial condition and results of operations. U.S. STATUTORY BASIS FINANCIAL RESULTS ($ in millions) AFG's U.S. insurance subsidiaries prepare financial statements under accounting practices prescribed or permitted by its domiciliary state regulator (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company. The National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) is adopted as a component of prescribed practices by each domiciliary state. For further information, see Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report Form 10-K. Ambac Assurance Corporation AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $598 and $1,191 at December 31, 2022, respectively, as compared to $757 and $1,322 at December 31, 2021, respectively. As of December 31, 2022, statutory policyholder surplus and qualified statutory capital included $519 principal balance of surplus notes outstanding and $115 liquidation preference of preferred stock outstanding. These surplus notes (including related accrued interest of $427 that is not recorded under statutory basis accounting principles); preferred stock; and all other liabilities, including insurance claims, and $146 principal balance of Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC. The significant drivers to the net decrease in policyholder surplus were surplus note repurchases at a cost of $440, contributions to contingency reserves of $28 and a decrease in the fair value of pooled investments of $16, partially offset by statutory net income of $328 for the year ended December 31, 2022. Statutory net income for the year ended December 31, 2022 was positively impacted by (i) the R&W litigation settlements at amounts in excess of our carrying value; (ii) the Puerto Rico restructuring; and (iii) AFS' repayment of its intercompany loan with AAC that was previously impaired. AAC's statutory surplus and therefore AFG's ultimate ability to realize residual value and/or dividends from AAC is sensitive to | Ambac Financial Group, Inc. 52 2022 FORM 10-K Table of Contents , multiple factors, including: (i) loss reserve development, (ii) approval by OCI of payments on surplus notes, (iii) ongoing interest costs associated with surplus notes, (iv) swap gains and losses at AFS, the financial position of which is supported by certain guarantees and financing arrangements from AAC, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded, (viii) changes to the fair value of pooled fund and other investments carried at fair value, (ix) realized gains and losses, including losses arising from other than temporary impairments of investment securities, (x) the ultimate residual value of Ambac UK, which may be impacted by numerous factors including foreign exchange rates, and (xi) future changes to prescribed practices by the OCI. The significant differences between GAAP and SAP are that under SAP: • Loss reserves are only established for losses on guaranteed obligations that have experienced a payment default in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights (5.1% as prescribed by OCI). Under GAAP, in addition to the establishment of loss reserves for defaulted obligations, loss reserves are established (net of GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 3.9%. • Mandatory contingency reserves are required based upon the type of obligation insured, whereas GAAP does not require such a reserve. Releases of the contingency reserves are generally subject to OCI approval and relate to a determination that the held reserves are deemed excessive. • Investment grade fixed maturity investments are stated at amortized cost and certain below investment grade fixed maturity investments are reported at the lower of amortized cost or fair value. Under GAAP, all fixed maturity investments are reported at fair value. • Wholly owned subsidiaries are not consolidated; rather, the equity basis of accounting is utilized and the carrying values of these investments are subject to admissibility tests. • Variable interest entities ("VIE") are not required to be assessed for consolidation. Under GAAP, a reporting entity that has both the following characteristics is required to consolidate the VIE: a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. AAC generally has the obligation to absorb losses of VIEs that could potentially be significant to the VIE as the result of its guarantee of insured obligations issued by VIEs. For certain VIEs AAC has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under GAAP. • All payments of principal and interest on the surplus notes are subject to the approval of the OCI. Unpaid interest due on the surplus notes is expensed when the approval for payment of interest has been granted by the OCI. Under GAAP, interest on surplus notes is accrued regardless of OCI approval. • Upfront premiums written are earned on a basis proportionate to the remaining scheduled debt service to the original total principal and interest insured. Installment premiums are reflected in income pro-rata over the period covered by the premium payment. Under GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date. • Insurance intangibles that arose as a result of the implementation of Fresh Start reporting are not a concept within SAP. This insurance intangible asset is amortized as an expense on a level yield basis over the life of the related insurance risks. • Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts. Everspan Indemnity Insurance Company Everspan Indemnity Insurance Company’s statutory policyholder surplus was $107 at December 31, 2022, as compared to $106 at December 31, 2021. The significant drivers to the increase in policyholder surplus for the year ended December 31, 2022, were capital contributions of $16, primarily to support the acquisition of three admitted carriers and the growth of Everspan while maintaining a policyholders surplus in excess of $100, partially offset by a net loss and changes in investment in subsidiaries, primarily due to a limitation on the amount of goodwill that may be admitted in accordance with SAP. The significant differences between GAAP and SAP are that under SAP: • Investment grade fixed maturity investments are stated at amortized cost and certain below investment grade fixed maturity investments are reported at the lower of amortized cost or fair value. Under GAAP, all fixed maturity investments are reported at fair value. • Majority owned subsidiaries are not consolidated; rather, the equity basis of accounting is utilized and the carrying values of these investments are subject to admissibility tests. • The acquisition of Providence Washington Insurance Company ("PWIC") and the 21st Century Companies were recorded as equity method investments, which include a goodwill component representing the acquisition cost in excess of the related entity's statutory surplus. Goodwill is being amortized over ten years. Under GAAP, the acquisition of the companies were recorded as asset acquisitions, which require i) all net assets to initially be recorded at fair value, and ii) the acquisition cost in excess of the fair value of net assets to be allocated to the bases of certain types of assets based on their relative fair values, if | Ambac Financial Group, Inc. 53 2022 FORM 10-K Table of Contents , applicable. Acquired assets include intangible assets with indefinite lives. Such assets are not amortized but their estimated useful lives are reevaluated each reporting period. No goodwill is recorded for asset acquisitions. • Acquisition costs and ceding commissions, other than excess ceding commissions, are expensed or recognized at the time of a transaction. Under GAAP, acquisition costs and ceding commissions are deferred and recognized over the life of the related transaction. • Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts. 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 £468 at December 31, 2022, as compared to £444 at December 31, 2021. At December 31, 2022, the carrying value of cash and investments was £508, an increase from £500 at December 31, 2021. The increase in shareholder funds and cash and investments was primarily due to the continued receipt of premiums and investment income, and from foreign exchange gains within Ambac UK's investment portfolio, partially offset by loss expenses, operating expenses and tax payments. The significant differences between US GAAP and UK GAAP are that under UK GAAP: • Loss reserves are only established for losses on guaranteed obligations when, in the judgment of management, a monetary default in the timely payment of debt service is likely to occur, which would result in Ambac UK incurring a loss. A loss provision is established in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights. The discount rate for loss provisions is equal to the lower of the rate of return on invested assets for either the current year or the period covering the current year plus the four previous years, currently at 0%. The discount rate used for estimated recoveries under subrogation rights is reflective of the credit risk of the counterparty from which subrogation will be received, currently 5.3%. Under U.S. GAAP, loss reserves are established (net of US GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 3.5%. • Investments in fixed maturity securities are stated at amortized cost, subject to an other-than-temporary impairment evaluation. Under US GAAP, all bonds are reported at fair value. • VIEs are not required to be assessed for consolidation. Under US GAAP, as noted under AAC Statutory Basis Financial Results above, VIE's with certain characteristics are required to be consolidated. For several VIEs Ambac UK has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under U.S. GAAP. • Upfront premiums written are earned on a basis proportionate to the remaining scheduled debt service to the total principal and interest insured. Installment premiums are reflected in income pro-rata over the period covered by the premium payment. Under US GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date. • Insurance intangibles that arose as a result of the implementation of Fresh Start reporting are not a concept within UK GAAP. Under US GAAP, this insurance intangible asset is amortized as an expense on a level yield basis over the life of the related insurance risks. • Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts. Ambac UK is also required to prepare financial information in accordance with the Solvency II Directive. The basis of preparation of this information is significantly different from both US GAAP and UK GAAP. Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £338 at December 31, 2022. This is an increase from December 31, 2021, when available capital resources were £250 of which £240 were eligible to meet solvency capital requirements. Eligible capital resources at December 31, 2022 and December 31, 2021, are in comparison to regulatory capital requirements of £213 and £238, respectively. Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £125 at December 31, 2022 and was in a surplus position by £1 at December 31, 2021. The surplus increased as of December 31, 2022, due to the combined impact of (i) the increase in long term interest rates, which resulted in a decrease in technical provision liabilities and hence an increase in eligible own funds and (ii) a decrease in capital requirements for non-life risk due to the maturity and de-risking of certain policies, together with natural run-off of the insured portfolio in the year. Dialogue between Ambac UK management and its regulators remains ongoing with respect to options for strengthening the capital position further. Final annual Solvency II data and Ambac UK's annual Solvency and Financial Condition Report will be published on Ambac's website in April 2023. NON-GAAP FINANCIAL MEASURES ($ in millions) In addition to reporting the Company's financial results under GAAP,the Company currently reports three non-GAAP financial measures: EBITDA, adjusted earnings and adjusted book value. The most directly comparable GAAP measures are pre-tax net income for EBITDA, net income attributable to | Ambac Financial Group, Inc. 54 2022 FORM 10-K Table of Contents , common stockholders for adjusted earnings and Total Ambac Financial Group, Inc. stockholders’ equity for adjusted book value. A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community that provides greater transparency and enhanced visibility into the underlying drivers of our businesses on a basis that may not be otherwise apparent on a GAAP basis. We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis. These non-GAAP financial measures are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently. Ambac has a significant U.S. tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments for both Adjusted Earnings and Adjusted Book Value; which is subject to change. The following paragraphs define each non-GAAP financial measure. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below. EBITDA. EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization of intangible assets. EBITDA is also adjusted for noncontrolling interests in subsidiaries where Ambac does not own 100%. Legacy Financial Guarantee Insurance Specialty Property and Casualty Insurance Insurance Distribution Corporate & Other Consolidated Year Ended December 31, 2022 Pretax income (loss) (1) $ 540 $ (6) $ 5 $ (14) $ 525 Adjustments: Interest expense 168 — — — 168 Depreciation 2 — — — 2 Amortization of intangible assets 44 — 3 — 47 Net (gain) attributable to noncontrolling interest — (1) (1) Earnings before interest, taxes, depreciation and amortization $ 754 $ (6) $ 6 $ (14) $ 740 Year Ended December 31, 2021 Pretax income (loss) (1) $ 20 $ (8) $ 4 $ (15) $ 2 Adjustments: Interest expense 187 — — — 187 Depreciation 2 — — — 2 Amortization of intangible assets 52 — 3 — 55 Net (gain) attributable to noncontrolling interest (1) (1) Earnings before interest, taxes, depreciation and amortization $ 262 $ (8) $ 5 $ (15) $ 245 (1) Pretax income (loss) is prior to the impact of noncontrolling interests. Adjusted Earnings (Loss). Adjusted earnings (loss) is defined as net income (loss) attributable to common stockholders, as reported under GAAP, adjusted on an after-tax basis for the following: • Insurance intangible amortization: Elimination of the amortization of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for consistent with the provisions of the Financial Services – Insurance Topic of the ASC. • Foreign exchange (gains) losses: Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies. This adjustment eliminates the foreign exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies, which enables users of our financial statements to better view the results without the impact of fluctuations in foreign currency exchange rates and facilitates period-to-period comparisons of Ambac's operating performance. | Ambac Financial Group, Inc. 55 2022 FORM 10-K Table of Contents , The following table reconciles net income attributable to common stockholders to the non-GAAP measure, Adjusted Earnings on a total dollar amount and per diluted share basis, for all periods presented: 2022 2021 2020 ($ in millions, except per share data) Year Ended December 31, $ Amount Per Diluted Share (1) $ Amount Per Diluted Share (1) $ Amount Per Diluted Share (1) Net income (loss) attributable to common stockholders $ 522 $ 11.31 $ (17) $ (0.61) $ (437) $ (9.47) Adjustments: Non-credit impairment fair value (gain) loss on credit derivatives — — — — — — Insurance intangible amortization 44 0.95 52 1.12 57 1.23 Foreign exchange (gains) losses (12) (0.25) 7 0.15 3 0.06 Adjusted Earnings (Loss) (1) $ 555 $ 12.01 $ 43 $ 0.66 $ (378) $ (8.19) (1) Per Diluted share includes the impact of adjusting redeemable noncontrolling interest to its redemption value Adjusted Book Value. Adjusted book value is defined as Total Ambac Financial Group, Inc. stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following: • Insurance intangible asset: Elimination of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC. • Net unearned premiums and fees in excess of expected losses: Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance. This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis. In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR. However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity. This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders’ equity for financial guarantee contracts where expected losses are less than UPR. This adjustment is only made for financial guarantee contracts since such premiums are non-refundable. • Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income: Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”). The AOCI component of the fair value adjustment on the investment portfolio may differ from realized gains and losses ultimately recognized by the Company based on the Company’s investment strategy. This adjustment only allows for such gains and losses in adjusted book value when realized. The following table reconciles Total Ambac Financial Group, Inc. stockholders’ equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented: 2022 2021 ($ in millions, except per share data) December 31, $ Amount Per Share $ Amount Per Share Total Ambac Financial Group, Inc. stockholders’ equity $ 1,252 $ 27.85 $ 1,038 $ 22.42 Adjustments: Insurance intangible asset (266) (5.91) (320) (6.91) Net unearned premiums and fees in excess of expected losses 214 4.76 310 6.68 Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income (Loss) 71 1.59 (154) (3.32) Adjusted Book Value $ 1,272 $ 28.29 $ 874 $ 18.88 The increase in Adjusted Book was primarily attributable to Adjusted earnings for the year ended December 31, 2022 (excluding earned premium previously included in Adjusted Book Value), partially offset by translation losses on the consolidation of AFG's foreign subsidiaries. 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. expected term, interest rates, foreign currency rates, time passage) and (ii) changes to expected losses for policies which do not exceed their related unearned premiums and (iii) new reinsurance transactions. | Ambac Financial Group, Inc. 56 2022 FORM 10-K Table of Contents , Item 7A. Quantitative and Qualitative Disclosures about Market Risk ($ in millions) Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments, as a result of changes in market rates and prices, such as interest rates (inclusive of credit spreads), foreign currency exchange rates and other relevant market rate or price changes. Market risk is, in part, a function of the markets in which the underlying assets are traded. The Company’s market risk sensitive financial instruments are primarily entered into for purposes other than trading. As discussed further below, the Company’s primary market risk exposures include those from changes in interest rates, foreign currency exchange rates and equity values of limited partnership and other alternative investments. • The primary market risks for fixed maturity investment securities are interest rate risk and foreign exchange rate risk. Ambac’s fixed maturity investment portfolio includes securities denominated both in U.S. dollars and foreign currencies, which are sensitive to changes in interest rates and foreign currency exchange rates. Our fixed maturity investments are generally classified as available for sale, with the effect of market movements recognized immediately through Other comprehensive income, or through Net income when securities are sold or when an impairment charge is recorded, although certain securities held at December 31, 2022 are classified as trading with changes in fair value reported through Net income as they occur. • Ambac also invests in limited partnerships and other alternative investments, primarily consisting of diversified pooled investment funds, which are reported as Other investments. These funds are subject to equity value changes driven primarily by changes to their respective net asset value (“NAV”). Ambac’s share of the changes of the equity value of the funds is reported through Net income. For additional information about Ambac’s investments, see Note 5. Investments in this Annual Report on Form 10-K located in Part II. Item 8. • The interest rate derivatives portfolio is managed as a partial hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac's financial guarantee exposures. Changes in fair value of interest rate derivatives are recognized immediately through Net income. For additional information about Ambac’s interest rate derivatives, see Note 10. Derivative Instruments to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. • Although our long-term debt obligations are reported at amortized cost and not adjusted for fair value changes, changes in interest rates could have a material impact on their fair value, though with no direct impact on our consolidated financial statements. For additional information about Ambac’s debt obligations, see Note 13. Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. Fixed maturity investment securities that are distressed Ambac-insured bonds have market risk characteristics that behave inversely to those associated with future financial guarantee claim payments. Accordingly, such securities are excluded from the market risk sensitivity measures below. Financial instruments of VIEs that are consolidated as a result of Ambac financial guarantees are also excluded from Ambac's measures of market risk. Ambac’s exposure to such consolidated VIEs is generally limited to financial guarantees outstanding on the VIEs’ liabilities or assets. See Note 12. Variable Interest Entities to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further information about VIEs consolidated as a result of Ambac’s financial guarantees. Ambac utilizes various systems, models and sensitivity scenarios to monitor and manage market risk. These models include estimates, made by management, which utilize current and historical market information. This market information is considered in management’s judgments about adverse sensitivity scenarios that are reasonably possible to occur in the near-term. The impact of these scenarios do not consider the possible simultaneous movement in other market rates or prices, actions of management or other factors that could lessen or worsen actual results. For these reasons, the valuation results from these models could differ materially from amounts actually realized in the market. Market Risk Sensitivities Interest Rate Risk. Financial instruments for which fair value may be affected by changes in interest rates consist primarily of fixed maturity investment securities, long-term debt and interest rate derivatives. Increases to interest rates would result in declines in the fair value of our fixed maturity investment portfolio. Interest rate increases would also have a negative economic impact on expected future claim payments within the financial guarantee portfolio, primarily related to RMBS and student loan policies. Conversely, interest rate increases would generally result in fair value gains on interest rate derivatives and lower the fair value of our debt obligations. Ambac performs scenario testing to measure the potential for losses in volatile markets. These scenario tests include parallel and non-parallel shifts in the benchmark interest rate curve. We also monitor our interest rates exposure through periodic reviews of projected cash flows and durations of our asset and liability positions. The following table summarizes the estimated change in fair value of our fixed maturity investment portfolio from a hypothetical immediate increase in interest rates of 100 basis points across the yield curve as of December 31, 2022 and 2021: December 31, 2022 2021 Fair value of fixed maturity investment (1) $ 1,740 $ 1,656 Pre-tax impact of 100 basis point increase in interest rates Decrease in dollars $ (53) $ (50) As a percent of fair value 3 % 3 % (1) Excludes investments in distressed Ambac-insured securities and securities held by VIEs consolidated as a result of Ambac’s financial guarantees | Ambac Financial Group, Inc. 57 2022 FORM 10-K Table of Contents , The following table presents the impact on the fair value of our long-term debt obligations and interest rate derivatives of a hypothetical immediate decrease in interest rates of 100 basis points across the yield curve as of December 31, 2022 and 2021: December 31, 2022 2021 Fair value of long-term debt including accrued interest (1) $ (878) $ (2,598) Pre-tax impact of 100 basis point decrease in interest rates Increase in dollars $ (18) $ (55) As a percent of fair value 2 % 2 % Fair value of interest rate derivative net assets (liabilities) (1) $ (12) $ (19) Pre-tax impact of 100 basis point decrease in interest rates Pre-tax loss from change in fair value in dollars $ (29) $ (51) (1) Excludes long-term debt and derivative instruments of VIEs consolidated as a result of Ambac’s financial guarantees Foreign Currency Risk. Ambac has fixed maturity investments and investments in pooled funds denominated in currencies other than the U.S. dollar, primarily British pounds sterling and Euro. These financial instruments are primarily invested assets of Ambac UK and are held in consideration of non-U.S. dollar exposure in the financial guarantee insurance portfolio and operations of Ambac UK. The adverse fair value impact of a stronger U.S. dollar relative to other currencies on investment holdings would be directionally offset by the economic benefits to non-U.S. dollar financial guarantees and other risk exposures. The following table summarizes the estimated decrease in fair value of these financial instruments assuming immediate 20% strengthening of the U.S. dollar relative to the foreign currencies as of December 31, 2022 and 2021: December 31, 2022 2021 Fair value of investments denominated in currencies other than the U.S. dollar (1) $ 398 $ 478 Pre-tax impact of 20% strengthening of the U.S. dollar $ (80) $ (96) (1) Excludes investments in distressed Ambac-insured securities and securities held by VIEs consolidated as a result of Ambac’s financial guarantees Equity Sensitivity. Ambac’s investment portfolio includes equity and partnership interests in pooled funds with diverse asset holdings and strategies. The table below summarizes the decrease in fair value of Ambac’s pooled fund investments that would occur assuming an immediate and uniform 10% decline in NAV of the funds. The selection of a 10% fair value stress is made only as an illustration of the hypothetical impact of adverse market movements on Ambac’s investments with equity value sensitivity. Actual market shocks could have materially different aggregate results and would likely not have a uniform impact on all funds given the diversity of the funds’ holdings and strategies. December 31, 2022 2021 Fair value of investments in pooled funds $ 556 $ 683 Pre-tax impact of 10% decline in NAV of the funds $ (56) $ (68) | Ambac Financial Group, Inc. 58 2022 FORM 10-K Table of Contents , Item 8. Financial Statements and Supplementary Data AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Account Firm KPMG LLP , New York, NY , PCAOB ID 185 60 Consolidated Financial Statements Consolidated Balance Sheets 63 Consolidated Statements of Stockholders’ Equity 65 Consolidated Statements of Total Comprehensive Income (Loss) 64 Consolidated Statements of Cash Flows 66 Notes to Consolidated Financial Statements Note 1. Background and Business Description 67 Note 11. Goodwill and Intangible Assets 112 Note 2. Basis of Presentation and Significant Accounting Policies 70 Note 12. Variable Interest Entities 112 Note 3. Segment Information 83 Note 13. Long-term Debt 115 Note 4. Business Combination 85 Note 14. Revenues From Contracts with Customers 117 Note 5. Investments 86 Note 15. Comprehensive Income 118 Note 6. Fair Value Measurements 92 Note 16. Net Income Per Share 119 Note 7. Financial Guarantees in Force 98 Note 17. Income Taxes 119 Note 8. Insurance Contracts 99 Note 18. Employment Benefit Plans 121 Note 9. Insurance Regulatory Restrictions 106 Note 19. Leases 123 Note 10. Derivative Instruments 110 Note 20. Commitments and Contingencies 124 | Ambac Financial Group, Inc. 59 2022 FORM 10-K Table of Contents , Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Ambac Financial Group, Inc.: Opinion on Internal Control Over Financial Reporting We have audited Ambac Financial Group, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I, II and III (collectively, the consolidated financial statements), and our report dated February 28, 2023 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP New York, New York February 28, 2023 | Ambac Financial Group, Inc. 60 2022 FORM 10-K Table of Contents , Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Ambac Financial Group, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Ambac Financial Group, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I, II and III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Estimate of loss and loss adjustment expense reserves and subrogation recoverable As described in Notes 2 and 8 to the consolidated financial statements, the Company estimates financial guarantee loss and loss expense reserves and subrogation recoverable (loss reserves) on a policy-by-policy basis based upon the present value of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates. Expected net claim cash outflows represent the present value of expected claim cash outflows, less the present value of expected recovery cash inflows. For such policies, a loss and loss adjustment expense reserves liability is recorded for the present value of expected net claim cash outflows in excess of the related unearned premium revenue. Expected net recovery cash inflows represent the present value of expected recovery cash inflows, less the present value of expected claim cash outflows. For such policies, a subrogation recoverable asset is recorded. As of December 31, 2022, the Company recorded loss and loss adjustment expense reserves of $805 million and subrogation recoverable of $271 million. We identified the evaluation of loss adjustment reserves as a critical audit matter. The evaluation encompassed the assessment of the loss reserves methodologies, including those methods used to estimate the following assumptions: (1) credit worthiness of the issuer of the insured security, (2) the likelihood of possible outcomes regarding the probability of default by the issuer of the insured security, (3) the expected loss severity for each insurance policy, and (4) the probability of remediation, settlement and restructuring outcomes. The evaluation of the methods and the impact of these assumptions required specialized skills and subjective and complex auditor judgment due to a high level of estimation uncertainty. The following are the primary procedures we performed to address this critical audit matter. With the assistance of credit risk and valuation professionals with specialized industry knowledge and experience, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's estimation of loss reserves. This included controls related to the determination of the assumptions and the sources of data and the analysis of the loss reserves. We involved credit risk professionals with specialized skills and | Ambac Financial Group, Inc. 61 2022 FORM 10-K Table of Contents , knowledge, who assisted in assessing the individual issuer ratings and credit classifications for certain policies by evaluating the financial performance of the issuer of the insured security and underlying collateral. We also involved valuation professionals with specialized skills and knowledge, who assisted in: • evaluating the methods used to estimate loss reserves for compliance with U.S. generally accepted accounting principles, • evaluating, for certain policies, the assumptions, including: the likelihood of possible outcomes regarding the probability of default by the issuer of the insured security; the expected loss severity for each insurance policy; and, the probability of remediation, settlement and restructuring outcomes, and the sources of data and assumptions used in the calculation of loss reserves by comparing to the Company’s internal experience and related historical and industry trends. /s/ KPMG LLP We have served as the Company’s auditor since 1985. New York, New York February 28, 2023 | Ambac Financial Group, Inc. 62 2022 FORM 10-K Table of Contents , AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in millions, except share data) December 31, 2022 2021 Assets: Investments: Fixed maturity securities, at fair value (amortized cost of $ 1,469 and $ 1,605 ) $ 1,395 $ 1,730 Fixed maturity securities pledged as collateral, at fair value (amortized cost of $ — and $ 15 ) — 15 Fixed maturity securities - trading, at fair value 59 — Short-term investments, at fair value (amortized cost of $ 507 and $ 415 ) 507 414 Short-term investments pledged as collateral, at fair value (amortized cost of $ 64 and $ 105 ) 64 105 Other investments (includes $ 556 and $ 683 at fair value) 568 690 Total investments (net of allowance for credit losses of $ 0 and $ 0 ) 2,593 2,955 Cash and cash equivalents (including $ 14 and $ 5 of restricted cash) 44 21 Premium receivables (net of allowance for credit losses of $ 5 and $ 9 ) 269 323 Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $ 0 and $ 0 ) 115 55 Deferred ceded premium 124 90 Deferred acquisition costs 3 — Subrogation recoverable 271 2,092 Derivative assets 27 76 Intangible assets 326 362 Goodwill 61 46 Other assets 84 68 Variable interest entity assets: Fixed maturity securities, at fair value 1,967 3,455 Restricted cash 17 2 Loans, at fair value 1,829 2,718 Derivative and other assets 241 40 Total assets $ 7,973 $ 12,303 Liabilities and Stockholders’ Equity: Liabilities: Unearned premiums $ 372 $ 395 Loss and loss adjustment expense reserves 805 1,570 Ceded premiums payable 39 33 Deferred program fees and reinsurance commissions 5 — Long-term debt 639 2,230 Accrued interest payable 427 576 Derivative liabilities 38 95 Other liabilities 163 133 Variable interest entity liabilities: Long-term debt (includes $ 2,788 and $ 4,056 at fair value) 3,107 4,216 Derivative liabilities 1,048 1,940 Other liabilities 5 — Total liabilities 6,647 11,187 Commitments and contingencies (See Note 20) Redeemable noncontrolling interest 20 18 Stockholders’ equity: Preferred stock, par value $ 0.01 per share; 20,000,000 shares authorized shares; issued and outstanding shares— none — — Common stock, par value $ 0.01 per share; 130,000,000 shares authorized; issued shares: 46,658,990 and 46,477,068 — — Additional paid-in capital 274 257 Accumulated other comprehensive income (loss) ( 253 ) 58 Retained earnings 1,245 726 Treasury stock, shares at cost: 1,685,233 and 172,929 ( 15 ) ( 3 ) Total Ambac Financial Group, Inc. stockholders’ equity 1,252 1,038 Nonredeemable noncontrolling interest 53 60 Total stockholders’ equity 1,305 1,098 Total liabilities, redeemable noncontrolling interest and stockholders’ equity $ 7,973 $ 12,303 See accompanying Notes to Consolidated Financial Statements | Ambac Financial Group, Inc. 63 2022 FORM 10-K Table of Contents , AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Total Comprehensive Income (Loss) (Dollars in millions, except share data) Year Ended December 31, 2022 2021 2020 Revenues: Net premiums earned $ 56 $ 47 $ 54 Commission income 31 26 — Program fees 3 — — Net investment income 17 139 122 Net investment gains (losses), including impairments 31 7 22 Net gains (losses) on derivative contracts 129 22 ( 50 ) Net realized gains on extinguishment of debt 81 33 — Income (loss) on variable interest entities 21 7 5 Other income 10 1 3 Litigation recoveries 126 — — Total revenues and other income 505 282 156 Expenses: Losses and loss adjustment expenses (benefit) ( 396 ) ( 88 ) 225 Amortization of deferred acquisition costs, net 3 1 — Commission expense 18 15 — General and administrative expenses 141 111 92 Intangible amortization 47 55 57 Interest expense 168 187 222 Total expenses ( 20 ) 281 596 Pretax income (loss) 525 2 ( 440 ) Provision (benefit) for income taxes 2 18 ( 3 ) Net income (loss) 522 ( 16 ) ( 437 ) Less: net (gain) loss attributable to noncontrolling interest ( 1 ) ( 1 ) — Plus: gain on purchase of auction market preferred shares 1 — — Net income (loss) attributable to common stockholders $ 522 $ ( 17 ) $ ( 437 ) Other comprehensive income (loss), after tax Net income (loss) $ 522 $ ( 16 ) $ ( 437 ) Unrealized gains (losses) on securities, net of income tax provision (benefit) of $( 6 ), $( 2 ) and $ 1 ( 225 ) ( 12 ) 15 Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $ — , $ — and $ — ( 85 ) ( 8 ) 23 Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $ — , $ — and $ — — ( 1 ) 1 Changes to postretirement benefit, net of income tax provision (benefit) of $ — , $ — and $ — ( 1 ) ( 1 ) ( 3 ) Total other comprehensive income (loss), net of income tax ( 310 ) ( 21 ) 37 Total comprehensive income (loss), net of income tax 212 ( 38 ) ( 400 ) Less: net (gain) loss attributable to noncontrolling interest ( 1 ) ( 1 ) — Plus: gain on purchase of auction market preferred shares 1 — — Total comprehensive income (loss) attributable to common stockholders $ 212 $ ( 38 ) $ ( 400 ) Net income (loss) per shared attributable to common stockholders Basic $ 11.48 $ ( 0.61 ) $ ( 9.47 ) Diluted $ 11.31 $ ( 0.61 ) $ ( 9.47 ) Weighted average number of common shares outstanding: Basic 45,719,906 46,535,001 46,147,062 Diluted 46,414,830 46,535,001 46,147,062 See accompanying Notes to Consolidated Financial Statements | Ambac Financial Group, Inc. 64 2022 FORM 10-K Table of Contents , AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity Ambac Financial Group, Inc. ($ in Millions) Total Retained Earnings Accumulated Other Comprehensive Income (Loss) Preferred Stock Common Stock Additional Paid-in Capital Treasury Stock, at Cost Nonredeemable Noncontrolling Interest Balance at January 1, 2020 $ 1,536 $ 1,203 $ 42 $ — $ — $ 232 $ — $ 60 Total comprehensive income (loss) ( 400 ) ( 437 ) 37 — — — — — Adjustment to initially apply ASU 2016-13 ( 4 ) ( 4 ) — — — — — — Stock-based compensation 11 — — — — 11 — — Cost of shares (acquired) issued under equity plan ( 3 ) ( 2 ) — — — — ( 1 ) — Balance at December 31, 2020 $ 1,140 $ 759 $ 79 $ — $ — $ 242 $ ( 1 ) $ 60 Total comprehensive income (loss) ( 38 ) ( 17 ) ( 21 ) — — — — — Stock-based compensation 14 — — — — 14 — — Cost of shares (acquired) issued under equity plan ( 6 ) ( 4 ) — — — — ( 2 ) — Changes to redeemable noncontrolling interest ( 12 ) ( 12 ) — — — — — — Balance at December 31, 2021 $ 1,098 $ 726 $ 58 $ — $ — $ 257 $ ( 3 ) $ 60 Total comprehensive income (loss) 211 521 ( 310 ) — — — — — Stock-based compensation 17 — — — — 17 — — Cost of shares (acquired) issued under equity plan ( 4 ) ( 5 ) — — — — 2 — Cost of shares repurchased ( 14 ) — — — — — ( 14 ) — Changes to Redeemable noncontrolling interest 3 3 — — — — — — Sale of noncontrolling interest in subsidiary 2 — — — — — — 2 Purchase of Ambac Assurance auction market preferred shares ( 8 ) 1 — — — — — ( 9 ) Balance at December 31, 2022 $ 1,305 $ 1,245 $ ( 253 ) $ — $ — $ 274 $ ( 15 ) $ 53 See accompanying Notes to Consolidated Financial Statements | Ambac Financial Group, Inc. 65 2022 FORM 10-K Table of Contents , AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in millions) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income attributable to common stockholders $ 522 $ ( 17 ) $ ( 437 ) Redeemable noncontrolling interest ( 1 ) ( 1 ) — Repurchase of auction market preferred shares 1 — — Net income 522 ( 16 ) ( 437 ) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2 2 1 Amortization of bond premium and discount ( 11 ) ( 13 ) ( 15 ) Share-based compensation 17 14 11 Unearned premiums, net ( 58 ) ( 82 ) ( 48 ) Losses and loss expenses, net 1,220 ( 147 ) 76 Ceded premiums payable 6 6 ( 3 ) Premium receivables 54 48 44 Accrued interest payable ( 134 ) 103 93 Amortization of intangible assets 47 55 57 Net investment gains (losses), including impairments ( 31 ) ( 7 ) ( 22 ) (Gain) loss on extinguishment of debt ( 81 ) ( 33 ) — Variable interest entity activities ( 21 ) ( 7 ) ( 5 ) Derivative assets and liabilities ( 44 ) ( 23 ) 6 Other, net ( 152 ) ( 33 ) 67 Net cash provided by (used in) operating activities 1,335 ( 131 ) ( 175 ) Cash flows from investing activities: Proceeds from sales of bonds 523 236 1,109 Proceeds from matured bonds 206 698 137 Purchases of bonds ( 403 ) ( 343 ) ( 975 ) Proceeds from sales of other invested assets 166 39 374 Purchases of other invested assets ( 112 ) ( 127 ) ( 475 ) Change in short-term investments ( 52 ) 98 158 Change in cash collateral receivable 44 9 — Proceeds from paydowns of consolidated VIE assets 504 171 178 Acquisitions, net of cash acquired ( 18 ) — ( 74 ) Other, net 9 ( 5 ) 1 Net cash provided by investing activities 866 776 432 Cash flows from financing activities: Proceeds from issuance of Sitka AAC Note — 1,163 — Proceeds from issuance of Surplus Notes — 11 — Paydowns of LSNI Ambac Note — ( 1,641 ) ( 121 ) Payments for debt issuance costs — ( 12 ) — Payments for purchases of common stock ( 14 ) — — Payments for purchase of surplus notes ( 191 ) — — Payments for redemption of Sitka AAC Note ( 1,210 ) — — Payments for redemption of Tier 2 Notes ( 143 ) — — Payments for auction market preferred shares ( 8 ) — — Tax payments related to shares withheld for share-based compensation plans ( 4 ) ( 6 ) ( 3 ) Distributions to noncontrolling interest holders ( 1 ) ( 1 ) — Payments of consolidated VIE liabilities ( 591 ) ( 170 ) ( 178 ) Net cash used in financing activities ( 2,163 ) ( 657 ) ( 303 ) Effect of foreign exchange on cash and cash equivalents ( 1 ) — — Net cash flow 38 ( 12 ) ( 46 ) Cash, cash equivalents, and restricted cash at beginning of period 23 35 81 Cash, cash equivalents, and restricted cash at end of period $ 61 $ 23 $ 35 See accompanying Notes to Consolidated Financial Statements | Ambac Financial Group, Inc. 66 2022 FORM 10-K Table of Contents AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Millions, Except Share Amounts) 1. BACKGROUND AND BUSINESS DESCRIPTION Ambac Financial Group, Inc. (“AFG”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, 1991 . References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires. Ambac's business operations include: • Legacy Financial Guarantee Insurance — Ambac's financial guarantee business includes the activities of Ambac Assurance Corporation ("AAC") and its wholly owned subsidiaries, including Ambac Assurance UK Limited (“Ambac UK”) and Ambac Financial Services LLC ("AFS"). Both AAC and Ambac UK have financial guarantee insurance portfolios that have been in runoff since 2008. AFS uses derivatives to hedge interest rate risk in AAC's insurance and investment portfolios. • Specialty Property and Casualty Insurance — Ambac's Specialty Property and Casualty Insurance program business includes five admitted carriers and an excess and surplus lines (“E&S” or “nonadmitted”) insurer (collectively, “Everspan”). Three of the five admitted carrier were acquired in 2022. Everspan carriers have an AM Best rating of 'A-' (Excellent). • Insurance Distribution — Ambac's specialty property and casualty ("P&C") insurance distribution business, which could include Managing General Agents and Underwriters (collectively "MGA/Us"), insurance wholesalers, and other distribution businesses, currently includes (i) Xchange Benefits, LLC (“Xchange”), a P&C MGA/U specializing in accident and health products, (ii) All Trans Risk Solutions, LLC ("All Trans"), a full service managing general underwriter specializing in commercial automobile insurance for specific "for-hire" auto classes, and (iii) Capacity Marine Corporation ("Capacity Marine"), a wholesale retail brokerage and reinsurance intermediary specializing in marine and international risk. Both All Trans and Capacity Marine Corporation were acquired in November 2022, refer to Note 4. Business Combination for further information relating to these acquisitions. Beginning in 2022, the Company began reporting these three business operations as segments; see Note 3. Segment Information for further information. Limitations on Voting and Transfer of Common Stock AFG’s Amended and Restated Certificate of Incorporation limits voting and transfer rights of stockholders in significant ways. Article IV contains voting restrictions applicable to any person owning at least 10 % of AFG's common stock so that such person (including any group consisting of such person and any other person with whom such person or any affiliate or associate of such person has any agreement, contract, arrangement or understanding with respect to acquiring, voting, holding or disposing of AFG’s common stock) shall not be entitled to cast votes in excess of one vote less than 10 % of the votes entitled to be cast by all common stock holders, except as otherwise approved by the OCI (as defined below). Article XII contains substantial restrictions on the ability to transfer AFG’s common stock. In order to preserve certain tax benefits, subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons shall become a holder of 5 % or more of AFG’s common stock or (ii) the percentage stock ownership interest in AFG of any holder of 5 % or more of AFG’s common stock shall be increased (a “Prohibited Transfer”). These restrictions shall not apply to an attempted transfer if the transferor or the transferee obtains the written approval of AFG’s Board of Directors to such transfer. A purported transferee of a Prohibited Transfer shall not be recognized as a stockholder of AFG for any purpose whatsoever in respect of the securities which are the subject of the Prohibited Transfer (the “Excess Securities”). Until the Excess Securities are acquired by another person in a transfer that is not a Prohibited Transfer, the purported transferee of a Prohibited Transfer shall not be entitled with respect to such Excess Securities to any rights of stockholders of AFG, including, without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or otherwise, in respect thereof, if any. Once the Excess Securities have been acquired in a transfer that is not a Prohibited Transfer, the securities shall cease to be Excess Securities. If the Board determines that a transfer of securities constitutes a Prohibited Transfer then, upon written demand by AFG, the purported transferee shall transfer or cause to be transferred any certificate or other evidence of ownership of the Excess Securities within the purported transferee’s possession or control, together with any distributions paid by AFG with respect to such Excess Securities, to an agent designated by AFG. Such agent shall thereafter sell such Excess Securities and the proceeds of such sale shall be distributed as set forth in the Amended and Restated Certificate of Incorporation. If the purported transferee of a Prohibited Transfer has resold the Excess Securities before receiving such demand, such person shall be deemed to have sold the Excess Securities for AFG’s agent and shall be required to transfer to such agent the proceeds of such sale, which shall be distributed as set forth in the Amended and Restated Certificate of Incorporation. Strategies to Enhance Shareholder Value The Company's primary goal is to maximize long-term shareholder value through the execution of key strategies for its (i) Specialty Property and Casualty Insurance and Insurance Distribution businesses and (ii) Legacy Financial Guarantee Insurance. Specialty Property and Casualty Insurance and Insurance Distribution strategic priorities include: • Growing a Specialty Property and Casualty Insurance business which generates underwriting profits and an attractive return on capital from a diversified portfolio of | Ambac Financial Group, Inc. 67 2022 FORM 10-K Table of Contents AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Millions, Except Share Amounts) commercial and personal liability risks accessed through program administrators. • Building an Insurance Distribution business based on deep domain knowledge in specialty and niche classes of risk which generate attractive margins at scale. This will be achieved through acquisitions, new business “de-novo” formation and incubation, and product expansion supported by a centralized technology led shared services offering. • Making opportunistic investments that are strategic to both the Specialty Property and Casualty Insurance and Insurance Distribution businesses. Legacy Financial Guarantee Insurance strategic priorities include: • Actively managing, de-risking and mitigating insured portfolio risk, and pursuing recovery of previously paid losses. • Improving operating efficiency and optimizing our asset and liability profile. • Exploring strategic options to further maximize value for AFG. The execution of Ambac’s strategy to increase the value of its investment in AAC is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010, as amended (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC, as well as the Stipulation and Order among the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”), AFG and AAC that became effective on February 12, 2018, as amended (the “Stipulation and Order”), each of which requires OCI and, under certain circumstances, holders of surplus notes, to approve certain actions taken by or in respect of AAC. In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of AFG. The Settlement Agreement limits certain activities of AAC and its subsidiaries, such as issuing indebtedness; engaging in mergers and similar transactions; disposing of assets; making restricted payments; creating or permitting liens; engaging in transactions with affiliates; modifying or creating tax sharing agreements; and taking certain actions with respect to surplus notes (among other restrictions and limitations). The Settlement Agreement includes certain allowances with respect to these activities and generally requires the approval of OCI and, in some cases, holders of surplus notes issued pursuant to the Settlement Agreement, for consents, waivers or amendments. The Stipulation and Order includes affirmative covenants, as well as restrictions on certain business activities and transactions, of AFG and AAC. The Stipulation and Order has no fixed term and may be terminated or modified only with the approval of OCI. OCI reserved the right to modify or terminate the Stipulation and Order in a manner consistent with the interests of policyholders, creditors and the public generally. The execution of Ambac’s strategy to increase the value of its investment in AAC may also be affected by a new capital framework being developed by OCI ("OCI's Runoff Capital Framework") to assist OCI with making decisions related to capital and liquidity management at AAC. OCI's Runoff Capital Framework is not yet complete and therefore we are not able to predict the results of such and what it may mean for our Legacy Financial Guarantee strategy, particularly as it relates to deleveraging AAC and distributing capital to AFG. Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of AAC’s creditworthiness, the structure of the underlying risk and associated policy as well as other counterparty specific factors. AAC's ability to commute policies or purchase certain investments may also be limited by available liquidity. Surplus Note Exchanges and Repurchases On January 19, 2021, AAC entered into a purchase agreement (the “Purchase Agreement”) with AFG and certain funds or accounts (the “Note Holders”), pursuant to which (i) the Note Holders agreed to sell to AAC all of the individual beneficial interests (the “Interests”) in the 5.1 % senior notes due August 28, 2039 (the “Corolla Notes”), issued by the Corolla Trust, a Delaware statutory trust formed by AFG in 2014 (the "Corolla Trust")(see Note 12. Variable Interest Entities for a discussion of the establishment of the Corolla Trust), (ii) AFG agreed to sell to AAC the owner trust certificate for the Corolla Trust (the “Corolla Certificate”), which constituted all of the equity interests in the Corolla Trust, and (iii) AAC agreed to exchange the Interests and the Corolla Certificate for AAC’s surplus notes (collectively, the “Corolla Note Exchange”). The Note Holders held 100 % of the outstanding Corolla Notes. Pursuant to the Purchase Agreement, each $ 1.00 principal amount of the Corolla Notes (and the associated amount of accrued and unpaid interest thereon) was exchanged for $ 0.9125 principal amount of surplus notes (and the associated amount of accrued and unpaid interest thereon) on the date of the consummation of the Corolla Note Exchange (the “Closing”). In addition, every $ 1.00 principal amount of the Corolla Certificate (and the associated amount of accrued and unpaid interest thereon) was exchanged for $ 0.64 principal amount of surplus notes (and the associated amount of accrued and unpaid interest thereon) on the date of Closing. The Closing occurred on January 22, 2021. At the Closing AAC issued $ 267 aggregate principal amount of surplus notes to consummate the Corolla Note Exchange and acquire all of the interests in the Corolla Trust. Subsequent to the closing the Corolla Trust was dissolved and the junior surplus note that had been deposited in the Corolla Trust by AFG in 2014 was canceled. In February 2021, AAC entered into a purchase agreement pursuant to which the holder of $ 15 principal amount of 5.1 % junior surplus notes issued by AAC agreed to sell such notes to AAC in exchange for surplus notes (the "JSN Exchange"). Pursuant to the purchase agreement, each $ 1.00 principal amount of the junior surplus notes (and the associated amount of accrued and unpaid interest thereon) was exchanged for $ 0.8581 principal amount of surplus notes (and the associated amount of | Ambac Financial Group, Inc. 68 2022 FORM 10-K Table of Contents AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Millions, Except Share Amounts) accrued and unpaid interest thereon). The closing of the JSN Exchange occurred on February 11, 2021, when AAC issued approximately $ 13 aggregate principal amount of surplus notes. Subsequent to the closing of the JSN Exchange the junior surplus notes were canceled. As a result of the Corolla Note Exchange and the JSN Exchange, AAC no longer has any junior surplus notes outstanding. The surplus notes exchanged pursuant to the Corolla Note Exchange and the JSN Exchange are part of the same series as, and rank equally with, the surplus notes previously issued by AAC. The Company recorded a gain of $ 33 for the year ended December 31, 2021, arising from AAC's purchases of junior surplus notes below their carrying values which is reported within Net realized gains (losses) on extinguishment of debt in the Consolidated Statements of Total Comprehensive Income (Loss). In addition, the Company recorded a gain of $ 4 for the year ended December 31, 2021, from the exchange of the Corolla Certificate held by AFG above its carrying value, which is reported within Net realized investment gains (losses) in the Consolidated Statements of Total Comprehensive Income (Loss). During 2022, AAC repurchased $ 266 current par of surplus notes from third party holders below the carrying value of the surplus notes including accrued interest, resulting in a gain of $ 134 which is reported within Net realized gains (losses) on extinguishment of debt in the Consolidated Statements of Total Comprehensive Income (Loss) for the year ended December 31, 2022. In addition, in November 2022, AAC purchased all of the remaining surplus notes received by AFG following execution of the Corolla Trust Purchase Agreement described above. AAC's repurchase of surplus notes from AFG had no impact on the consolidated financial statements of the Company. Puerto Rico Our financial guarantee insured exposure to Puerto Rico (the "Commonwealth") consisted of several different issuing entities (all below investment grade and whereby AAC has paid substantial claims since 2016) that have been part of the debt restructuring process under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), a U.S. federal law enacted in 2016 that, among other things, established a financial oversight board (the “FOMB”) and provided for a process for restructuring debt that roughly follows U.S. Bankruptcy laws. As of December 6, 2022, all AAC-insured Puerto Rico obligations have been restructured under PROMESA via court-approved plans of adjustment or qualifying modifications. Secured Note Refinancing On July 6, 2021, a newly formed variable interest entity and wholly-owned subsidiary of AFG, Sitka Holdings, LLC (“Sitka”), issued $ 1,175 par amount of LIBOR plus 4.5 % senior secured notes due 2026 (the “Sitka Senior Secured Notes”). In connection with the issuance and sale of the Sitka Senior Secured Notes, AAC issued a secured note to Sitka in the same amount and with the same interest rate and maturity date as the Sitka Senior Secured Notes (the "Sitka AAC Note"). The proceeds from this offering of $ 1,163 were used to fund a portion of the full redemption of the Ambac LSNI Secured Notes due 2023 (the “LSNI Secured Notes”) and the secured note issued by AAC concurrently with the issuance of the LSNI Secured Notes (the "LSNI Ambac Note"). The remaining balance of the LSNI Secured Notes were redeemed utilizing other available temporary sources of liquidity. Ambac did not consolidate Sitka since it does not have a variable interest in the trust. Accordingly, the Sitka AAC Note was reported within Long-term debt on the Consolidated Balance Sheet. The Sitka AAC Note and the Sitka Senior Secured Notes were fully redeemed with the proceeds (net of reinsurance) of the BOA Settlement Payment from the BOA Parties (as such terms are defined below). Settlement of RMBS Litigations and Redemption of Secured Notes: Settlement of RMBS Litigations: In October 2022, AAC entered into a Settlement Agreement and Release (the “BOA Settlement Agreement”) with Bank of America Corporation and certain affiliates thereof (together, the “BOA Parties”) pursuant to which the BOA Parties paid AAC the sum of $ 1,840 (the “BOA Settlement Payment”) following the dismissal of AAC’s lawsuits against the BOA Parties concerning certain residential mortgage-backed securities (“RMBS”) trusts, and the withdrawal by AAC of its objections, including any pending appeals, concerning the settlements that were the subject of certain trust instructional proceedings. The BOA Settlement Payment received in October 2022 significantly reduced the subrogation recoverable asset on the Consolidated Balance Sheet. In exchange for the BOA Settlement Payment, AAC, on its own behalf and on behalf of its affiliates, agreed to release the BOA Parties and related parties (the “Released Parties”) from claims asserted or which could have been asserted in AAC’s pending litigations against the BOA Parties as well as claims that AAC and its affiliates ever had, may currently have or may have in the future against the Released Parties, subject to certain limited exceptions. The BOA Settlement Agreement also requires AAC to dismiss other pending claims against the Released Parties, and to generally refrain from, and in certain situations hold the Released Parties harmless with respect to, certain actions taken by AAC with respect to RMBS trusts created prior to the date of the BOA Settlement Agreement involving the Released Parties. The BOA Settlement Payment included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties. Management allocated the BOA Settlement Payment to each of the litigations based on previously developed valuations of each individual litigation. The portion of the BOA Settlement Payment allocated to fraud litigation recoveries has been recorded as a litigation recovery in the Statement of Comprehensive Income (Loss). On December 29, 2022, AAC entered into a Settlement Agreement and Release (the “Nomura Settlement Agreement”) with Nomura Credit & Capital, Inc. (“Nomura”) to settle its litigation against Nomura concerning certain RMBS trusts (the “Trusts”). Pursuant to the Nomura Settlement Agreement, Nomura made a cash payment to AAC of $ 140 (the "Nomura Settlement Payment"), and AAC and Nomura agreed to release | Ambac Financial Group, Inc. 69 2022 FORM 10-K Table of Contents AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Millions, Except Share Amounts) each other and their respective affiliates and related persons from any claims relating to the Trusts, the financial guaranty policies issued by AAC in connection with Trusts (other than AAC’s obligations to pay insurance claims under such policies), the securities related to the Trusts, and the mortgage loans related to the Trusts. The Nomura Settlement Payment received in January 2023 will further reduce the subrogation recoverable asset on the Consolidated Balance Sheet. Redemption of Notes: During 2022 and 2023, AAC wholly redeemed its secured debt, in accordance with the terms of such debt, utilizing the BOA Settlement Payment, the Nomura Settlement Payment and other resources as follows: • Effective October 29, 2022, AAC wholly redeemed the Sitka AAC Note from the BOA Settlement Payment, for $ 1,218 (a price equal to 103 % of the principal amount plus accrued and unpaid interest) and Sitka wholly redeemed the Sitka Senior Secured Notes for the same amount. Ambac recorded a loss of $ 53 reported in Net realized gains (losses) on extinguishment of debt in the Consolidated Statements of Total Comprehensive Income (Loss) for difference between the carrying value of the Sitka AAC Note and the redemption amount paid, excluding accrued interest. • Effective October 29, 2022, AAC applied Net Proceeds (as defined below) of approximately $ 213 from the BOA Settlement Payment to partially redeem Tier 2 Notes plus accrued and unpaid interest as of the date of redemption. The Tier 2 Notes were secured by proceeds from RMBS litigations net of reinsurance (“Net Proceeds”) in excess of $ 1,600 and were subject to mandatory redemption from Net Proceeds in excess of $ 1,600 . • Effective January 15, 2023, AAC applied the Net Proceeds of $ 140 from the Nomura Settlement Payment plus approximately $ 6 from other sources to fully redeem the remaining Tier 2 Notes plus accrued and unpaid interest in the amount of approximately $ 146 as of the date of redemption. See Note 13. Long-term Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for the year ended December 31, 2022, for a description of Sitka, the Sitka AAC Note, the Sitka Senior Secured Notes and the Tier 2 Notes. AAC also invested a portion of its assets in the Sitka Senior Secured Notes, reported as Fixed maturity securities - available-for-sale on the Consolidated Balance Sheet and recorded a realized investment gain of $ 5 in the Consolidated Statements of Total Comprehensive Income (Loss) on the redemption date. Impact to the Consolidated Statement of Comprehensive Income (Loss): The total gain recognized in net income attributable to common stockholders related to entering into the BOA Settlement Agreement and the Nomura Settlement Agreement, including the redemption of the Sitka AAC Note following the BOA Settlement, was as follows: Third Quarter Fourth Quarter Full Year 2022 Losses and loss benefit (1) $ 319 $ 43 $ 362 Litigation recoveries — 126 126 Net realized gains (losses) on extinguishment of debt — ( 53 ) ( 53 ) Net investment gains (losses), including impairments — 5 5 Impact to net income attributable to common stockholders $ 319 $ 121 $ 440 (1) Full year 2022 losses and loss benefit relating to R&W recoveries were $ 123 . 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES Ambac’s consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosures. Such estimates that are particularly susceptible to change are used in connection with certain fair value measurements, valuation of financial guarantee loss reserves for non-derivative insurance policies and the valuation allowance on the deferred tax asset, any of which individually could be material. Consolidation The consolidated financial statements include the accounts of AFG and all other entities in which AFG (directly or through its subsidiaries) has a controlling financial interest, including variable interest entities (“VIEs”) for which AFG or an AFG subsidiary is deemed the primary beneficiary in accordance with the Consolidation Topic of the Accounting Standards Codification ("ASC"). All significant intercompany balances have been eliminated. The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. A VIE is an entity: a) that lacks enough equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties; or b) where the group of equity holders does not have: (1) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance; (2) the obligation to absorb the entity’s expected losses; or (3) the right to receive the entity’s expected residual returns. The determination of whether a variable interest holder is the primary beneficiary involves performing a qualitative analysis of the VIE that includes, among other factors, its capital structure, contractual terms including the rights of each variable interest holder, the activities of the VIE, whether the variable interest holder has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, whether the variable interest holder has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could | Ambac Financial Group, Inc. 70 2022 FORM 10-K Table of Contents AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Millions, Except Share Amounts) potentially be significant to the VIE, related party relationships and the design of the VIE. An entity that is deemed the primary beneficiary of a VIE is required to consolidate the VIE. Refer to Note 12. Variable Interest Entities , for a detailed discussion of Ambac’s involvement in VIEs, Ambac’s methodology for determining whether Ambac is required to consolidate a VIE and the effects of VIEs being consolidated. AFG Unconsolidated Financial Information Financial information of AFG is presented in Schedule II in this Annual Report on Form 10-K as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020. Investments in subsidiaries are accounted for using the equity method of accounting in Schedule II. Measurement of Credit Losses on Financial Instruments (CECL) Ambac measures credit losses on financial assets that are not accounted for at fair value through net income in accordance with the Current Expected Credit Loss standard or "CECL". The CECL impact on available-for-sale debt securities is discussed in the Investments sub-section below. The CECL impact on amortized cost assets is addressed in the Premium, Reinsurance Recoverables and Loan sub-sections below. These amortized cost assets reflect management's current estimate of all expected lifetime credit losses. The estimate of expected lifetime credit losses considers historical information, current information, as well as reasonable and supportable forecasts. Expected lifetime credit losses for amortized cost assets are recorded as an allowance for credit losses, with subsequent increases or decreases in the allowance reflected in net income each period. CECL does not apply to subrogation recoveries of previously paid and unpaid losses on insurance contracts accounted for under ASC 944 nor does it apply to equity method investments accounted for under ASC 323. Investments The Investments - Debt Securities Topic of the ASC requires that all debt instruments be classified in Ambac’s Consolidated Balance Sheets according to their purpose and, depending on that classification, be carried at either cost or fair market value. Ambac’s non-VIE debt investment portfolio is accounted for on a trade-date basis and consists primarily of: • Investments in fixed maturity securities are either classified as available-for-sale or trading as defined by the Investments - Debt Securities Topic of the ASC. Available-for-sale debt securities are reported in the financial statements at fair value with unrealized gains and losses, net of deferred taxes, reflected in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity and computed using amortized cost as the basis. For purposes of computing amortized cost, premiums and discounts are accounted for using the effective interest method over the term of the security. For structured debt securities with a large underlying pool of homogenous loans, such as mortgage-backed and asset-backed securities, premiums and discounts are adjusted for the effects of actual and anticipated prepayments. For other fixed maturity securities, such as corporate and municipal bonds, discounts are amortized or accreted over the remaining term of the securities and premiums are amortized to the earliest call date. Investments in fixed maturity securities classified at trading are reported in the financial statements at fair value with unrealized gains and losses included in Net investment income on the Statement of Total Comprehensive Income (Loss). • Equity interests in pooled investment funds which are accounted for in accordance with the Investments - Equity Securities Topic of the ASC and reported as Other investments on the Consolidated Balance Sheet with income reported through Net investment income on the Statement of Total Comprehensive Income (Loss). Equity interests in the form of common stock or in-substance common stock are classified as trading securities and reported at fair value while limited partner interests in such funds are reported using the equity method. • Preferred equity investments that do not have readily determinable fair values and are carried at cost, less any impairments as permitted under the Investments — Equity Securities Topic of the ASC. VIE investments in fixed maturity securities are carried at fair value as they are classified as either available-for-sale or trading as defined by the Investments — Debt Securities Topic of the ASC, or accounted for under the fair value option election. For additional information about VIE investments, including fair value by asset-type, see Note 12. Variable Interest Entities . Fair value is based primarily on quotes obtained from independent market sources. When quotes for fixed maturity securities are not available or cannot be reasonably corroborated, valuation models are used to estimate fair value. These models include estimates, made by management, which utilize current market information. When fair value is not readily determinable for pooled investment funds, the investments are valued using net asset value ("NAV") as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Investment valuations could differ materially from amounts that would actually be realized in the market. Realized gains and losses on the sale of investments are determined on the basis of specific identification. Refer to Note 6. Fair Value Measurements for further description of the methodologies used to determine the fair value of investments, including model inputs and assumptions where applicable. Ambac has a formal credit impairment review process for fixed maturity available-for-sale securities in its investment portfolio. Ambac conducts a review each quarter to identify and evaluate investments that have indications of impairment in accordance with the Investments - Debt Securities Topic of the ASC. Under CECL, factors considered to identify and assess securities for other than temporary impairment included: (i) fair values that have declined by 20 % or more below amortized cost; (ii) recent downgrades by rating agencies; (iii) the financial condition of the issuer and financial guarantor, as applicable, | Ambac Financial Group, Inc. 71 2022 FORM 10-K Table of Contents AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollar Amounts in Millions, Except Share Amounts) and an analysis of projected defaults on the underlying collateral; (iv) whether scheduled interest payments are past due; (v) whether Ambac has the intent to sell the security; and (vi) whether it is more likely than not that Ambac will be required to sell a security before the anticipated recovery of its amortized cost basis. The recognition of credit impairment losses for available-for-sale debt securities are recorded as an allowance for credit losses with an offsetting charge to net income. Improvements to estimated credit losses for available-for-sale debt securities are recognized immediately in net income. If we believe a decline in the fair value of a particular fixed maturity available-for-sale investment is not credit impaired, we record the decline as an unrealized loss net of tax in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity on our Consolidated Balance Sheets. If management either: (i) has the intent to sell its investment in a debt security or (ii) determines that the Company more likely than not will be required to sell the debt security before its anticipated recovery of the amortized cost basis less any current period credit impairment, then an impairment charge is recognized in earnings, with the amortized cost of the security written-down to fair value. The evaluation of securities for credit impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether, and to what extent, declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s or guarantor’s financial condition and/or future prospects, the impact of regulatory actions on the investment portfolio, the performance of the underlying collateral, the effects of changes in interest rates or credit spreads and the expected recovery period. With respect to Ambac insured securities owned, future cash flows used to measure credit impairment represents the sum of (i) the bond’s intrinsic cash flows and (ii) the estimated AAC claim payments. Ambac’s assessment about whether a decline in value is considered a credit impairment reflects management’s current judgment regarding facts and circumstances specific to a security and the factors noted above. If that judgment changes, Ambac may ultimately record a charge for credit impairment in future periods. Ambac has made certain accounting policy elections related to accrued interest receivable ("AIR") for available-for-sale investments under CECL. Elections include: i) not measuring AIR for credit impairment, instead AIR is written off when it becomes 90 days past due; ii) writing off AIR by reversing interest income; iii) presenting AIR separately in Other Assets on the balance sheet and iv) excluding AIR from amortized cost balances in required CECL disclosures found in Note 5. Investments. AIR at December 31, 2022 and 2021 was $ 10 and $ 10 , respectively. Refer to Note 5. Investments for further credit impairment disclosures. Premiums Legacy Financial Guarantee Insurance: Gross premiums were received either upfront or in installments. For premiums received upfront, an unearned premium revenue (“UPR”) liability was established, which was initially recorded as the cash amount received. For installment premium transactions, a premium receivable asset and offsetting UPR liability was initially established in an amount equal to: (i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the underlying insured obligation is a homogenous pool of assets which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method). An appropriate risk-free rate corresponding to the weighted average life of each policy and currency is used to discount the future premiums contractually due or expected to be collected. For example, U.S. dollar exposures are discounted using U.S. Treasury rates while exposures denominated in a foreign currency are discounted using the appropriate risk-free rate for the respective currency. The weighted average risk-free rate at December 31, 2022 and 2021, was 3.0 %. and 2.2 %, respectively, and the weighted average period of future premiums used to estimate the premium receivable at December 31, 2022 and 2021, was 8.0 years and 8.0 years, respectively. Insured obligations consisting of homogeneous pools for which Ambac uses expected future premiums to estimate the premium receivable include residential mortgage-backed securities ("RMBS"). As prepayment assumptions change for homogenous pool transactions, or if there is an actual prepayment for a “contractual” method installment transaction, the related premium receivable and UPR are adjusted in equal and offsetting amounts with no immediate effect on earnings using new premium cash flows and the then current risk-free rate corresponding to the initial weighted average life of the related policy. For both upfront and installment premium policies, premium revenues are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date (referred to as the level-yield method). For installment paying policies, the premium receivable discount, equating to the difference between the undiscounted future installment premiums and the present value of future installment premiums, is accreted as premiums earned in proportion to the premium receivable balance at each reporting date. When a bond issue insured by Ambac has been retired early, typically due to an issuer call, any remaining UPR is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue. Certain obligations insure