What changed in this filing

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Item 1. Business

2023-03-01 compared with 2022-02-24 · 308 added, 238 removed, 207 unchanged (73% of the section changed)

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

Ambac's business operations include:

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

• Specialty Property & Casualty Program Insurance ("SPCP") — Currently includes excess and surplus lines (“E&S” or “nonadmitted”) insurer Everspan Indemnity Insurance Company ("Everspan Indemnity") and admitted insurer Everspan Insurance Company, along with four other admitted insurance carrier subsidiaries (“Everspan”).

Everspan insurance carriers that are currently part of the intercompany pooling agreement received an AM Best Financial Strength rating of 'A-' (Excellent) in February 2021 and launched its first insurance program in May 2021.

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

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 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for further information relating to this acquisition.

AFG has $269 million in net assets (excluding its investment in subsidiaries) and net operating loss carry-forwards of $3,744 million ($2,148 million of which is allocated to AAC) at December 31, 2021.

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;

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.

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

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

Corporate Strategy:

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

Specialty P&C Insurance Program Platform strategic priorities include:

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

• Building a leading federation of specialty MGA/U partners through additional acquisitions and de novo builds, supported by a centralized business services unit including core technology solutions.

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

Financial Guarantee Insurance companies’ strategic priorities include:

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

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

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

• Exploring strategic options to further maximize value for AFG.

DESCRIPTION OF THE BUSINESS

Financial Guarantee Insurance 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's financial condition began to deteriorate in 2007 as a result of which these companies have been unable to write new financial guaranty business since such time.

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 Ambac UK, or (iv) other strategic transactions to accelerate or enhance the above-stated corporate strategy.

We can provide no assurance that Ambac will achieve any of the aforementioned goals.

AAC and Ambac UK have been working toward reducing risk within their insured portfolios, such as exposures to financially stressed municipal entities (including Puerto Rico) and asset-backed securities (including residential mortgage-backed securities ("RMBS") and student loan-backed securities).

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 challenging environment that includes long

(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-

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duration obligations.

AAC is also actively prosecuting legal claims to recover losses in its FG portfolio.

With regards to AAC, this strategy is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC;

the Stipulation and Order (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K);

and in the indenture for the Tier 2 Notes (as defined in Note 12.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K), each of which requires OCI (as defined below) and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of AAC.

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backed securities as well as large and concentrated exposures.

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.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information.

Financial guarantee revenues consist mostly of premiums earned from insurance contracts, net of reinsurance.

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:

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(iii) interest expense on debt, (iv) operating expenses and (v) insurance intangible amortization.

AAC’s ability to pay dividends to AFG has been significantly restricted by the deterioration of AAC’s financial condition and by regulatory, legal and contractual restrictions.

It is highly unlikely that AAC will be able to make dividend payments to AFG for the foreseeable future, which constrains AFG's liquidity.

Refer to "Dividend Restrictions, Including Contractual Restrictions" below and Note 8.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K, for more information on dividend payment restrictions.

Interest rate derivative transactions are executed through Ambac Financial Services (“AFS”), a wholly-owned subsidiary of AAC.

The primary activity of AFS is to partially hedge interest rate risk in the financial guarantee insurance and investment portfolios.

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.

Under agreements governing interest rate derivative positions, AFS generally must post collateral or margin in excess of the market value of the swaps and futures contracts.

A 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, previous termination payments and other cash needs.

Credit risk associated with interest rate derivative positions primarily relates to the potential default of a counterparty.

As AFS's interest rate derivatives generally consist of centrally cleared swaps, US treasury futures, the associated credit risk is mitigated through the use of industry standard collateral or margin requirements.

For the small number of remaining legacy derivatives with financial guarantee customers that do not require collateral, credit risk is managed through the risk management processes described in the Risk Management Group section below.

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 Form 10-K for further information.

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 and credit derivative contracts expose the Company to the direct credit risk of the assets and/or obligor supporting the guaranteed obligation.

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;

economic, including the risk of economic recession;

natural disaster;

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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, the Stipulation and Order and the indenture for the Tier 2 Notes.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information.

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.

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.

The Surveillance group's focus is on the early identification of potential stress and/or credit deterioration and the related analysis of credit exposures in the insured portfolio.

Additionally, Surveillance evaluates the impact of changes in the economic, regulatory or political environment on the insured portfolio.

Analysts in this group 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.

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,

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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 appropriate credit classifications, ratings and changes to a transaction or bond type’s review period and surveillance requirements.

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 Part II, Item 8 in

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this Form 10-K for further discussion of the various credit classifications utilized by Ambac.

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.

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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 RMBS, for example, which have several correlations including those associated with consumer lending, unemployment and home prices.

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.

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Risk Remediation

Risk Remediation's focus is on exposure reduction and loss mitigation related to the insured portfolio.

In particular, this group focuses 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.

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, Risk Remediation will develop and implement a remediation or loss mitigation plan that could 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.

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 meetings with Credit Risk Management (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.

We have established cross-functional teams in key areas of focus, comprised of personnel both within the RMG and in other departments, as part of the risk remediation process.

An example of such efforts includes the teams of professionals focused on the review and enforcement of contractual representations and warranties ("R&W") supporting RMBS policies.

Members of these cross-functional teams will often work with external experts in the pursuit of risk reduction efforts.

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”).

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 independent assessments, reviews and approvals and drives consistency and timeliness.

The scope of credit matters under the purview of CRM includes material amendments, consents and waivers, evaluation of remediation or loss mitigation plans, credit review scheduling, credit classifications, rating designations, review of watch list or adversely classified credits, sector reviews and overall portfolio reviews.

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 structured transactions, including certain structured public finance transactions, AAC may be the control party as a result of insuring the transaction’s senior class or tranche of debt obligations.

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 Ambac is party to and/or has certain rights in documents supporting transactions in the insured portfolio, Ambac frequently receives requests for amendments, consents and waivers (“ACWs”).

CRM reviews, analyzes and processes all requests for ACWs.

The decision to approve or reject ACWs is based upon certain credit factors, such as the issuer’s ability to repay the bonds and the bond’s security features and structure.

As part of the CRM process, members of the RMG review, analyze and process all requests for ACWs.

Similarly, in certain international structured finance, regulated utility, public-private partnerships and other international transactions, Ambac UK may be the control party.

Because Ambac UK is party to and/or has certain rights in documents supporting Ambac UK-insured transactions, Ambac UK receives requests for ACWs.

At Ambac UK, the Portfolio Risk Management team reviews, analyzes and processes ACWs with similar credit considerations as noted in the AAC process factored into the decision to approve or reject the ACW.

As a part of the Segregated Account Rehabilitation Proceedings (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K), the Rehabilitation Court (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K) enjoined certain actions by other parties to preserve AAC’s control rights that could otherwise have lapsed or been

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

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Pursuant to the Second Amended Plan of Rehabilitation (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K) and orders of the Rehabilitation Court, such protections continue after the conclusion of the Segregated Account Rehabilitation Proceedings.

Watch List and Adversely Classified Credits

Watch list and adversely classified credits are tracked closely by the appropriate RMG teams and discussed as part of the CRM process.

Adversely classified credit meetings include members of RMG and other groups within the Company, as necessary.

The review schedule for adversely classified credits is tailored to the 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 Board of Directors no less than quarterly.

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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.

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Loss Reserving and Analytics ("LRA")

LRA manages the quarterly loss reserving process for insured portfolio credits with projected policy claims.

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.

LRA works with surveillance and risk remediation analysts responsible for a particular credit on the development, review and implementation of loss reserve scenarios and related analysis.

Specialty Property & Casualty Program Insurance

Everspan’s strategy is to develop a sustainable, long-term specialty property & casualty program insurance business with diverse classes of risks.

Everspan sources business through program administrators and managing general agents (collectively “MGA”), reinsurers, brokers, producers and others.

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.

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 third parties to market and administer policies and handle claims within defined authorities on Everspan's behalf.

Everspan's management team has significant years of experience in the program insurance business and has long-standing and broad relationships with MGAs, reinsurers, brokers, producers and third-party claims administrators.

Everspan is comprised of Everspan Indemnity Insurance Company, an E&S carrier, which is eligible to write business in all U.S.

states and territories and five admitted carriers.

Everspan's admitted carriers include:

• Everspan Insurance Company, which holds certificates of authority in fifty-one U.S.

states and territories, of which forty-six grant full property and casualty authority.

• Providence Washington Insurance Company (“PWIC”) and 21st Century Indemnity Insurance Company, 21st Century Pacific Insurance Company and 21st Century Auto Insurance Company of New Jersey (collectively, the "21st Century Companies"), which were acquired by Everspan Insurance Company on October 1, 2021 and January 1, 2022, respectively.

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

and the vast majority of PWIC’s legacy liabilities have been transferred out of PWIC pursuant to an insurance business transfer, which was approved by the Oklahoma County District Court in October 2020.

All remaining liabilities are fully ceded to reinsurers and are supported by an unlimited indemnity from the Seller, Enstar Holdings (US), which mitigates any residual risk to these reinsurers.

• The 21st Century Companies were acquired from a national insurance group that has a Financial Strength Rating of “A” (Excellent) from AM Best.

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

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

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

Everspan is focused on generating strong underwriting results via its participatory risk retention business model.

For the year ended December 31, 2021, Everspan issued insurance policies generating $13 million of gross written premium, of which Everspan retained approximately 20%.

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:

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($ 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

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.

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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 acceptable 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 to secure the reinsured risks.

Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on reinsurance recoverables, including the evaluation for credit impairments.

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.

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.

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Everspan faces competition from program business market participants such as State National, Clear Blue Insurance Group, Accelerant Specialty, Benchmark Insurance Company, Falls Lake Insurance, Fortegra Insurance Group, Spinnaker Insurance Company and Accredited Surety and Casualty Company, Inc.

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• 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.

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 insurers from entering target markets within the property and casualty industry.

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.

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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 industries 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.

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.

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Business Acquisition and Program Partner Selection:

As noted above, most of Everspan’s programs are sourced either from MGAs 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 MGAs 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 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.

Upon receipt of a new submission, Everspan promptly determines whether the program is within Everspan's appetite and Everspan has the ability to write the program;

it then either declines or starts an initial diligence process.

During the initial diligence process, underwriting, actuarial and program management resources review the submission.

If approved by these resources, an underwriting memorandum is prepared and submitted to Everspan's Underwriting Risk Committee for initial approval.

Everspan's Underwriting Risk Committee is chaired by Everspan’s Chief Underwriting Officer and consists of employees and consultants with expertise in underwriting,

credit, and finance.

If initial approval is received, Everspan then conducts comprehensive underwriting, claims, operational, compliance and financial diligence on the partner.

As part of the diligence process, Everspan works closely with the potential MGA to design the program’s underwriting guidelines, ongoing reporting and auditing requirements.

Everspan also typically requires the producing partner to retain underwriting risk or otherwise align incentives with the program’s 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 third-party claims administrator or (“TPA”), which in some cases are managed by the MGA or producing partner.

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 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 as respects the solvency of the MGA and/or reinsurers.

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 MGAs 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 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 and TPA and hold monthly underwriting meetings with both the MGA and TPA.

Underwriting and claims data is provided by the MGAs and TPAs monthly.

Additionally, Everspan conducts underwriting, claims and accounting audits, generally on-site, for each program at least once a year.

Although Everspan monitors its programs on an ongoing basis including performance of statutory required procedures, monitoring efforts may not be adequate, or these entities may exceed their underwriting or claims settlement authorities or otherwise breach obligations owed to Everspan.

To the extent that these entities exceed their authorities or otherwise breach obligations owed to Everspan in the future, our results of operations or financial condition could be materially adversely affected.

Everspan maintains the right to terminate relationships with its MGAs and TPAs.

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 are an important factor in assessing Everspan’s competitive position in the insurance industry.

AM Best assigns Financial Strength Ratings (FSRs) to property and casualty insurance companies based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, the adequacy and soundness of ceded reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus

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.

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and the competence, experience and integrity of management.

AM Best's FSR scale ranges from 'A++' (superior) to 'D' (poor).

These ratings are not a recommendation to buy, sell or hold any security, and they may be revised or withdrawn at any time by AM Best.

Additionally, AM Best assigns a Best’s Financial Size Category (FSC) to letter-rated insurers, which is a convenient indicator of the company’s size.

The FSC is represented by Roman numerals ranging from Class I (smallest) to Class XV (largest).

The FSC is not part of the FSR.

Everspan insurance carriers that were part of the intercompany pooling agreement during 2021 received an AM Best rating of 'A-' (Excellent) and Financial Size Category of Class VIII.

We view this rating and financial size category as a competitive advantage in the marketplace.

Under the intercompany pooling agreement, affiliated parties agree to and associate themselves, as the Everspan Pool, for the purpose of insuring and reinsuring all business written by or on behalf of each of them, with the intention that each party shall participate, jointly and severally, in the fortunes of the combined underwriting, reinsurance, retrocessions, and claim operations of the other party to the extent of their respective fixed percentage in the Everspan Pool.

It is expected that the newly acquired admitted carriers will be participants to the Everspan Pool in 2022 or have a reinsurance agreement with an Everspan entity to share underwriting risk.

A downgrade in the AM Best rating could adversely impact Everspan’s business volumes and competitive position because demand for certain of its products may be reduced, particularly because some customers require that Everspan maintain minimum ratings to enter, maintain or renew business with it.

Managing General Agency / Underwriting

Ambac’s MGA/U strategy is to build a diversified portfolio of MGA/U covering various P&C products.

Ambac expects to grow the MGA/U business using several strategies, including (i) organic growth, (ii) additional acquisitions and/or partnerships, and (iii) hiring experienced underwriting teams to incubate our own MGA/U.

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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 necessarily be required to do so, depending on strategic and operational considerations.

On December 31, 2020, Ambac acquired 80% of the membership interests of Xchange.

Xchange's management team has significant longstanding relationships with carriers, agents, policyholders, affinity groups and reinsurers.

Ambac has the option to purchase the remaining 20% after 2023 and Xchange's management has the option to sell their 20% to Ambac after 2025.

Xchange was formed in 2010 and operates through specialty producers in accident and health sectors across the U.S.

which are typically not targeted by large direct writers and to whom Xchange customized service.

Below is a description of Xchange's largest products for which it is delegated underwriting authority by insurance carriers:

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 —

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.

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less than one year).

Xchange underwrote premiums for its carriers of approximately $118 million for the year ended December 31, 2021.

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

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.

Xchange is also eligible to receive profit sharing contingent commissions on certain programs (mostly LM and STM) based on the underwriting results of the policies it writes, which may cause some variability in revenue and earning recognition.

Gross Commission revenues for 2021 were $26 million.

Business written by Xchange is generally concentrated in January and July, which may result in revenue and earnings concentrations in the first and third quarters each calendar year.

Xchange's core expenses include commissions it pays to its independent agents / producers and compensation for its management and staff, which currently total 21 individuals.

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.

Xchange conducts business through approximately ten insurance carriers and dozens of agents and other distributors.

Commission revenue and expense growth will be driven by Xchange’s expansion of its U.S.

geographic distribution, diversification of its products and by adding new insurance carriers and their related distribution network.

The MGA/U business is highly competitive, and firms actively compete with Xchange for customers and insurance carrier capacity.

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.

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• 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..

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.

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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.

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• 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

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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.

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.

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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.

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The Board of Directors receives quarterly updates from Board committees and the Board provides guidance to individual committee activities, as appropriate.

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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.

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These committees will meet monthly or as needed on an ad hoc basis.

• The AAC Risk Committee's objective is to establish an interdisciplinary team of professionals to provide oversight of the key risk remediation issues impacting AAC.

• 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 Chief Executive Officer, Head of Risk Management, Chief Financial Officer and senior managers from throughout risk, corporate services, operations, investment management, legal and finance.

• The Asset Liability Management Committee's (“ALCO”) objective is to foster an enterprise wide culture and approach to liquidity management, asset management, asset valuation and hedging.

Members of ALCO include the Chief Executive Officer, Chief Financial Officer, Head of Risk Management and senior managers from investment management and the Risk Management Group.

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.

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

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Members of the committee include Ambac's Chief Executive Officer, key members of Everspan management and other senior managers or advisors of Ambac.

Additionally, a Reinsurance & 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.

Xchange established an Underwriting Committee in 2021 for the purpose of reviewing and approving any new business initiative or product line proposed to be undertaken by Xchange.

Members of the Underwriting Committee include Ambac's Chief Executive Officer, Chief Financial Officer, key members of Xchange management and other senior managers or advisors of Ambac.

• 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

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

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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 Form 10-K or other filings with the SEC and the information contained on our website is not part of this document.

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

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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.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on regulatory restrictions.

Pursuant to the terms of the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes, AAC must seek prior approval by OCI of certain corporate actions.

The Settlement Agreement, Stipulation and Order and indenture for the Tier 2 Notes include covenants which restrict the operations of AAC.

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.

The indenture for the Tier 2 Notes will remain in force until the Tier 2 Notes have been redeemed, repurchased or repaid in full.

Certain of the restrictions in the Settlement Agreement and indenture for the Tier 2 Notes may be waived with the approval of the OCI and/or the requisite percentage of holders of debt securities issued thereunder.

Xchange Benefits is a property and casualty managing general underwriter, specializing in accident and health insurance.

Xchange Affinity is also a managing general underwriter.

Xchange Benefits and Xchange Affinity, like some other managing general underwriters and program administrators, may be subject to licensing requirements and regulation by insurance regulators in various states in which they conduct business.

Certain of the restrictions in the Settlement

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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, and any related security breaches.

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.

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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.

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

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expanded privacy rights for California residents by enacting the California Privacy Rights Act.

In 2021 Virginia and Colorado enacted similar privacy laws.

We anticipate federal and state regulators to continue to enact legislation related to privacy and cybersecurity.

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”).

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As such, Ambac UK is authorized to run-off its insurance portfolio in the United Kingdom.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on regulatory restrictions.

AFG and certain of its subsidiaries are also subject to non-U.S.

laws and regulations relating to the cybersecurity and privacy of the information of clients, employees or others.

AFG’s UK subsidiary, Ambac UK, has conducted insurance business throughout Europe and is subject to the U.K.’s Data Protection Act 2018, and the E.U.’s General Data Protection Regulation (GDPR), but these laws should not have a significant impact on Ambac UK.

The application, interpretation and enforcement of these non-U.S laws and regulations are often uncertain, and may have an impact on AFG and its subsidiaries businesses and operations.

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 the 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.

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.

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.

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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 further restricted by the Settlement Agreement, the Stipulation and Order, the indenture for the Tier 2 Notes and the terms of its Auction Market Preferred Shares ("AMPS").

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information on dividends.

As a result of these restrictions, AAC is not expected to pay dividends to AFG for the foreseeable future.

Pursuant to the Settlement Agreement and the indenture for the Tier 2 Notes, 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.

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.

Insurance Regulatory Restrictions to the Consolidated Financial

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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.

Any such payment on surplus notes would require either payment or collateralization of a proportional amount of the Tier 2 Notes (or interest thereon) in accordance with the terms of the Tier 2 Note indenture.

The Stipulation and Order requires OCI approval for the payment of any dividend or distribution on the common stock of AAC.

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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 capital requirements in practice act as a restriction on the payment of dividends, where a firm has a lower level of regulatory capital than its regulatory capital requirement as is the case for Ambac UK.

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

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between AAC and Ambac UK).

As a result, Ambac UK is not expected to pay any dividends to AAC for the foreseeable future.

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.

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.

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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 managed both internally by experienced investment managers and externally by investment management firms.

All investments are made in accordance with the general objectives, policies, and guidelines for investments reviewed or overseen by the Board of Directors of the applicable subsidiary.

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.

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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 investment policy.

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, the Stipulation and Order and the indenture for the Tier 2 Notes.

Background and Business Description and Note 12.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for more information about the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes.

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 .

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 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.

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The Board of Directors of Ambac UK approves any changes or exceptions to Ambac UK’s investment policy.

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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.

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Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.

Included in the investment portfolio is AFG's investment in securities insured or issued by AAC, including surplus notes ($90 million fair value at December 31, 2021) that are eliminated in consolidation.

The following table provide certain information concerning the consolidated investments of Ambac:

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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 %

Total long-term fixed maturity investments 1,745 3.9 % 2,332 4.3 %

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)

Other investments (4)

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Refer to Note 5.

Investments of the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion of Ambac insured securities held in the investment portfolio.

(3) Other investments include interests in pooled investment funds that are either classified as trading securities or are reported under the equity method and for 2020 Ambac's interests in an unconsolidated trust created in connection with its sale of junior surplus notes on August 28, 2014.

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.

As of December 31, 2022, Ambac had 145 employees in the United States and 10 employees in the United Kingdom.

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Ambac considers its employee relations to be satisfactory.

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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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business