What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-24 · 777 added, 724 removed, 644 unchanged (70% of the section changed)

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

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

Risk Factors in this Annual Report on Form 10-K for the year ended December 31, 2022.

Refer to Item 1.

Business and Note 1.

Description of the Business and Note 1.

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

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Ambac UK Financial Results under UK Accounting Principles

Non-GAAP Financial Measu res

Non-GAAP Financial Measures

EXECUTIVE SUMMARY ($ in millions)

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

Developments included the following:

• AFG contributed $92 of additional capital to Everspan.

• Everspan received an 'A-' Financial Strength Rating from AM Best in February 2021.

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

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

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

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

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

PWIC's legacy liabilities were fully ceded to reinsurers and Everspan also benefits from an unlimited, uncapped indemnity from Enstar Holdings (US) to mitigate any residual risk to these reinsurers.

On January 3, 2022, Everspan completed the acquisition of the 21st Century Companies (three carriers) from a national insurance group that has a Financial Strength Rating of “A” (Excellent) from AM Best.

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

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

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

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

• See below AAC and Subsidiaries for the various 2021 activities relating to the financial guarantee business

In addition to its focus on Xchange, AFG is actively seeking to expand the MGA/U business though additional acquisitions and development of new MGA/U companies.

As of December 31, 2021, net assets of AFG, excluding its equity investments in subsidiaries, were $269.

AFG Net Assets:

AFG has the following net assets to support its goals and strategies, including the development and growth of its Specialty Property and Casualty Insurance and Insurance Distribution businesses, acquisitions and capital management.

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

As of December 31, 2022, AFG's stand alone net assets, excluding its equity investments in subsidiaries, were $223.

($ in millions)

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Other net assets 17

(1) Includes surplus notes (fair value of $90) issued by AAC that are eliminated in consolidation.

AAC and Subsidiaries

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

From April 1, 2022, through December 31, 2022, AFG repurchased 1,605,316 shares for $14 at an average purchase price of $8.86 per share.

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

Specialty Property and Casualty Insurance Segment

The key value metrics for the Specialty Property and Casualty Insurance segment for the years ended December 31, 2022 and 2021 were as follows:

Year ended December 31, 2022 2021

Gross premiums written $ 146 $ 13

Net premiums written 29 3

Pretax income (loss) $ (6) $ (8)

Earnings before interest, taxes, depreciation and amortization (6) (8)

Loss ratio 65.4 % 71.4 %

Stockholders Equity (1)

(1) Represents Ambac's stockholders equity in the Specialty Property and Casualty Insurance segment, including intercompany eliminations.

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

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

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

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

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

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Insurance Distribution Segment

The key value metrics for the Insurance Distribution segment for the years ended December 31, 2022 and 2021 were as follows:

Year ended December 31, 2022 2021

Premiums placed $ 135 $ 117

Commission income 31 26

Sub-producer commission expense 18 15

Net commissions 13 12

Pretax income (loss) $ 5 $ 4

Earnings before interest, taxes, depreciation and amortization 6 5

Stockholders Equity (1)

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

Effective November 1, 2022, Ambac acquired controlling interests in All Trans Risk Solutions, LLC ("All Trans") and Capacity Marine Corporation ("Capacity Marine"), adding approximately $60 of annual premiums placed to the Insurance Distribution segment, for a collective purchase price of $26.

Refer to Note 4.

Business Combination to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for further details on these acquisitions.

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

Legacy Financial Guarantee Insurance Segment

The key value metrics for the Legacy Financial Guarantee Insurance segment for the years ended December 31, 2022 and 2021 were as follows:

Year ended December 31, 2022 2021

Net premiums earned $ 42 $ 46

Net investment income 12 138

Net gains on derivative contracts 128 22

Net realized gains on extinguishment of debt 81 33

Litigation recoveries 126 —

Loss and lossadjustment expenses (benefit) (406) (89)

General and administrative expenses 102 77

Interest expense 168 187

Pretax income (loss) $ 540 $ 20

Stockholders Equity (1)

Adversely Classified Credit Net Par Outstanding $ 4,735 $ 6,361

(1) Represents Ambac's stockholders equity in the Legacy Financial Guarantee Insurance segment, including intercompany eliminations and insurance intangible assets of $266.

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

Asset management primarily entails maximizing the risk-adjusted return on non-VIE invested assets and managing liquidity to help ensure resources are available to meet operational and strategic cash needs.

Asset management primarily entails maximizing the risk-adjusted return on non-VIE invested assets and managing liquidity to help ensure resources are available to meet

operational and strategic cash needs.

These strategic cash needs include activities associated with Ambac's liability management and loss mitigation programs.

Settlement of RMBS Litigations and Redemption of Secured Notes:

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

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

On December 29, 2022, AAC entered into a Settlement Agreement and Release (the “Nomura Settlement Agreement”) with Nomura Credit & Capital, Inc.

(“Nomura”) to settle its RMBS litigation against Nomura.

As a result, Nomura paid AAC $140 million (the "Nomura Settlement Payment") in January 2023.

AAC used all proceeds of the Nomura Settlement Payment plus cash on hand to repay the remaining outstanding balance of Tier 2 Notes (as described in Note 13.

Long-Term Debt to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K).

The settlements with the BOA Parties and Nomura brought to closure all of AAC's legacy litigation against RMBS sponsors.

These settlement receipts materially exceeded the amount of subrogation recovery recorded on Ambac’s consolidated GAAP financial statements.

Refer to Note 1.

Background and Business Description in Part II, Item 8 in this Annual Report on Form 10-K for further details of the BOA Settlement Agreement and the Nomura Settlement Agreement and related impacts on Ambac's Statement of Comprehensive Income.

Asset Management

Investment portfolios are subject to internal investment guidelines, as well as limits on types and quality of investments

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imposed by insurance laws and regulations.

Investment portfolios are subject to internal investment guidelines as well as restrictions imposed by insurance laws and regulations which limit the types and quality of investments a carrier may acquire.

In the case of AAC, the Wisconsin Office of the Commissioner of Insurance ("OCI") has the right to approve changes to the investment guidelines pursuant to the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC.

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

Refer to Note 5.

Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for further details of fixed maturity investments by asset category and pooled investment funds by investment type.

At December 31, 2021, Ambac and its subsidiaries owned $609 of distressed Ambac-insured bonds, including significant concentrations of insured Puerto Rico and RMBS bonds.

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

Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for further details of fixed maturity investments by asset category and pooled investment funds by investment type.

At December 31, 2022 and 2021, Ambac and its subsidiaries owned $286 and $609, respectively, of distressed AAC and Ambac UK-insured bonds, including significant concentrations of insured RMBS bonds and, in 2021, insured Puerto Rico bonds.

As a result of the Puerto Rico restructurings discussed under "Liability and Insured Exposure Management" below,

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there are no AAC-insured Puerto Rico bonds held in the investment portfolio as of December 31, 2022.

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

Liability and Insured Exposure Management

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

During 2021, Ambac completed risk reduction transactions consisting of quota share reinsurance, refinancings, and commutations of $2,695, of which, quota share reinsurance represented $1,695.

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

During 2022, Ambac completed risk reduction transactions consisting of refinancings and commutations of $2,707, of which, $806 related to Puerto Rico.

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

The following table provides a comparison of total, adversely classified ("ACC") and watch list (as described in Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K) credit net par outstanding in the insured portfolio at December 31, 2022 and 2021.

Net par exposure within the U.S.

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Watch List $ 3,044 $ 3,824 $ (780) (20) %

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

We have been paying claims for several years on most of our exposure to Puerto Rico, which consists of several different issuing entities (all below investment grade).

These issuing entities, which have been part of the PROMESA restructuring process that began in 2016, each have their own credit risk profile attributable to discrete revenue sources, direct general obligation pledges, and/or general obligation guarantees.

On January 18, 2022, Judge Swain, U.S.

District Court for the District of Puerto Rico, confirmed the modified Eighth

Amended Plan of Adjustment for the Commonwealth of Puerto Rico ("Eighth Amended POA").

On January 20, 2022, Judge Swain approved the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively).

Although the Eighth Amended POA, the PRIFA QM and CCDA QM remain subject to appeal (see Risk Factors— "Insured Portfolio Losses"), the Eighth Amended POA, PRIFA QM, and CCDA QM are expected to become effective on or before March 15, 2022.

Consummation of the plan of adjustment and qualifying modifications will resolve the PROMESA restructuring process for the GO, PBA, PRIFA and CCDA issuing entities that have portions of their bonds insured by AAC.

On the effective date of the Eighth Amended POA, PRIFA QM, and CCDA QM, and pursuant to bondholder elections, (i) all of the remaining outstanding AAC-insured GO and PBA bonds will be satisfied and eliminated via commutation or acceleration, and (ii) about 39% and 19% of the par of AAC's outstanding AAC-insured PRIFA and CCDA bonds, respectively, will be reduced via commutation, with the remainder of those bonds (belonging to bondholders who elected not to commute their AAC Insurance Policies) being deposited into trusts together with such policies and the bondholders' respective shares of distributed Eighth Amended POA, PRIFA QM, or CCDA QM consideration.

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

AAC-insured bonds of PRHTA are subject to the PRHTA POA, a separate plan of adjustment that is expected to be filed prior to March 31, 2022, with a confirmation hearing to follow later in 2022.

Refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Guarantees in Force, in this Annual Report on Form 10-K for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

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

including, but not limited to, higher unemployment;

volatility in the capital markets;

closure or severe curtailment of the operations and, hence, revenues, of many businesses and public and private enterprises to which we are directly or indirectly exposed.

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

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

As of December 31, 2021, there have been no defaults of Ambac-insured obligations as a result of the COVID-19 pandemic.

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Despite the significant overall benefit of the above relief measures, which were designed to help mitigate the economic impact of the COVID-19 pandemic generally, certain of these measures may still adversely affect Ambac's insured portfolio.

In particular, this includes the U.S.

government's temporary relief measures that required mortgage loan servicers to offer relief to borrowers who suffer hardship as a result of COVID-19.

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

While these relief measures have largely since expired, the resulting delays in starting mortgage foreclosure processes and the impact of potential post-forbearance related mortgage loan modifications may have an adverse impact on our insured RMBS transactions.

Consequently, we have anticipated that we will experience an increase in claim payments for certain of our insured RMBS obligations following the resumption of foreclosure activity and the implementation of post-forbearance mortgage loan modifications.

However, since the onset of the COVID-19 pandemic, much of the potential increase in claim experience has been offset by the benefit to excess spread within the securitization structures as a result of the reduction in interest rates, which is expected to result in higher excess spread recoveries to Ambac.

The impact from the COVID-19 pandemic on Ambac also includes the ability of our counterparties to pay their obligations when due, most notably AAC's reinsurers for their portion of future financial guaranty claim payments.

Ambac has reinsured approximately 17.9% of its gross par outstanding to five reinsurance counterparties.

Each of these reinsurance counterparties (i) is experienced in the business of reinsuring and/or writing financial guaranty insurance and (ii) have current ratings of A+ (by S&P) or better and have collateralization or replacement triggers upon downgrade within Ambac's reinsurance agreements.

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

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

Refer to "Financial Guarantees In Force," "Results of Operations" and "Balance Sheet Commentary" for further financial details on the current impact from COVID-19.

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

Our evaluation process incorporates the perceived impact of COVID-19 on historical and prospective business results.

The decrease in total, ACC and watch list credit net par outstanding resulted from active de-risking (including AAC's exposures to Puerto Rico), and strengthening of the USD versus the GBP and EURO, as well as scheduled maturities, amortizations, refundings and calls.

Russia and Ukraine Conflict

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

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

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

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

However, as the conflict continues and if it were

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

Financial Statement Impact of Foreign Currency

The impact of foreign currency as reported in Ambac's Consolidated Statement of Total Comprehensive Income (Loss) for the year ended December 31, 2021 included the following:

The impact of foreign currency as reported in Ambac's Consolidated Statement of Total Comprehensive Income (Loss) for the years ended December 31, 2022 and 2021 included the following:

($ in millions)

December 31, 2022 2021

Net income (1)

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Refer to Part II, Item 7A "Quantitative and Qualitative Disclosures about Market Risk" for further information on the impact of future currency rate changes on Ambac's financial instruments.

In July 2017, the Financial Conduct Authority, the authority that regulates LIBOR, announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021.

The Alternative Reference Rates Committee (‘ARRC’), a group of private-market participants convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from U.S.

dollar LIBOR (‘USD-LIBOR’) to a more robust reference rate, proposed that the Secured Overnight Financing Rate (‘SOFR’) represents the best alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR.

ARRC has proposed a transition plan with specific steps and timelines designed to encourage the adoption of SOFR and guide the transition to SOFR from USD-LIBOR.

The Financial Conduct Authority in the United Kingdom and other regulatory bodies have issued statements encouraging cessation of new transactions referencing USD LIBOR after December 31, 2021, while supporting extension of the publication of major USD-LIBOR tenors to mid-2023 to allow additional legacy contracts to mature on their existing terms.

Organizations are currently working on industry-wide and company-specific transition plans related to derivatives and cash markets exposed to USD-LIBOR.

After December 31, 2021, banks ceased publishing most GBP-LIBOR rates.

In response, in October 2021, noteholders of obligations linked to GBP-LIBOR and insured by Ambac UK consented to the replacement of GBP-LIBOR references with compounded Sterling Overnight Index Average ("SONIA") plus a credit adjustment spread effective on the first interest payment date in 2022.

Ambac therefore no longer insures any obligations linked to Non-USD LIBOR.

As of December 31, 2021, the Company has exposure to LIBOR in the following areas:

(i) the financial guarantee insured portfolio, (ii) the Sitka AAC Note (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K) included in long-term debt, (iii) certain invested assets and interest rate derivatives.

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

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

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

Similar federal legislation was passed into law in March 2022 and the Federal Reserve's Board of Governors adopted the final rules for implementing this legislation in December 2022.

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

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

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

SEC Proposed Rules on Climate Related Information

On March 21, 2022, the Securities and Exchange Commission (“SEC”) proposed rule amendments that would require public

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Ambac has reviewed its financial guarantee portfolio to identify insured transactions that it believes may be impacted by the transition from LIBOR.

The review focused on insured issues that were scheduled or projected to have an outstanding principal balance as of December 31, 2021.

The Company reviewed the governing documents' provisions for the setting of interest rates in the event LIBOR is unavailable ("fallback language").

The Company has initiated a dialogue with relevant trustees, calculation agents, auction agents, servicers and other parties responsible for implementing the rate change in these transactions.

Most have not yet committed to specific courses of action, but the passage of legislation in New York State and the expectation that similar federal legislation will be enacted should facilitate greater clarity for those transactions that do not have clear fallback language.

The Sitka AAC Note is referenced to 3-month USD-LIBOR and has a final maturity of July 6, 2026.

The Sitka AAC Note includes specific fallback language that addresses both the calculation of interest using a replacement reference rate to 3-month USD-LIBOR and the circumstances that would trigger use of the replacement rate.

Ambac's investment and derivative portfolios have been evaluated to assess the risk of LIBOR unavailability based on the respective instruments' fallback language and parties responsible for implementing the alternative rates.

Investments that are Ambac-insured securities are being addressed through efforts on the financial guarantee portfolio described above.

For other investments, we are working with our investment managers to ensure LIBOR indexed positions in our portfolio contain unambiguous fallback language or will be governed by relevant legislation.

Ambac's centrally cleared interest rate swaps are expected to follow LIBOR transition steps outlined by the International Swaps and Derivatives Association, Inc.

Our non-cleared interest rate swaps are all governed by New York law and either have offsetting LIBOR exposure with a single counterparty that serves as calculation agent responsible for rate changes or have Ambac as the calculation agent.

Given the uncertainty of the ultimate timing of the LIBOR sunset, as well as the lack of clarity on decisions that parties responsible for calculating interest rates will make and the reaction of impacted parties as well as the unknown level of interest rates when the change occurs, the Company cannot at this time predict the impact of the discontinuance of LIBOR, if it occurs, on every obligation the Company guarantees or on its other LIBOR indexed financial instruments.

For more information, see the the risk factor " Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences " found in Part I, Item 1A of this Form 10-K.

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companies to include certain climate-related information in their periodic reports and registration statements, including oversight and governance, material impacts (operational and financial), risk identification and management, and Scope 1, 2 and 3 emissions (the “Proposed Rule”).

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

These new requirements, if adopted, would at the earliest take effect in fiscal year 2024 and begin to apply to SEC filings in 2025.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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This section highlights accounting estimates management views as critical because they are most important to the portrayal of the Company's financial condition;

and require management to make difficult and subjective

judgments regarding matters that are inherently uncertain and subject to change.

and require management to make difficult and subjective judgments regarding matters that are inherently uncertain and subject to change.

These estimates are evaluated on an on-going basis considering historical developments, political events, market conditions, industry trends and other information.

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Management has identified the following critical accounting policies and estimates:

(i) valuation of financial guarantee loss and loss expense reserves, (ii) valuation of certain financial instruments and (iii) valuation of deferred tax assets.

(i) valuation of financial guarantee loss and loss adjustment expense reserves, (ii) valuation of certain financial instruments and (iii) valuation of deferred tax assets.

Management has discussed each of these critical accounting policies and estimates with the Audit Committee, including the reasons why they are considered critical and how current and anticipated future events impact those determinations.

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Valuation of Financial Guarantee Losses and Loss Expense Reserves (including Subrogation Recoverables)

The loss and loss expense reserves and subrogation recoverable assets (collectively defined as "loss reserves") discussed in this section relate only to Ambac’s non-derivative financial guarantee insurance policies issued to beneficiaries, including unconsolidated VIEs.

The loss and loss adjustment expense reserves and subrogation recoverable assets (collectively defined as "loss reserves") discussed in this section relate only to Ambac’s non-derivative financial guarantee insurance policies issued to beneficiaries, including unconsolidated VIEs.

A loss reserve is recorded on the balance sheet on a policy-by-policy basis at the present value ("PV") of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates.

The estimate for future net cash flows consider the likelihood of all possible outcomes that may occur from missed principal and/or interest payments on the insured obligation.

This estimate also considers future recoveries related to breaches of contractual representations and warranties by RMBS transaction sponsors, remediation strategies, excess spread and other contractual or subrogation-related cash flows.

Ambac’s approach to resolving disputes involving contractual breaches by transaction sponsors or other third parties has included negotiations and/or pursuing litigation.

Ambac does not estimate recoveries for litigations where its sole claim is for fraudulent inducement, since any remedies under such claims would be non-contractual.

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

This estimate also considers future recoveries related to remediation strategies and other contractual or subrogation-related cash flows.

The evaluation process for expected future net cash flows is subject to certain estimates and judgments regarding the probability of default by the issuer of the insured security, probability of negotiation or settlement outcomes (which may include commutation, litigation and other settlements, and/or a refinancing), probability of a restructuring outcome (which may include payment moratoriums, debt haircuts and/or subsequent recoveries) and the expected loss severity of credits for each insurance contract.

As the probability of default for an individual credit increases and/or the severity of loss given a default increases, our loss reserve for that insured obligation will also increase.

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economic, credit or other unforeseen events could have an adverse impact on default probabilities and loss severities.

Political, economic, credit or other unforeseen events could have an adverse impact on default probabilities and loss severities.

The loss reserves for many transactions are derived from the issuer’s creditworthiness.

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The number and severity of credits included in our loss reserves depend to a large extent on transaction specific attributes, but will generally increase during periods of economic stress and decline during periods of economic prosperity.

Reinsurance contracts mitigate our loss reserves but since Ambac currently has minimal exposure ceded to reinsurers on credits with loss reserves, the existing reinsurance contracts are unlikely to have a significant effect on loss reserve volatility.

Reinsurance contracts mitigate our loss reserves but since Ambac currently has minimal exposure ceded to reinsurers on financial guarantee credits with loss reserves, the existing reinsurance contracts are unlikely to have a significant effect on loss reserve volatility.

Loss reserve volatility will also be materially impacted by changes in interest rates from period to period.

The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac’s Financial Guarantee loss and loss expense reserves at December 31, 2021 and 2020:

Gross Loss and Loss Expense

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Table of Contents ,

The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac’s Financial Guarantee loss and loss adjustment expense reserves at December 31, 2022 and 2021:

Gross Loss and Loss Adjustment Expense

December 31, 2022

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Totals $ 6,302 (554)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $784 and $24 respectively, at December 31, 2021, and $739 and $33, respectively at December 31, 2020.

Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss adjustment expense reserves are $472 and $33 respectively, at December 31, 2022, and $784 and $24, respectively at December 31, 2021.

Ceded loss and loss adjustment expense reserves are included in Reinsurance recoverable on paid and unpaid losses.

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

(3) Loss and Loss Expense reserves at December 31, 2021, of $(554) are included in the balance sheet in the following line items:

Loss and loss expense reserves:

(3) Loss and Loss Adjustment Expense reserves at December 31, 2022, of $444 are included in the balance sheet in the following line items:

Loss and loss adjustment expense reserves:

$715 and Subrogation recoverable:

Loss and Loss Expense reserves at December 31, 2020, of $(397) are included in the balance sheet in the following line items:

Loss and loss expense reserves:

Loss and Loss Adjustment Expense reserves at December 31, 2021, of $(554) are included in the balance sheet in the following line items:

Loss and loss adjustment expense reserves:

$1,538 and Subrogation recoverable:

(4) Ambac records as a component of its loss and loss expense reserves, estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties.

(4) Ambac records as a component of its loss and loss adjustment expense reserves, estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties.

Ambac has recorded gross estimated recoveries of $140 and $1,730 at December 31, 2022 and 2021, respectively.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for a description of the cash flow and statistical methodologies used to develop loss reserves.

See the Balance Sheet section of this Management's Discussion and Analysis of Financial Condition and Results of Operations below for a discussion on the reasons for changes to Gross Loss and Loss Adjustment Expense Reserves during 2022.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for a description of the cash flow and statistical methodologies used to develop loss reserves.

The majority of our large loss reserves utilize the cash flow method of reserving.

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Scenarios and probabilities of each are adjusted regularly to reflect changes in status, outlook and our analysis and views.

Significant judgment is used to develop the cash flow assumptions and related probabilities, and there can be no certainty that the scenarios or probabilities will not deviate materially from ultimate outcomes.

• In some cases, such as RMBS and student loans, cash flow projections include the modeling of an issuer or transaction’s future revenues and expenses to determine the resources available to pay debt service on our insured obligations.

Key assumptions impacting RMBS cash flow models include projected home price appreciation and interest rates A component of our RMBS loss reserve estimate includes subrogation recoveries related to securitized loans in such transactions that breached certain representations and warranties ("R&W").

Significant judgment is used to develop the cash flow assumptions and related probabilities, and there can be no

certainty that the scenarios or probabilities will not deviate materially from ultimate outcomes.

• In some cases, such as RMBS and student loans, cash flow projections include the modeling of a securitization's cash flows to determine the resources available to pay debt service on our insured obligations.

Key assumptions impacting RMBS cash flow models include borrower credit characteristics, projected home price appreciation, interest rates and mortgage loan modification activity.

Key assumptions impacting student loan cash flow models include projected loan defaults, recoveries and interest rates.

• In other cases, such as many public finance exposures, we consider the issuer's overall ability and willingness to pay as it relates to the existing fiscal, economic, legal, restructuring and/or political framework relevant to a particular exposure or group of exposures.

We then develop multiple scenarios where issuer debt service is paid, missed and/or haircut with claims paid then modeled for any recovery amount (and potential variability of the recovery amount) and timing.

We then develop multiple scenarios where issuer debt service is paid, missed and/or haircut with claims paid then factor in any projected recovery amount (and potential variability of the recovery amount) and the timing thereof.

There is no certainty our assumptions as to scenarios or probabilities will not be subject to material changes as developments occur.

• In estimating loss reserves, we also incorporate scenarios which represent the potential outcome of remediation strategies.

Remediation scenarios may include (i) a potential refinancing of the transaction by the issuer;

• In estimating loss reserves, we may also incorporate scenarios which represent the potential outcome of remediation strategies.

Remediation scenarios could include (i) a potential refinancing of the transaction by the issuer;

(ii) the issuer’s ability to redeem outstanding securities at a discount, thereby increasing the structure’s ability to absorb future losses;

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The remediation scenarios and the related probabilities of occurrence vary by policy depending on ongoing and expected discussions and negotiations with issuers and/or investors.

In addition to commutation negotiations that are underway with various counterparties in various forms, our reserve

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estimates may also include scenarios which incorporate our ability and/or expectation to commute additional exposure with other counterparties.

In addition to commutation negotiations that are underway with various counterparties in various forms, our reserve estimates may also include scenarios which incorporate our ability and/or expectation to commute additional exposure with other counterparties.

Valuation of Certain Financial Instruments

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The fair value hierarchy, the financial instruments classified within each level, our valuation methods, inputs, assumptions and the review and validation procedures over quoted and modeled pricing are further detailed in Note 6.

Fair Value Measurements to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K.

Fair Value Measurements to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

The level of judgment in estimating fair value is largely dependent on the amount of observable market information available to fair value a financial instrument, which is also determinative of where the financial instrument is classified in the fair value hierarchy.

Level 3 instruments are valued using models which use one or more significant inputs or value drivers that are unobservable and therefore require significant judgment.

Level 3 financial instruments which are material include certain invested assets, uncollateralized interest rate swaps and investments and loan receivables of consolidated VIEs.

Level 3 financial instruments which are material include certain

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invested assets, uncollateralized interest rate swaps and investments and loan receivables of consolidated VIEs.

Model-derived valuations of Level 3 financial instruments incorporate estimates of the effects of Ambac's own credit risk and/or counterparty credit risk, which can be complex and judgmental.

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Deferred tax assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss ("NOL").

More specifically, deferred tax assets represent a future tax benefit that results from losses recorded under GAAP in a current period which are only

deductible for tax purposes in future periods and NOL carry forwards.

More specifically, deferred tax assets represent a future tax benefit that results from losses recorded under GAAP in a current period which are only deductible for tax purposes in future periods and NOL carry forwards.

Valuation allowances are established to reduce deferred tax assets to an amount that “more likely than not” will be realized.

On a quarterly basis, management identifies and considers all available evidence, both positive and negative, in making the determination with significant weight given to evidence that can be objectively verified.

Positive evidence includes removal of the going concern independent auditor opinion in 2018, the Segregated Account's February 12, 2018 exit from rehabilitation, Everspan's receipt of an 'A-'' Financial Strength Rating from AM Best, the launch of a specialty program property and casualty insurance business, and AFG's acquisition of a majority interest in an MGA/U business.

Management considers all available evidence, both positive and negative, when determining whether to establish and/or maintain a valuation allowance against deferred tax assets, with significant weight given to evidence that can be objectively verified.

Positive evidence includes reduced potential for material loss as a result of settling RMBS representation and warranty litigation and resolving exposure to Puerto Rico, Everspan's receipt of an 'A-'' Financial Strength Rating from AM Best, the launch of a specialty program property and casualty insurance business, AFG's acquisition of majority interests in MGA/U businesses and AAC's reduction of material amounts of debt.

Negative evidence includes the potential for unrecognized future insurance tax losses;

cumulative pre-tax losses in recent years;

uncertainty regarding timing and magnitude of RMBS R&W litigation recoveries;

and no new financial guarantee business.

cumulative pre-tax losses, adjusted for nonrecurring one-time events, for the last three years;

the legacy financial guarantee business remains in run-off;

and material amounts of debt remain at AAC.

The level of deferred tax asset recognition is influenced by management’s assessment of future expected taxable income, which depends on the existence of sufficient taxable income within the carry forward periods available under the tax law.

As a result of the above-described risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover the U.S.

federal deferred tax asset and therefore has a full valuation allowance.

To the extent such risks and uncertainties are resolved, Ambac may have the ability to establish a history of making reliable estimates of future income which could ultimately result in a reduction to the deferred tax asset valuation allowance.

Income Taxes to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for additional information on the Company's deferred income taxes.

Income Taxes to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for additional information on the Company's deferred income taxes.

FINANCIAL GUARANTEES IN FORCE

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

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

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

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Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and for 2021 excludes exposure of the policy insuring the Sitka Senior Secured Notes as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K.

Public Finance (1) (2)

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Below we will discuss the significant exposures in our insured portfolio relating to each of the three markets.

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for exposures by bond type.

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for exposures by bond type.

Public Finance Insured Portfolio

Ambac’s portfolio of U.S.

public finance exposures is $12,360 in net par outstanding, representing 44% of Ambac’s net par outstanding as of December 31, 2021, and a 20% reduction from the amount outstanding at December 31, 2020.

This reduction in exposure was due to additional reinsurance acquired, restructuring transactions, scheduled paydowns, and early terminations (calls, refundings and pre-refundings).

While Ambac’s U.S.

public finance portfolio consists predominantly of municipal bonds such as general obligation, revenue, and lease and tax-backed obligations of state and local government entities, the portfolio also includes several non-municipal types of bonds, such as financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public interests.

AAC’s portfolio of U.S.

public finance exposures totaled $10,547 in net par outstanding, representing 47% of Ambac’s net par outstanding as of December 31, 2022, and a 15% reduction from the amount outstanding at December 31, 2021.

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This reduction in exposure was due to the Puerto Rico restructuring transactions, other active de-riskings, scheduled paydowns, and early terminations (calls, refundings and pre-refundings).

public finance portfolio consists of municipal bonds such as general obligation, revenue, and lease and tax-backed obligations of state and local government entities, and also includes several non-municipal types of bonds, such as financings with public and private elements, which generally finance infrastructure, housing and other public interests, the largest sector of which is U.S.

military housing which accounts for approximately 51% of AAC's U.S.

Public Finance Insured Portfolio.

Municipal Bonds

Municipal bonds are generally supported directly or indirectly by the issuer’s taxing authority or by public sector fees and assessments which may or may not be specifically pledged.

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Municipal bankruptcies and similar proceedings, while still relatively uncommon, have occurred, exposing Ambac to the risk of liquidity claims and ultimate losses if issuers cannot successfully adjust their liabilities without impairing creditors.

Non-Municipal Bonds

Public/private transactions are generally structured to achieve their targeted public interest objective without direct support from the public sector.

Some examples of this type of financing include affordable housing, private education, privatized military housing and student housing.

Some examples of this type of financing include affordable housing, private education, and privatized military housing.

Protections within these financings provided to Ambac usually include the strength of the financed asset’s essentiality and public purpose and may include financial covenants, collateral and control rights.

Risk factors include financial underperformance, event risk and a shift in the asset’s mission or essentiality.

One example of this type of financing is U.S.

Military Housing Bonds

AAC's largest concentration of non-municipal bonds is U.S.

military housing.

• Ambac insures approximately $5,490 net par of privatized military housing debt.

Ambac insures $5,400 net par of privatized military housing debt.

The debt was issued to finance the construction and/or renovation of housing units for military personnel and their families on domestic U.S.

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Debt service is not directly paid or guaranteed by the U.S.

Rather, the bonds are serviced from the

cash flow generated in most cases by rental payments deposited by the military directly into lockbox accounts as part of each service personnel’s Basic Allowance for Housing (BAH).

Rather, the bonds are serviced from the cash flow generated in most cases by rental payments deposited by the military directly into lockbox accounts as part of each service personnel’s Basic Allowance for Housing (BAH).

In typically small percentages, rental payments can also come from civilians, including retired service personnel and US Department of Defense contractors living on a particular base.

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Risk factors affecting these transactions include ongoing base essentiality, military deployments, the U.S.

government’s commitment to fund the BAH, marketability/attractiveness of the on-base housing units versus off-base housing, construction completion, environmental remediation, utility and other operating costs and housing management.

Ambac's exposure to privatized military housing debt is a growing concentration given the long-dated maturity profile of the exposure relative to faster run-off of other parts of Ambac's insured portfolio.

As of December 31, 2021, privatized military housing represented approximately 20% of net par outstanding.

government’s commitment to fund the BAH, marketability/attractiveness of the on-base housing units versus off-base housing, construction completion, environmental remediation, natural disasters, excessive utility and other operating costs and housing management.

Ambac's exposure to privatized military housing debt is a growing concentration given the long-dated maturity profile of the exposure relative to

other parts of Ambac's insured portfolio.

As of December 31, 2022, privatized military housing represented approximately 24% of net par outstanding as compared to 19.6% as of December 31, 2021.

Structured Finance Portfolio

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structured finance exposures is $3,612 in net par outstanding, representing 16% of Ambac’s net par outstanding as of December 31, 2022, and a 26% reduction from the amount outstanding at December 31, 2021.

This reduction in exposure was primarily related to (i) residential mortgage-backed securities ("RMBS") policies, which continued to prepay as well as incur claims and (ii) quota share reinsurance of a structured insurance credit.

This reduction in exposure was primarily related to (i) RMBS policies, which continued to prepay as well as incur claims, (ii) de-risking activity and (iii) scheduled paydowns.

Current insured exposures primarily include securitizations of mortgage loans, home equity loans and student loans, in each case where the majority of the underlying collateral risk is situated in the United States.

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Ambac’s portfolio of international finance insured exposures is $8,454 in net par outstanding, representing 37% of Ambac’s net par outstanding as of December 31, 2022, and a 21% reduction from the amount outstanding at December 31, 2021.

This reduction in exposure was primarily the result of scheduled maturities within investor-owned utilities, commutations and a strengthening of the US dollar versus the British pound and the Euro.

This reduction in exposure was primarily the result of commutations and a strengthening of the US dollar versus the British pound and the Euro.

Ambac’s international finance insured exposures include a wide array of obligations in the international markets, including infrastructure financings, utility obligations, whole business securitizations (e.g., securitizations of substantially all of the operating assets of a corporation) and sub-sovereign credits.

At December 31, 2021, sub-sovereign and investor-owned and

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public utilities represented approximately 18% and 12% of net par outstanding, respectively.

At December 31, 2022, sub-sovereign and investor-owned and public utilities represented approximately 18% and 11% of net par outstanding, respectively.

Ambac has no insured exposure related to emerging markets.

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Ambac continues to assess these risks through its ongoing risk management.

Ambac UK, which is regulated in the United Kingdom (“UK”), had been AAC’s primary vehicle for directly issuing financial guarantee policies in the UK and the European Union with $10,292 net par outstanding at December 31, 2021.

portfolio of insured exposures underwritten by Ambac UK is financially supported exclusively by the assets of Ambac UK and no capital support arrangements are in place with any other Ambac affiliate.

Ambac UK, which is regulated in the United Kingdom (“UK”), was AAC’s primary vehicle for directly issuing financial guarantee policies in the UK and the European Union with $8,194 net par outstanding at December 31, 2022.

The portfolio of insured exposures underwritten by Ambac UK is financially supported exclusively by the assets of Ambac UK and no capital support arrangements are in place with any other Ambac affiliate.

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Ambac's international net par exposures are principally in the United Kingdom ($7,223);

however, we also have exposures with credit risk based in various EU member states, including Austria, France, Germany and Italy ($1,284).

Italy, with net par exposure of $718 in particular has experienced economic, fiscal and political strains since the 2008 global financial crisis such that the likelihood of default on an insured sub-sovereign obligation in that country is higher than when the policy was underwritten.

however, we also have exposures with credit risk based in various EU member states, including

Austria, France, Germany and Italy ($971).

Ambac does not guarantee any sovereign bonds of the above EU countries.

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

Risk Name Country-Bond Type Ambac

Bond Kind Country-Bond Type Ambac

Ultimate Maturity Year Net Par

IF AUK Capital Hospitals plc (2)

UK-Infrastructure A- 2046 925 3.3 %

IF AUK Anglian Water UK-Utility A- 2035 905 3.2 %

IF AUK Mitchells & Butlers Finance plc-UK Pub Securitisation UK-Asset Securitizations BBB 2033 $ 892 3.2 %

IF AUK Aspire Defence Finance plc UK-Infrastructure A- 2040 836 3.0 %

IF AUK National Grid Gas UK-Utility BBB+ 2037 835 3.0 %

IF AUK Posillipo Finance II S.r.l Italy-Sub-Sovereign BIG 2035 661 2.4 %

PF AAC New Jersey Transportation Trust Fund Authority - Transportation System US-Lease and Tax-backed Revenue BBB- 2036 623 2.2 %

IF AUK National Grid Electricity Transmission UK-Utility BBB+ 2036 557 2.0 %

IF AUK RMPA Services plc UK-Infrastructure BBB+ 2038 550 2.0 %

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

UK-Infrastructure BBB- 2040 541 1.9 %

IF AUK Investor Owned Utility Gas - unsecured UK-Utility BBB+ 2037 $ 805 3.6 %

IF AUK Other Asset Securitizations UK-Asset Securitizations BBB 2033 744 3.3 %

IF AUK PFI - Accommodation UK-Infrastructure A- 2040 723 3.2 %

IF AUK PFI - Hospitals UK-Infrastructure A- 2046 688 3.0 %

IF AUK Investor Owned Utility Other - unsecured UK-Utility A- 2035 598 2.6 %

IF AUK Sub-Sovereign Italy-Sub-Sovereign BIG 2035 591 2.6 %

IF AUK Investor Owned Utility Electric - unsecured UK-Utility BBB+ 2036 556 2.5 %

PF AAC US State Lease/Appropriation US-Lease and Tax-backed Revenue BBB- 2036 489 2.2 %

IF AUK PFI - Accommodation UK-Infrastructure BBB+ 2038 472 2.1 %

PF AAC Military Housing US-Housing Revenue BBB- 2052 450 2.0 %

Total $ 6,116 27.1 %

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BIG denotes credits deemed below investment grade.

(2) A portion of this transaction is insured by an insurance policy issued by AAC.

AAC has issued a policy for this transaction that will only pay in the event that Ambac UK does not pay under its insurance policies (“second to pay policy")

Net par related to the top ten exposures reduced $1,209 from December 31, 2021.

Exposures are impacted by changes in foreign exchange rates, certain indexation rates, scheduled and unscheduled paydowns and the purchase of quota share reinsurance.

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

Exposures are impacted by commutations, changes in foreign exchange rates ($575 reduction during 2022), certain indexation rates linked to inflation measures in the United Kingdom (RPI) and Australia (CPI), and scheduled and unscheduled paydowns.

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

The concentration of net par amongst the top ten (as a percentage of net par outstanding) increased slightly to 27.1% at December 31, 2022, from 26.2% at December 31, 2021.

National Grid Gas had an Ambac rating downgrade since December 31, 2020, Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $32 per single risk, with insured

exposures ranging up to $455 and a median net par outstanding of $5.

Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $30 per single risk, with insured exposures ranging up to $386 and a median net par outstanding of $5.

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

We continue to experience stress in our exposure to Puerto Rico (the "Commonwealth") that consists of several different issuing entities (all below investment grade) with total net par exposure of $1,054 as of December 31, 2021.

Each issuing entity has its own credit risk profile attributable to, as applicable, discrete revenue sources, direct general obligation pledges and/or general

Our exposure to Puerto Rico (the "Commonwealth") consisted of several different issuing entities (all below investment grade and whereby AAC has paid substantial claims since 2016) that have been part of the debt restructuring process under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), a U.S.

federal law enacted in 2016 that, among other things, established a financial oversight board (the “FOMB”) and provided for a process for restructuring debt that

roughly follows U.S.

Bankruptcy laws.

As of December 6, 2022, all AAC-insured Puerto Rico obligations have been restructured under PROMESA via court-approved plans of adjustment or qualifying modifications.

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

Net Par Outstanding

($ in millions) December 31,

PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) (1)

PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA) 66 73

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

PR Infrastructure Financing Authority (Special Tax Revenue) — 403

PR Convention Center District Authority (Hotel Occupancy Tax — 86

Commonwealth of Puerto Rico - General Obligation Bonds — 11

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

Total Net Exposure to The Commonwealth of Puerto Rico and Related Entities $ 244 $ 1,054

Total Net P&I Exposure to The Commonwealth of Puerto Rico and Related Entities $ 884 $ 2,423

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obligation guarantees.

Refer to Part I, Item 1 in this Annual Report on Form 10-K for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

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(1) As of February 16, 2023, net par of $136 has been reduced through acceleration and redemption payments consistent with AAC's plan to further de-risk its exposure to Puerto Rico.

Commonwealth Plan of Adjustment (Title III Case)

On November 3, 2021, the Financial Oversight and Management Board for Puerto Rico ("Oversight Board"), as representative of the Commonwealth of Puerto Rico, the Puerto Rico Public Buildings Authority, and the Employees Retirement System of the Government of the Commonwealth of Puerto Rico, filed the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al.

("Eighth Amended POA").

The Eighth Amended POA proposed to restructure approximately $33,000 of debt across various Commonwealth instrumentalities, including obligations insured by AAC, and approximately $50,000 in pension obligations.

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

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

The plan consideration to be made available to creditors under these plan support agreements is described below.

A hearing to confirm the Commonwealth’s plan of adjustment was held over several days between November 8, 2021.

On January 18, 2022, Judge Laura Taylor Swain, U.S.

District Court for the District of Puerto Rico, entered an order requesting certain changes to the Eighth Amended POA and related materials.

None of the requested changes would substantively impact the contemplated recovery to Ambac and holders of AAC-insured bonds under the Eighth Amended POA.

The Oversight Board filed a revised version of the plan and corresponding materials shortly thereafter.

On January 18, 2022, Judge Swain confirmed the Eighth Amended POA.

The Eighth Amended POA, together with the qualifying modifications for PRIFA and CCDA discussed below, are expected to have an effective date on before March 15, 2022.

Certain parties have appealed from the order confirming the Eighth Amended POA and have sought a stay pending this appeal;

if the stay is granted, the effective date may be delayed.

The successful consummation of the Eighth Amended POA and qualifying modifications for PRIFA and CCDA on the effective date will represent a significant step towards resolution of AAC's remaining Puerto Rico exposure.

PRIFA/CCDA Qualifying Modifications (Title VI Cases)

The PRIFA PSA and PRHTA/CCDA PSA contain provisions requiring the parties thereto to support the terms of Title VI

Qualifying Modifications for PRIFA and CCDA.

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

The PRIFA QM and CCDA QM proposed to restructure about $1,900 and $384 of debt, respectively, including obligations insured by AAC.

The hearing to consider approval of the PRIFA QM and the CCDA QM was held contemporaneously with the confirmation hearing in the Commonwealth’s Title III proceedings in November 2021.

On January 20, 2022, Judge Swain approved the PRIFA QM and CCDA QM.

The PRIFA QM and CCDA QM will share the same effective date as the Eighth Amended POA, which is expected to occur on or prior to March 15, 2022.

As discussed above, this date may be delayed if a stay is granted pending the appeal of the Eighth Amended POA.

District Court for the District of Puerto Rico, entered an order confirming the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al.

("Eighth Amended POA") together with the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively).

On March 15, 2022, the Eighth Amended POA, the PRIFA QM and CCDA QM became effective, restructuring approximately $33,000 of debt across various Commonwealth instrumentalities, including obligations insured by AAC, and approximately $50,000 in pension obligations.

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

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

AAC-Insured Bond Effective Date Transactions

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

i) their respective shares of GO/PBA plan consideration available under the Eighth Amended POA, and ii) cash from Ambac.

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

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

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

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

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

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

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

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

The AAC-insured PRIFA and

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

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

During the second quarter of 2022, the remainder of those PRIFA and CCDA bonds belonging to bondholders who elected not to commute their AAC Insurance Policies and were deposited into trusts together with such policies were all accelerated, satisfying and eliminating all of the AAC-insured PRIFA and CCDA bonds.

PRHTA Plan of Adjustment (Title III Case)

The Oversight Board, as Title III representative of the Puerto Rico Highways and Transportation Authority ("PRHTA"), is expected to file a Title III Plan of Adjustment for PRHTA ("PRHTA POA") prior to March 31, 2022.

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

Bondholder Elections:

GO, PBA, PRIFA, and CCDA

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

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

Under this option, bondholders will receive:

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

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

Under the second option, bondholders who failed to elect commutation will receive payment, in cash, of the outstanding principal amount of the bondholders’ insured bonds plus the accrued and unpaid interest thereon as of the effective date (the “Ambac Acceleration Price.”), as adjusted for any payments already made by Ambac on account of the applicable Ambac Insurance Policies.

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

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

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

Under the first option, bondholders will receive:

1) their respective shares of certain consideration available under

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the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable and 2) cash from Ambac.

Bondholders who elected this option will receive this consideration in full and final discharge of Ambac’s obligations under the Ambac Insurance Policies.

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

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

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

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

Plan Support Agreements

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

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

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

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

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

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

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

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

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

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

On October 12, 2022, Judge Swain entered an order confirming the Fifth Amended Title III Plan of Adjustment of The Puerto Rico Highways and Transportation Authority (" PRHTA POA").

On December 6, 2022, the PRHTA POA became effective, restructuring approximately $6,400 of PRHTA claims, including obligations insured by AAC.

The PRHTA POA, among other things incorporated the settlement reflected in the PRHTA/CCDA PSA.

PRHTA / CCDA PSA

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

The PRHTA/CCDA PSA, originally executed on May 5, 2021, provides for certain consideration for holders of bonds

issued by certain Commonwealth instrumentalities, PRHTA, and CCDA on account of their claims against the Commonwealth arising from such bonds ("Clawback" claims).

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

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

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

The waterfall provides that, in years one through 22, (a) holders of general obligation ("GO") bonds will receive the first $100 of outperformance;

(b) the Clawback creditors will receive the next $11.1;

and (c) any amounts received thereafter will be split 90%/10% between GO creditors and Clawback creditors.

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

Overall, Clawback CVI recoveries are subject to a lifetime cap of 75% of allowed claim amounts under the Eighth Amended POA.

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

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

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

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

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

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

For example, a 1% change in the estimated value of the Clawback CVI plan consideration related to the AAC-insured PRIFA, CCDA and PRHTA bonds would have an impact of about $2 on reserves.

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

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

PRHTA creditors will also share $389 of cash proceeds, including a $264 interim distribution, payable at the effective date of the Eighth Amended POA.

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

AAC will receive directly the pro rata share of the CW/PRHTA clawback recovery and interim PRHTA distributions allocable to its owned or insured PRHTA bonds.

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

Claim recovery expectations for PRHTA creditors under the PRHTA/CCDA PSA are uncertain and subject to interpretation due to the aforementioned

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uncertainty related to the value of and/or the actual performance of the Clawback CVI.

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

Amended and Restated GO / PBA PSA

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

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

Under the Amended GO/PBA PSA, creditors will receive up to $7,024 of cash, of which up to $350 was contingent upon FY2021 revenue outperformance exceeding $350 on a dollar-for-dollar basis, $6,683 of new GO current interest bonds, $443 of new GO 5.375% capital appreciation bonds, $288 of new GO 5.00% capital appreciation bonds, and GO Bond CVI, subject to a lifetime cap of about $3,500.

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

The value of the GO Bond CVI is highly uncertain, given the contingent, outperformance-driven structure of the instrument Recovery derived from fixed consideration (i.e., excluding GO Bond CVI) is estimated to vary between approximately 67% and 77% (as of the petition date) for GO creditors, and between approximately 75% and 80% (as of the petition date) for PBA creditors.

Under the Amended and Restated GO/PBA PSA, in exchange for executing the agreement and agreeing to its terms and conditions, creditors that were authorized to vote their claim will receive a PSA restriction fee of 1.32% of their claim amount at the effective date of the Eighth Amended POA.

The Amended and Restated GO/PBA PSA was further amended to allow for additional time to consummate the Eighth Amended POA (i.e., relevant deadlines therein extended from January 31, 2022 to March 15, 2022).

Plan of Adjustment and Qualifying Modification Considerations

The Eighth Amended POA has been confirmed, and the PRIFA QM and the CCDA QM have been approved.

All are expected to become effective on or before March 15, 2022.

However, uncertainty remains as to (i) whether the effective date will be stayed pending the appeal of the order confirming Eighth Amended POA;

(ii) the result of the pending First Circuit appeal of the order confirming the Eighth Amended POA;

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

(iv) the extent to which exposure

management strategies, such as commutation and acceleration, will be executed;

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

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

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

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

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

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

Ambac Title III Litigation Update

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

In connection with the July 27, 2021 PRIFA PSA, Ambac filed an urgent motion to stay various pending matters related to outstanding litigation in connection with the Commonwealth's Title III proceedings.

On August 3, 2021, the Court entered an order staying the requested matters.

While confirmation of the Eighth Amended POA and approval of the PRIFA QM and CCDA QM resolve many of the issues raised in the pending matters, the Court’s order confirming the Eighth Amended POA are now subject to appeal.

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

Refer to Note 19.

Commitments and Contingencies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further information about Ambac's litigation relating to Puerto Rico.

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

While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, particularly given the developing economic, political, and legal circumstances in Puerto Rico.

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

Due to uncertainty regarding numerous factors, described above, that will ultimately determine the extent of Ambac's losses, it is also possible that favorable developments and results with respect to such factors may cause losses to be lower than current reserves, possibly materially.

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

Under the PRHTA/ CCDA PSA, PRHTA creditors shared $389 of cash proceeds that was paid on July 8, 2022, once the PRHTA distribution condition was met pursuant to the Eighth Amended POA (the “Interim Distribution”).

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

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

holders of PRHTA ’68 bonds will receive the first dollars of Clawback CVI, followed by holders of PRHTA ’98 bonds PRHTA bondholders also received new PRHTA bonds with a face amount of $1,245.

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

In addition, AAC and other PRHTA creditors received restriction fees and consummation costs that were payable at the effective date of the PRHTA POA.

PRHTA Interim Distribution

On July 8, 2022, following satisfaction of the PRHTA distribution condition, AAC received its share of the Interim Distribution of cash and Clawback CVI related to the Ambac insured PRHTA '68 and '98 bonds in satisfaction of the Clawback claims against the Commonwealth under the Eighth Amended POA.

The Interim Distribution to AAC totaled approximately $19 of cash and $295 maximum notional value of Clawback CVI, which had been recorded as cash and fixed maturity securities - trading (at fair value), respectively, on the Consolidated Balance Sheet.

On the PRHTA POA effective date, a portion of the cash and Clawback CVI were:

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

($ in millions) Range of

Outstanding Net Par

Outstanding (2)(4)

PR Infrastructure Financing Authority (Special Tax Revenue) 2023-2044 BIG $ 403 $ 872 $ 202

PR Highways and Transportation Authority (1998 Resolution - Senior Lien Transportation Revenue) 2022-2042 BIG 394 620 164

PR Convention Center District Authority (Hotel Occupancy Tax) 2028-2031 BIG 86 123 72

PR Public Buildings Authority - Guaranteed by the Commonwealth of Puerto Rico 2022-2035 BIG 83 139 96

PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA) 2047-2054 BIG 73 648 37

Commonwealth of Puerto Rico - General Obligation Bonds 2022-2023 BIG 11 12 56

PR Highways and Transportation Authority (1968 Resolution - Highway Revenue) 2022-2027 BIG 4 9 25

Total Net Exposure to The Commonwealth of

Puerto Rico and Related Entities $ 1,054 $ 2,423 $ 652

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac.

In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used.

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

BIG denotes credits deemed below investment grade.

(2) Net Par and Interest Outstanding ("P&I") represent the total insured future debt service remaining over the lifetime of the bonds.

P&I for capital appreciation bonds does not represent the accreted amount but rather the amount due at respective maturity dates.

(3) In addition to ever-to-date net claims paid, Ambac made net claim payments of $23 in January 2022.

(4) Net Par and Interest Outstanding excludes the effects of a 10% current interest rate on $60 net par of PR Public Buildings Authority ("PBA") bonds with a maturity date of July 1, 2035, resulting from the absence of a remarketing.

Should a remarketing not occur before the maturity of the bonds, the Net Par and Interest Outstanding for PBA exposure would increase by $37.

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

PRHTA Effective Date Transactions

On the PRHTA effective date, 1) all remaining outstanding AAC-insured PRHTA '68 bonds were fully satisfied and eliminated via acceleration, and 2), pursuant to bondholder election, AAC-insured PRHTA '98 bondholders who elected commutation of their insurance received (i) their share of PRHTA plan consideration under the PRHTA POA and the interim distribution under the Eighth Amended POA, and (ii) cash from AAC.

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

The AAC-insured PRHTA '98 bondholders who failed to elect commutation had their bondholders’ share of plan consideration under the PRHTA POA and the interim distribution under the Eighth Amended POA deposited into a trust.

On the plan effective date, about 21% of the outstanding par of the AAC-insured PRHTA 98 bonds, totaling about $83 of net par outstanding was commuted with the remainder totaling about $312 of net par outstanding being deposited into the trusts.

Following the effective date, subsequent redemptions of trust units via the pass through of plan consideration proceeds and AAC acceleration payments further reduced AAC-insured PRHTA '98 net par exposure to $178 as of December 31, 2022.

Since year-end, AAC-insured PRHTA exposure has been further reduced through redemptions of trusts units via the pass through of plan consideration proceeds, interest on plan consideration, and AAC acceleration payments.

Additional Insured Portfolio Information

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Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay guaranteed obligations.

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Exposure Currency

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Total $ 22,613 100 %

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Form 10-K, for geographic detail by location of risk as of December 31, 2021.

Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Annual Report on Form 10-K, for geographic detail by location of risk as of December 31, 2022.

Ratings Distribution

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

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AAA is less than 1% in both periods.

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Summary of Below Investment Grade Exposure:

Bond Type ($ in millions) Net Par Outstanding

Net Par Outstanding

December 31, 2022 2021

Public Finance:

$ 1,054 $ 1,070

Military Housing

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Total $ 3,953 $ 5,438

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

The net decline in below investment grade exposures is primarily due to de-risking activities, including the Puerto Rico restructuring, and foreign exchange rates of $71.

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

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As a primary financial guarantor, AAC is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations under these reinsurance agreements.

AAC's reinsurers all have applicable ratings of A of better.

As of December 31, 2022, the aggregate amount of insured par ceded by AAC to reinsurers under reinsurance agreements was $4,938, with the largest reinsurer accounting for $2,187 or 7.9% of gross par outstanding at December 31, 2022.

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37 2022 FORM 10-K

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The following table shows the distribution, by bond type, of AAC’s ceded guaranteed portfolio at December 31, 2022:

($ in millions) Ceded Par Amount

Bond Type Ceded Par Amount

December 31, 2022 2021

Public Finance:

Lease and tax-backed revenue $ 1,618 $ 1,156

General obligation $ 1,265 $ 1,458

Lease and tax-backed revenue 1,169 1,618

Housing revenue 910 922

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Structured Finance:

Structured insurance 313 115

Investor-owned utilities 174 222

Structured insurance — 313

Other 136 185

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RESULTS OF OPERATIONS ($ in millions)

The following discussion should be read along with the financial statements included in this Form 10-K, as well as Part II, "Item 7, Management's Discussion and Analysis's of Financial Condition and Results of Operations" of our Form 10-K for the year ended December 31, 2020, which provides additional information on comparisons of years 2020 and 2019.

Net loss attributable to common stockholders for the year ended December 31, 2021, was $17 compared to a net loss attributable to common stockholders of $437 for the year ended December 31, 2020.

The decrease in losses was primarily driven by:

(i) lower loss and loss expenses, (ii) net gains on derivative contracts, (iii) a $33 net gain on extinguishment of debt in 2021, (iv) higher investment income and (v) lower interest expense, partially offset by higher operating and tax expenses.

The following discussion should be read along with the financial statements included in this Annual Report on Form 10-K, as well as Part II, "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K for the year ended December 31, 2021, which provides additional information on comparisons of years 2021 and 2020.

Net income attributable to common stockholders for the year ended December 31, 2022, was $522 compared to a net loss attributable to common stockholders of $17 for the year ended December 31, 2021.

The net income variance was primarily driven by:

(i) a higher benefit through loss and loss adjustment expenses, (ii) a litigation recovery, (iii) higher gains on derivative contracts, (iv) higher net gains on extinguishment of debt, and (v) lower interest expense, partially offset by lower returns from the investment portfolio.

A summary of our financial results is shown below:

($ in millions)

Year Ended December 31, 2022 2021 2020

2021 2020 2019

Net premiums earned $ 56 $ 47 $ 54

Commission income 31 26 —

Program fees 3 — —

Net investment income 17 139 122

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Net gains (losses) on derivative contracts 129 22 (50)

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

Other income (expense) (1)

Net realized gains on extinguishment of debt 81 33 —

Income (loss) on variable interest entities 21 7 5

Losses and loss expenses (benefit) (88) 225 13

Litigation recoveries 126 — —

Losses and loss adjustment expenses (benefit) (396) (88) 225

Amortization of deferred acquisition costs, net 3 1 —

Commission expense 18 15 —

General and administrative expenses 141 111 92

Intangible amortization 47 55 57

Operating expenses 126 92 103

Interest expense 168 187 222

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Net income (loss) 522 (16) (437)

net (gain) loss attributable to noncontrolling interest (1) (1) —

Net income (loss) attributable to common stockholders $ 522 $ (17) $ (437)

(1) 2019 includes proceeds received in connection with an SEC action against Citigroup Global Markets Inc.

in the amount of $142.

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

Significant interest rate declines during the first quarter of 2020 contributed materially to a net increase in loss reserves and losses on interest rate derivative contracts for the year ended December 31, 2020.

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

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

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

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

For additional information on the risks posed by COVID-19, refer to “Part I, Item 1A-Risk Factors” in this Form 10-K.

Ambac's results for the year ended December 31, 2022 were significantly impacted by the following:

• As of December 6, 2022, all AAC-insured Puerto Rico obligations were restructured under PROMESA via court-approved plans of adjustment or qualifying modifications.

As a result of these successful restructurings, Ambac's 2022 consolidated financial results included a net benefit of $180 in losses and gains of $37 on the consolidation of newly established variable interest entities;

partially offset by net losses of $23 from sales and changes to the fair value of securities received by AAC in the restructurings, losses of $17 on the VIEs after initial consolidation and accelerated amortization of the insurance intangible asset.

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The following paragraphs describe the consolidated results of operations of Ambac for 2021 and 2020.

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• On October 6, 2022, AAC entered into a Settlement Agreement and Release with Bank of America Corporation and certain affiliates thereof (the "BOA Parties") whereby the parties settled all RMBS litigation brought by AAC against the BOA Parties and AAC received $1,840.

On December 29, 2022, AAC entered into a Settlement Agreement and Release with Nomura Credit & Capital, Inc.

whereby the parties settled all RMBS litigation brought by AAC against Nomura and AAC received $140 on January 3, 2023.

AAC used the proceeds from these settlements (net of reinsurance) plus approximately $6 of cash on hand to fully redeem all debt obligations secured by the net proceeds of litigations brought by AAC against RMBS sponsors.

The settlements with the BOA Parties and Nomura brought to closure all of AAC's legacy litigation against RMBS sponsors.

Background and Business Description in Part II, Item 8 in this Annual Report on Form 10-K for further information.

During 2022, AAC recorded a gain of $123 million in loss and loss adjustment expenses and litigation recoveries of $126, offset by net realized losses on extinguishment of debt of $53 related to the above-mentioned settlement agreements.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for 2022 and 2021.

Gross Premiums Written.

Gross premiums written increased $125 for the year ended December 31, 2022, compared to the same periods in the prior year, as shown by segment below.

Year Ended December 31, 2022 2021 2020

Legacy Financial Guaranty Insurance $ (20) $ (11) $ (1)

Specialty Property & Casualty Insurance 146 13 —

Total $ 127 $ 2 $ (1)

Legacy Financial Guarantee Insurance gross written premiums were negative from de-riskings, pre-payments and other changes in expected cash flows of insured transactions.

See gross premiums written by line of business for the Specialty Property & Casualty Insurance business located in the Business section of Part I, Item 1 in this Annual Report on Form 10-K.

Net Premiums Earned.

Net premiums earned for the year ended December 31, 2021, decreased by $7 or 13% as compared to net premiums earned for the year ended December 31, 2020.

The decline was driven by reductions in FG premiums earned partially offset by $1 of specialty property and casualty net premiums earned.

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

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

The impact on net premiums earned related to credit losses amounted to $6 and $(5) for the for the years ended December 31, 2021 and 2020.

• Accelerated financial guarantee premium earnings as a result of calls and other accelerations on insured obligations largely due to de-risking activity of $1 and $12 for the for the years ended December 31, 2021 and 2020.

• New financial guarantee ceded reinsurance which reduces normal net premiums earned over the remaining period of the related ceded policies.

• The strengthening or weakening of the U.S.

dollar relative to the British Pound since Ambac's wholly-owned UK subsidiary, Ambac UK, operates in the United Kingdom and the British Pound is its functional currency.

Net premiums earned for the year ended December 31, 2022 increased by $9 or 20% as compared to net premiums earned for the year ended December 31, 2021, as shown below.

Year Ended December 31, 2022 2021 2020

Legacy Financial Guaranty Insurance $ 42 $ 46 $ 54

Specialty Property and Casualty Insurance 14 1 —

Total 56 47 54

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

The increase in Specialty Property & Casualty

Insurance net premiums earned was driven by the growth in net premiums written.

Commission Income.

Commission income was $31 compared to $26, for the years ended December 31, 2022 and 2021.

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

The increase was driven by greater premiums placed by Xchange Benefits as well as premiums placed by All Trans and Capacity Marine since their acquisition in November 2022.

Commission expense will largely track changes in gross commission.

For the year ended December 31, 2022 commissions expenses were $18 compared to $15 for the year ended December 31, 2021, representing approximately 58% of commission income in both periods.

Program Fees.

Program fee revenues were $3 compared to less than $1 for the years December 31, 2022 and 2021, respectively.

Program fee revenues represent the recognition of ceding commissions in excess of direct acquisition costs received from reinsurers and minimum fees received from MGA/Us until the related program reaches a certain level of premium.

Program fees are typically charged as a percentage of premiums ceded to reinsurers as a component of total ceding commissions.

Net Investment Income.

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

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

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

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For further information about investment funds held, refer to Note 5.

Investments to the Consolidated Financial Statements, included in this Annual Report on Form 10-K.

Net investment income from Ambac-insured securities, available-for-sale and short-term securities other than Ambac-insured and Other investments is summarized in the table below:

($ in millions)

Investments to the Consolidated Financial Statements, included in Part II, Item 8 in this Annual Report on Form 10-K.

Net investment income for the periods presented were driven by the Legacy Financial Guarantee Insurance segment, other segments' results were not significant.

Net investment income from Ambac-insured securities, available-for-sale securities other than Ambac-insured and Other investments is summarized in the table below:

Year Ended December 31,

2022 2021 2020

Securities available-for-sale:

Ambac-insured (including LSNI and Sitka Senior Secured Notes)

Ambac-insured (including secured notes)

$ 24 $ 45 $ 62

2 unchanged sentences

Net investment income $ 17 $ 139 $ 122

Net investment income increased $18 for the year ended December 31, 2021, compared to 2020.

As described further below, the variance was primarily driven by 2020 pricing volatility within fund investments resulting from the impact of the COVID-19 pandemic on financial markets and the impact of the LSNI Secured Note redemption in July 2021.

• Investment income from Ambac-insured securities decreased $17 in 2021, compared to 2020, due to lower income on LSNI Secured Notes.

As described in Note 1.

Background and Business Description, to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, on July 6, 2021, the LSNI Secured Notes were fully redeemed, including those held in Ambac's investment portfolio.

Investment income from other Ambac-insured securities, primarily consisting of RMBS and Puerto Rico bonds, was flat compared to 2020.

• Net investment income from available-for-sales securities other than Ambac-insured securities decreased $12 in 2021, compared to the prior year, reflecting a smaller asset base and lower average yields.

Portfolio repositioning during 2021 and 2020, resulted in a higher allocation of pooled funds and Ambac-insured Puerto Rico bonds, while reinvestment in non-insured available-for-sale securities were generally at lower yields.

Short term rates also remained low throughout 2021, adversely impacting investment income.

Additionally, the use of cash for early debt redemptions and operating cash needs contributed to the smaller asset base.

• Other investments income increased $47 in 2021, compared to the prior year.

The increase resulted from overall positive performance in 2021 and additional investments, particularly in hedge and equity funds.

Relatively low returns in 2020 were driven by adverse changes in fair values as a consequence of the initial economic and financial market impact of the COVID-19 pandemic in the first quarter, offset by a generally strong market recovery in subsequent quarters of 2020.

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Net investment income decreased $123 for the year ended December 31, 2022, compared to 2021.

As described further below, the variance was primarily driven by 2022 fair value losses within fund investments and on fixed maturity investments classified as trading, and the impact of the LSNI Secured Note redemption in July 2021.

• Other investments results decreased $115 in 2022, compared to the prior year, including losses of $23 on securities received in the Puerto Rico restructurings which are classified as trading.

Pooled fund investments produced a net loss of $26 in 2022, a decrease of $92 compared to 2021.

The decrease was driven by net losses in most fund categories compared to generally strong performance in 2021, with the largest declines being in hedge funds, equities, high-yield and leveraged loan funds and real estate.

Investments in pooled funds may be volatile, but are generally expected to produce higher returns than traditional fixed maturity investments.

• Investment income from Ambac-insured securities decreased $21 in 2022, compared to 2021, due primarily to lower levels of secured note holdings, the impact of the March 15, 2022 and December 6, 2022 Puerto Rico restructurings and continued runoff of AAC-insured RMBS.

• Net investment income from available-for-sales securities other than Ambac-insured securities increased $13 in 2022, compared to the prior year, due to higher portfolio yields.

Net Investment Gains (Losses), including Impairments.

The following table provides a breakdown of net investment gains, for the periods presented:

($ in millions)

Year Ended December 31,

2022 2021 2020

Net realized gains on securities sold or called

$ 18 $ 11 $ 26

Foreign exchange gains (losses) (5) (4) 22

Net foreign exchange gains (losses)

Credit impairment — — —

2 unchanged sentences

$ 32 $ 7 $ 22

Net investment gains on securities sold or called during the year ended December 31, 2021, included a gain of $4 realized on the sale of AFG's equity interest in the Corolla Trust in connection with the Corolla Exchange Transaction.

Net investment gains on securities sold or called during the year ended December 31, 2022, included a recovery of $9 from a class-action settlement relating to certain RMBS securities previously held in the investment portfolio, $4 from the distribution of residual assets of a legacy financial guarantee student loan restructuring vehicle and $5 from the mandatory redemption of Sitka Senior Secured Notes over their amortized cost value.

Realized gains in 2021 included $4 on the sale of AFG's equity interest in the Corolla Trust in connection with the Corolla Note Exchange (as such terms are defined in Note 1.

Background and Business Information to the Consolidated Financial Statements included in this Annual Report).

Other net realized gains on securities sold or called in 2022 and 2021 are primarily from sales in connection with routine portfolio management.

Impairments are reported through earnings if management intends to sell securities or it is more likely than not that the Company will be required to sell before recovery of amortized cost.

Credit impairments are recorded in earnings only to the extent management does not intend to sell, and it is not more likely than not that the Company will be required to sell the securities, before recovery of their amortized cost.

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

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

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

If management either:

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

Net Gains (Losses) on Derivative Contracts.

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

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

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

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

Net gains (losses) on derivative contracts are primarily from the Company's interest rate derivatives portfolio, which is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee insurance and investment portfolios.

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

Results from other non-VIE derivatives were not significant to the periods presented.

Net gains on interest rate derivatives for the year ended December 31, 2022, were $128, compared to a net losses of $22 for the year ended December 31, 2021.

The net gain for the year ended December 31, 2021, resulted from the impact of rising interest rates and gains related to counterparty credit adjustments partially offset by the carrying cost of maintaining the economic hedge position.

The net loss for the year ended December 31, 2020, reflects significant declines in forward interest rates, triggered by the COVID-19 pandemic, and losses from the application of counterparty credit adjustments, described further below.

The net gain for the year ended December 31, 2022, reflects changes in fair value from increases in forward interest rates and lower counterparty credit adjustments on certain derivative assets, partially offset by portfolio carrying costs.

The improved results for the year ended December 31, 2022, resulted from significant interest rate increases combined with favorable portfolio positioning and the impact of credit spreads in derivative assets as described further below.

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

Inclusion of counterparty credit adjustments in the

valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $5 and $(6) for the years ended December 31, 2021 and 2020, respectively.

The gain for the year ended December 31, 2021, resulted from the decrease in underlying net asset values as interest rates increased.

The loss in 2020 was driven by wider credit spreads reflecting the credit rating downgrade of a derivative counterparty by Ambac during the first quarter, simultaneous with an increase in the underlying asset values as interest rates declined.

Other Income (Expense).

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

For the year ended December 31, 2021, other income includes Xchange revenues of $26.

Xchange pays commissions to sub-producers which are included in operating expenses.

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

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

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

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $8 and $5 for the years ended December 31, 2022 and 2021, respectively.

The lower counterparty credit adjustments for both periods reflected lower underlying asset values with the further impact of credit spread widening in 2022 and narrowing in 2021.

Net Realized Gains on Extinguishment of Debt.

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

Net realized gains on extinguishment of debt was $81 for year ended December 31, 2022.

Gains were recognized due to repurchases of surplus notes below their carrying values, partially offset with losses recognized on the redemption of the Sitka AAC Note (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K) above its carrying value.

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AAC repurchased $266 million current par of surplus notes from third party holders between the second and fourth quarters of 2022.

Net realized gains on extinguishment of debt was $33 for the year ended December 31, 2021, resulting from the 2021 exchanges of junior surplus notes below their carrying values.

Refer to Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, for further discussion of the 2021 Surplus Notes Exchanges.

Background and Business Description in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion of the 2021 Surplus Notes Exchanges.

Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase surplus notes and may consider opportunities to exchange securities issued by it from time to time for other securities issued by it.

Income (Loss) on Variable Interest Entities.

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

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

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

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

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

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

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

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

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

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

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

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

Income (loss) on variable interest entities was $21 and $7 for the years ended December 31, 2022 and 2021, respectively.

Results for the year ended December 31, 2021, were driven by the

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higher valuation of net assets on VIEs, together with realized gains of $2 on sales of assets from the COFINA Trust.

Results for the year ended December 31, 2020, were due to realized gains of $8 on sales of assets from the COFINA Trust partially offset by the lower valuation of net assets on a VIE impacted by COVID-19.

Results for the year ended December 31, 2022, related primarily to three VIE trusts created in connection with the Puerto Rico restructurings in 2022.

The year ended December 31, 2022, included the initial $37 gain upon consolidation, losses of $9 from changes to fair value of these VIEs' assets, and losses of $7 from these VIEs driven by interest costs.

Results for the year ended December 31, 2021, were due primarily to gains on higher valuation of net assets of VIEs, together with realized gains of $2 on sales of assets from the COFINA Trust.

Refer to Note 12.

Variable Interest Entities to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on the accounting for VIEs.

Losses and Loss Expenses (Benefit).

Losses and loss expenses include the financial guarantee and specialty property and casualty businesses.

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

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

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

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

Ambac has recorded R&W subrogation recoveries, net of reinsurance, of $1,704 and $1,725 at December 31, 2021 and 2020, respectively.

The decrease in these recoveries was primarily driven by lower projected losses.

Refer to Note 2.

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

The following table provides details, by bond type, for losses and loss expenses (benefit) incurred for the periods presented:

($ in millions)

Year Ended December 31, 2021 2020 2019

Structured Finance (1)

$ (20) $ (52) $ (111)

Domestic Public Finance (73) 256 250

$ (88) $ 225 $ 13

(1) The loss and loss expense (benefit) associated with changes in estimated representation and warranties for the year ended December 31, 2021, 2020 and 2019 was $20, ($23) and $42, respectively.

(2) Includes specialty property and casualty loss and loss expenses incurred of less than $1 for the year ended December 31, 2021.

(3) Includes loss expenses incurred of $55, $103 and $78 for the year ended December 31, 2021, 2020 and 2019, respectively.

Losses and loss expenses for 2021 were largely driven by favorable loss development in domestic public finance, primarily related to Puerto Rico, and structured finance, primarily related to improved credit in RMBS , partially offset by

the negative impact of discount rates , and loss expenses incurred.

Losses and loss expenses for 2020 were driven by higher projected losses in domestic public finance, largely Puerto Rico;

partially offset by improved Structured Finance losses as a result of the positive impact of lower interest rates on excess spread, reduced by lower discount rates and expected losses from COVID-19 related delinquencies.

Intangible Amortization.

Insurance intangible amortization was $52 and $57 for the years ended December 31, 2021 and 2020, respectively.

The decrease in amortization for the year ended December 31, 2021, compared to 2020, is primarily due to run-off of the insured portfolio and de-risking activity.

Other intangible amortization for the year ended December 31, 2021 was $3.

Operating Expenses.

Operating expenses consist of gross operating expenses plus reinsurance commissions.

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

Litigation Recoveries.

In connection with the settlement agreement with Bank of America Corporation and certain affiliates, the BOA Settlement Payment included recoveries from litigations for alleged breaches of contractual obligations

and fraud by the BOA Parties.

Management allocated the BOA Settlement Payment to each of the litigations based on previously developed valuations of each individual litigation.

The portion of the BOA Settlement Payment allocated to fraud litigation recoveries has been recorded as a litigation recovery in the Statement of Comprehensive Income (Loss).

Losses and Loss Adjustment Expenses (Benefit).

Losses and loss adjustment expenses include the financial guarantee and specialty property and casualty businesses.

Loss and loss adjustment expenses decreased $308 for the year ended December 31, 2022, compared to the prior year.

Legacy financial guarantee loss and loss adjustment expenses (benefit) were $(406) and $(89) for the years ended December 31, 2022 and 2021, respectively.

Specialty Property and Casualty Insurance loss and loss adjustment expenses were $9 and $— for the years ended December 31, 2022 and 2021, respectively

LFG Losses and loss expenses (benefit) for 2022, were driven by favorable RMBS development due to the impact of the settlement agreements with Bank of America Corporation and certain affiliates thereof and Nomura Credit and Capital, Inc.of $123 and the positive impact of discount rates, and favorable loss development in domestic public finance (primarily due to the Puerto Rico restructurings of $180).

LFG Losses and loss expenses for 2021 were largely driven by favorable loss development in domestic public finance, primarily related to Puerto Rico, and structured finance, primarily related to improved credit in RMBS, partially offset by the negative impact of discount rates, and loss expenses incurred.

General and Administrative Expenses ("G&A").

The following table provides a summary of G&A expenses for the periods presented:

($ in millions)

2 unchanged sentences

Non-compensation 75 49 41

Gross operating expenses 126 92 103

Reinsurance commissions, net — — —

Total operating expenses $ 126 $ 92 $ 103

Gross operating expenses for the year ended December 31, 2021 are $126, an increase of $34 from gross operating expenses for the year ended December 31, 2020.

G&A expenses for the year ended December 31, 2022 are $141, an increase of $30 from G&A expenses for the year ended December 31, 2021.

The increase was primarily due to the following:

• Higher compensation costs primarily due to:

(i) hiring in connection with the launch of Everspan offset by continued right sizing of staff levels, (ii) inclusion of Xchange costs of $4 and (iii) the impact of performance factors on incentive compensation.

• Higher non-compensation costs primarily due to:

(i) inclusion of Xchange costs of $16, mainly from producer commissions of $15, (ii) launch of Everspan, and (iii) increased legal fees.

Legal and consulting services provided for the benefit of OCI were flat at $2 during the years ended December 31, 2021 and 2020.

• Higher compensation costs primarily due to a net increase in staffing from additions in the Specialty Property and Casualty Insurance and Insurance Distribution segments, partially offset by reductions in staffing in the Legacy Financial Guaranty segment, and the impact of performance factor adjustments on incentive compensation expense.

• Higher non-compensation costs primarily related to Legacy Financial Guarantee Insurance segment defensive litigation expenses of $26 and Specialty Property and Casualty Insurance segment costs associated with growth of the business.

These items were partially offset by a reduction in advisory fees associated with Legacy Financial

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Guarantee Insurance stemming from the 2021 secured note refinancing.

Intangible Amortization.

Insurance intangible amortization was $44 and $52 for the years ended December 31, 2022 and 2021, respectively.

The decrease in amortization for the year ended December 31, 2022, compared to 2021, is primarily due to run-off of the insured portfolio and de-risking activity.

Other intangible amortization was $3 and $3 for the years ended December 31, 2022 and 2021 relating to the acquisitions within the Insurance Distribution segment.

Interest Expense.

Interest expense includes accrued interest on the LSNI Ambac Note (as defined in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K), Sitka AAC Note, Tier 2 Notes, Surplus Notes and other debt obligations.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K), Sitka AAC Note, Tier 2 Notes, surplus notes and other debt obligations.

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

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

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($ in millions)

Year Ended December 31,

2022 2021 2020

Surplus Notes (1)

4 unchanged sentences

(1) Includes interest on Junior Surplus Notes that were acquired and retired in 2021.

The decrease in interest expense for the year ended December 31, 2021, compared to the year ended December 31, 2020, reflects the impacts of the Secured Note Refinancing and 2021 Surplus Note Exchanges, described further in Note 1.

The decrease in interest expense for the year ended December 31, 2022, compared to the year ended December 31, 2021, reflects the impact of the 2021 refinancing and 2022 redemption of secured notes as described further under "Secured Note Refinancing" and "Redemption of Notes" in Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K.

These transactions resulted in lower debt outstanding and a lower coupon interest rate on the Sitka AAC Note relative to the LSNI Ambac Note.

Interest expense for 2021 also declined as a result of the Tier 2 Note fully accreting through interest expense by December 31, 2020.

Interest expense for 2022 also declined as a result of purchases of surplus notes throughout the year.

These benefits were partially offset by the effects of interest compounding on surplus notes and the Tier 2 Notes.

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

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

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

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

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

Interest will accrue, compounded on each anniversary of the original scheduled payment date or scheduled maturity date, on any unpaid principal or interest through the actual date of payment, at 5.1% per annum.

Holders of surplus notes will have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount.

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

Total accrued and unpaid interest for Surplus Notes outstanding to third parties were $576 at December 31, 2021.

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

scheduled payment date.

Total accrued and unpaid interest for surplus notes outstanding to third parties was $427 at December 31, 2022.

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

Ambac can provide no assurance as to when Surplus Note principal and interest payments will be made, if ever.

If OCI does not approve regular payments on Surplus Notes within the next several years, the total amount due for Surplus Notes may exceed AAC's financial resources and holders of Surplus Notes may not ever be paid in full.

Provision for Income Taxes.

The provision for income taxes for the year ended December 31, 2021 and 2020, was a expense of $18 and a benefit of $3, respectively.

The provision for income taxes for the year ended December 31, 2022 and 2021, was a expense of $2 and $18, respectively.

Income taxes for the year ended December 31, 2022 and 2021, includes provisions for income tax due in respect of Ambac UK of $3 and $16, respectively.

1 unchanged sentence

Federal net ordinary operating loss carryforwards, including approximately $1,630 at AFG and $1,824 at AAC.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

Year Ended December 31, 2022 2021

Net premiums earned $ 42 $ 46

Net investment income 12 138

Net investment gains (losses), including impairments 32 3

Net gains (losses) on derivative contracts 128 22

Net realized gains on extinguishment of debt 81 33

Other income 30 8

Litigation recoveries 126 —

Total 451 250

Losses and loss adjustment expenses (benefit) (406) (89)

General and administrative expenses 102 77

Total (303) (12)

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

Interest expense 168 187

Depreciation 2 2

Intangible amortization 44 52

Pretax income (loss) $ 540 $ 20

Stockholders equity (2)

(1) Abbreviated as "EBITDA" in future references

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

The Legacy Financial Guarantee Insurance segment is in active runoff.

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

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

Additionally, the segment results are impacted by changes in interest rates as they impact net gains on derivative contracts and

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interest expense on the floating rate Sitka AAC Note (prior to its redemption in 2022).

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

Net premiums earned.

Net premiums earned decreased $4 for the year ended December 31, 2022, compared to the same period in the prior year.

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

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

The positive impact on net premiums earned related to credit losses amounted to $4 and $8 for the years ended December 31, 2022 and 2021, respectively.

• Accelerated financial guarantee premiums earned as a result of calls and other accelerations on insured obligations, largely due to active de-risking of the insured portfolio, were $8 and $1 for the years ended December 31, 2022 and 2021, respectively.

Losses and Loss Adjustment Expenses (Benefit).

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

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

Ambac has recorded representation and warranty ("R&W") subrogation recoverables, net of reinsurance, of $140 and $1,704 at December 31, 2022 and 2021, respectively.

The decrease in these recoverables was primarily attributable to the settlement agreement with Bank of America Corporation and certain affiliates.

On December 29, 2022, AAC entered into a Settlement Agreement and Release with Nomura Credit & Capital, Inc.

whereby the parties settled all RMBS litigation brought by AAC against Nomura and AAC received $140 on January 3, 2023 bringing to a close all of AAC's legacy litigation against RMBS sponsor.

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

Year Ended December 31, 2022 2021

Structured Finance $ (207) $ (20)

Domestic Public Finance (192) (73)

$ (406) $ (89)

(1) Includes loss expenses incurred of $29, $55 and $103 for the year ended December 31, 2022, 2021 and 2020, respectively.

Losses and loss expenses (benefit) for 2022, were driven by favorable RMBS development due to the impact of the settlement agreements with Bank of America Corporation and certain affiliates thereof and Nomura Credit and Capital, Inc.

of $123 and the positive impact of discount rates, and favorable loss development in domestic public finance (primarily due to the Puerto Rico restructurings of $180).

Legacy financial guarantee losses and loss expenses for 2021 were largely driven by favorable loss development in domestic

public finance, primarily related to Puerto Rico, and structured finance, primarily related to improved credit in RMBS , partially offset by the negative impact of discount rates , and loss expenses incurred.

G&A Expenses.

The increase in operating expenses during the year ended December 31, 2022, as compared to the year ended December 31, 2021, is driven primarily by additional costs related to defensive litigation of $26.

Compensation cost benefits relative to 2021 from headcount reductions in the segment were more than offset by the impact of incentive compensation performance factor adjustments and severance charges.

Specialty Property and Casualty Insurance

Year Ended December 31, 2022 2021

Gross premiums written $ 146 $ 13

Net premiums written 29 3

Net premiums earned $ 14 $ 1

Net investment income 2 1

Net investment gains (losses), including impairments — —

Program fees 3 —

Losses and loss adjustment expenses (benefit) 9 —

Amortization of deferred acquisition costs, net 3 —

General and administrative expenses 13 9

Net (gain) loss attributable to noncontrolling interest — —

EBITDA (6) $ (8)

Pretax income (loss) $ (6) $ (8)

Loss and LAE Ratio 65.4 % NM

Combined Ratio 158.1 % NM

Ambac's stockholders equity (1)

(1) Represents Ambac stockholders equity in the Specialty Property and Casualty Insurance segment, including intercompany eliminations.

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

Fourteen programs were authorized to issue policies as of December 31, 2022.

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

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

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

Going forward, we may not be able to offset the impact of inflation on our loss costs with sufficient price increases.

The estimation of loss reserves may also be more difficult during extreme events, such as a

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43 2022 FORM 10-K

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pandemic, or during the persistence of volatile or uncertain economic conditions, due to, amongst other reasons, unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses.

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

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

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

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

Everspan's estimate of losses and loss expenses from this event is not material.

Segment pre-tax net income was favorably impacted by underwriting income driven by growth in earned premium and program fees relative to loss and loss adjustment expenses for the year ended December 31, 2022, compared to the year ended December 31, 2021.

General and Administrative expenses for the year ended December 31, 2022 increased as compared to the year ended December 31, 2021 primarily driven by costs associated with the increase in Everspan's operations including changes in staffing.

Costs associated with the acquisition of additional shell insurance companies, as we continued to ramp up Everspan's operations, impacted pre-tax income for the year ended December 31, 2022 by approximately $1, relative to the year ended December 31, 2021.

Insurance Distribution

Year Ended December 31, 2022 2021

Premiums placed $ 135 $ 117

Commission income $ 31 $ 26

Commission expense 18 15

Net commissions 13 12

General and administrative expenses 6 5

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

Depreciation (1)

Intangible amortization 3 3

Pretax income (loss) $ 5 $ 4

Ambac's stockholders equity (2)

(1) The Consolidated Statements of Comprehensive Income includes this in General and Administrative Expenses.

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

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

All Trans, a full service managing general underwriter with delegated underwriting authority in commercial automobile insurance for

specific "for-hire" auto classes;

and Capacity Marine, a wholesale and retail brokerage and reinsurance intermediary specializing in marine and international risk.

The Insurance Distribution business is typically compensated for its services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices and, in some cases, the managing of claims under an agency agreement.

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

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

Cirrata business placed premiums for its carriers of approximately $135 for the year ended December 31, 2022, up $18 or 15% as compared to the year ended December 31, 2021.

The growth was primarily driven by premiums placed by All Trans and Capacity Marine since their acquisition in November 2022.

Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which result in revenue and earnings concentrations in the first and third quarters each calendar year, however, we expect this to become less pronounced over time as Cirrata continues to grow and diversify into other classes of business.

G&A Expenses.

General and Administrative expenses for the year ended December 31, 2022 increased slightly as compared to the year ended December 31, 2021 as a result of employees hired to support the ESL renewal rights acquisition that occurred on April 29, 2022 and operating costs at All Trans and Capacity Marine since their acquisition in November 2022.

LIQUIDITY AND CAPITAL RESOURCES

($ in millions)

Liquidity is a measure of a company’s ability to generate sufficient cash to meet the cash requirements of its business operations and to satisfy general corporate obligations.

Holding Company Liquidity

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AFG is a holding company with no outstanding debt.

AFG’s liquidity is primarily dependent on its net assets, excluding its equity investments in subsidiaries, totaling $269 as of December 31, 2021, of which $142 is considered highly liquid, and secondarily on distributions and expense sharing payments from its subsidiaries.

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

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

• During 2021, AFG received distributions from Xchange of $6.

AFG’s liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $223 as of December 31, 2022, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

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

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

It is highly unlikely that AAC will be able to make dividend payments to AFG for the foreseeable future or that Everspan will be able to make dividend payments to AFG for several years, and therefore cash and investments, payments under the intercompany cost allocation agreement and distributions from Xchange will be AFG’s principal sources of liquidity in the near term.

Refer to Part I, Item 1, “Insurance Regulatory Matters — Dividend Restrictions, Including Contractual Restrictions” in this Annual Report on Form 10-K, and Note 8.

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

The principal uses of liquidity are the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac;

the making of strategic investments, which may include illiquid investments;

and capital investments to acquire, grow and/or capitalize new and/or existing businesses.

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

Contingencies could cause material liquidity strains.

• AFG supported the development of the Specialty P&C business, and its acquisitions, by contributing capital to

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

• Substantial uncertainty remains as to AAC's ability to pay dividends to AFG and the timing of any such dividends.

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

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

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44 2022 FORM 10-K

Everspan Indemnity of approximately $92 and $6 in 2021 and the first quarter of 2022, respectively.

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

AFG received distributions from Cirrata of $6 and $6 during the years ended December 31, 2022 and 2021.

AFG's principal uses of liquidity are:

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

such capital investments include investments in technology to support the efficient operation of our Specialty Property and Casualty and Insurance Distribution businesses.

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

AFG supported the development of the Specialty Property and Casualty Insurance business, and its acquisitions, with cash contributions of $15 and $92 to the Everspan group of companies during the years ended December 31, 2022 and 2021, respectively.

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

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

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

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

Operating Companies' Liquidity

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

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

reinsurance recoveries;

investment income and maturities and sales of investments.

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

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

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

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

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

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

See Part I, Item 1A.

Risk Factors in this Annual Report on Form 10-K for more information about risks relating to RMBS R&W subrogation recoveries.

Sources of liquidity for the Company’s insurance subsidiaries are through funds generated from premiums, recoveries of prior claim payments, reinsurance recoveries, fees, investment income and maturities and sales of investments.

• See Note 8.

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

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

• Although AAC has not yet experienced incremental claim payments as a result of the impact of COVID-19, such claims may occur in the future as issuers, particularly those with revenues that have been interrupted by the effects of the pandemic, may not have sufficient resources to pay debt service on insured debt.

Refer to "Executive Summary" in this Management's Discussion and Analysis for further discussion of the potential impact of the COVID-19 pandemic.

See below within this Management Discussion

and Analysis in the section titled "Balance Sheet" for the expected future financial guarantee claim payments, gross of expected recoveries.

Cash provided from these sources is used primarily for claim payments and commutations, loss expenses, acquisition costs (Specialty Property and Casualty Insurance segment only), debt service (Legacy Financial Guarantee segment only), operating expenses, reinsurance payments and purchases of securities and other investments.

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

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

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

Long-term Debt to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K for further discussion of the payment terms and conditions of the Tier 2 Notes as well as the aggregate annual maturities of all debt outstanding.

In addition to principal amounts of $2,334 as of December 31, 2021 with various maturities as described in Note 12.

Long-term Debt to the Consolidated Financial Statements, included in Part II, Item 8 in this Form 10-K, AAC's future interest obligations include $62 annually on the Sitka AAC Note through maturity on July 6, 2026, $605 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2022, and Tier 2 Note interest that may be paid-in-kind until maturity on February 12, 2055 at which time $5,060 would be due.

• Ambac is the lessee in operating leases for corporate offices, a data center and various equipment.

Leases to the Consolidated Financial Statements included in Part II, Item 8, in this Annual Report on Form 10-K, for a scheduled future undiscounted lease payments, gross of sublease receipts.

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

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

• As further described in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K:

(i) effective October 29, 2022, AAC wholly redeemed the Sitka AAC Note and partially redeemed Tier

2 Notes and (ii) effective January 15, 2023, AAC fully redeemed the remaining Tier 2 Notes.

Additionally, in the second and fourth quarters of 2022, AAC repurchased $334 current par of surplus notes (including $67 from AFG).

Following these redemptions and repurchases, current principal outstanding on AAC's long-term debt consisted of $519 of surplus notes.

AAC's future interest obligations on long-term debt after giving effect to these redemptions include $447 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2023.

• Ambac Financial Services ("AFS") uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as a partial economic hedge against the effects of rising interest rates elsewhere in the Legacy Financial Guarantee segment.

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

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

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

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

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

Managing General Agent / Underwriting (MGA/U):

The liquidity requirements of the MGA/U subsidiary are met primarily by funds generated from commission receipts (both

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47 2021 FORM 10-K |

base and profit commissions) from insurance carriers.

Insurance Distribution:

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

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

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

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

Consolidated Cash Flow Statement Discussion

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

($ in million)

Year Ended December 31, 2022 2021 2020

2021 2020 2019

Cash provided by (used in):

2 unchanged sentences

Financing activities (1)

(2,163) (657) (303)

Effect of foreign exchange on cash and cash equivalents (1) — —

Net cash flow $ 38 $ (12) $ (46)

(1) During the 2022, AAC made payments of $476 to accelerate AAC-insured PRIFA, CCDA and HTA bonds that were not commuted and were deposited into trusts established under the Puerto Rico restructurings.

Also during 2022, AAC received $165 for redemption of PRIFA trust units held in its investment portfolio.

Because these trusts are consolidated VIEs, this net cash activity of

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$311 is reflected as payments of VIE liabilities in financing activities for the year ended December 31, 2022.

Operating activities

The following represents the significant cash operating activities during the years ended December 31, 2022 and 2021:

• Debt service on the LSNI Ambac Note was $51 and $107 for the years ended December 31, 2021 and 2020, respectively.

• Debt service on the Sitka AAC Note was $30 for the year ended December 31, 2021.

• Cash provided from financial guarantee premiums were $35 and $47 for the years ended December 31, 2021 and 2020.

Cash provided from specialty property and casualty premiums were $8 for the year ended December 31, 2021.

• Payments related to (i) operating expenses were $83 and $76 for the years ended December 31, 2021 and 2020, respectively, ( ii) reinsurance premiums were $26 and $2 for the years ended December 31, 2021 and 2020, respectively, and (iii) interest rate derivatives were $(1) and $20 for the years ended December 31, 2021 and 2020, respectively.

• Interest, dividends and other distributed income from the investment portfolio was $80 and $104 for the years ended December 31, 2021 and 2020, respectively.

• Net loss and loss expenses paid, including commutation payments are detailed below:

($ in million)

• Cash provided by (i) gross premiums (net of commissions paid) were $139 and $38 for the years ended December 31, 2022 and 2021, respectively;

(ii) non-VIE interest rate derivatives were $84 and $(1) for the years ended December 31, 2022 and 2021, respectively;

(iii) VIE derivative payments were $(326) and $(24) for the years ended December 31, 2022 and 2021, respectively;

(iv) non-VIE investment portfolio income was $82 and $80 for the years ended December 31, 2022 and 2021, respectively;

and (v) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts were $47 for the year ended December 31, 2022.

• Payments for non VIE debt service and accreted interest on redemptions and debt repurchases of the Sitka AAC Note, Tier 2 Notes and Surplus Notes were $59, $70 and $154, respectively, for the year ended December 31, 2022.

Debt service payments on the LSNI Ambac Note and Sitka AAC Note were $51 and $30, respectively, for the year ended December 31, 2021.

• Payments related to (i) operating expenses we re $94 and $83 for the years ended December 31, 2022 and 2021, respectively;

and (ii) reinsurance premiums paid were $66 and $26 for the years ended December 31, 2022 and 2021, respectively

• Net Legacy Financial Guarantee Insurance loss and loss adjustment expenses paid (recovered), including commutation payments, during the years ended December 31, 2022 and 2021 are detailed below:

Year Ended December 31,

Net loss and loss adjustment expenses paid (recovered):

Net losses paid $ 298 $ 103

Net subrogation received (1)

(1,951) (121)

Net loss expenses paid 48 77

Net cash flow $ (1,605) $ 59

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

Investing Activities

Cash provided for investing activities in both 2021 and 2020 were to (i) provide liquidity for operating activities;

(ii) diversify the investment portfolio from fixed maturity to other assets (total fair value of pooled investments of $683 at December 31, 2021) and (iii) support strategic initiatives, including AFG's purchase 80% of Xchange for $74 in 2020, net of cash acquired.

(1) Includes the majority of the recoveries from the BOA Settlement Payment except for the portion allocated to fraud litigation recoveries.

The fraud litigation recoveries were $126 and are also included in cash flows from operations.

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

Financing Activities

Financing activities for the year ended December 31, 2021, include paydowns of the LSNI Ambac Note of $1,641, paydowns/maturities of VIE debt obligations of $170, partially offset by the proceeds from the Sitka AAC Note issuance of 1,163.

Financing activities for the year ended December 31, 2020, include paydowns of the LSNI Ambac Note of $121 and paydowns of VIE debt obligations of $178.

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

Financing activities for the year ended December 31, 2022, included payments for repurchase of surplus notes of $191, redemption of Sitka AAC Note of $1,210, partial redemption of Tier 2 Notes of $143, share repurchases of $14, repurchases of auction market preferred shares of $8 and paydowns and maturities of VIE debt obligations of $591 (including payments

for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

Financing activities for the year ended December 31, 2021, include paydowns of the LSNI Ambac Note of $1,641 and paydowns and maturities of VIE debt obligations of $170.

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

Future financing activities will include additional accelerations and redemptions of the VIE trusts created from the Puerto Rico restructuring, including $136 through February 16, 2023.

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

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

6 unchanged sentences

All collateral and margin obligations are currently met.

Collateral and margin posted by AFS totaled a net amount of $133 (cash and securities collateral of $13 and $120 respectively), including independent amounts, under these contracts at December 31, 2021.

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

Collateral and margin posted by AFS totaled $70 (cash and securities, at fair value, of $6 and $64 respectively), including independent amounts, under these contracts at December 31, 2022.

BALANCE SHEET ($ in millions)

Total assets decreased by approximately $917 from December 31, 2020 to $12,303 at December 31, 2021, primarily due to the impacts of the Corolla Trust Exchange and Secured Note Refinancing described in Note 1.

Background and Business Description in this Annual Report on Form 10-K located in Part II.

Item 8, payment of loss and loss expenses, interest and operating expenses, lower subrogation recoverables, lower consolidated VIE assets from paydowns of consolidated

Total assets decreased by approximately $4,330 from December 31, 2021 to $7,973 at December 31, 2022, primarily due to the reduction in asset values of VIEs of $2,162 and subrogation recoverables of $1,821.

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

The decline in subrogation recoverables was largely due to receipts under the settlement agreement with Bank of America Corporation and certain affiliates.

Additional declines in total assets were the result of (i) the payment of loss and loss adjustment expenses, interest and operating expenses, (ii) declines in invested asset values, (iii) lower derivative assets caused by rising interest rates, (iv) repurchases of Ambac common stock and AAC surplus notes and (v) lower premium receivables and intangible assets from

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VIE liabilities, lower derivative assets caused by rising interest rates and lower premium receivables and intangible assets from the continued runoff of the financial guarantee insurance portfolio.

Total liabilities decreased by approximately $886 from December 31, 2020, to $11,187 as of December 31, 2021, primarily due to lower loss reserves, and the payment of loss and loss expenses, lower VIE and non-VIE long-term debt (from the surplus note exchange transactions and Secured Note Refinancing) and lower derivative liabilities caused by rising interest rates.

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the continued runoff of the financial guarantee insurance portfolio.

Total liabilities decreased by approximately $4,540 from December 31, 2021, to $6,647 as of December 31, 2022, primarily due to reductions in the value of VIEs liabilities of $1,996 based on consistent factors as noted above in assets.

Additional liability declines driven by (i) the significant reduction in gross loss reserves from the Puerto Rico restructuring;

(ii) the impacts of the redemption of secured notes of $1,352 described in Note 1.

Background and Business Description in this Annual Report on Form 10-K located in Part II.

Item 8, (iii) repurchases of AAC surplus notes during 2022 with a carrying value of principal and interest of $461 at December 31, 2021, and (iv) lower derivative liabilities caused by rising interest rates.

As of December 31, 2022, total stockholders’ equity was $1,305, compared with total stockholders’ equity of $1,098 at December 31, 2021.

This decrease was primarily due to a Total Comprehensive Loss during 2021 and a $14 increase to the carrying value of redeemable NCI which is offset directly against retained earnings.

The Comprehensive Loss was primarily driven by the net loss attributable to common stockholders for the year ended December 31, 2021, of $17, unrealized losses on investments of $12 and translation losses on the consolidation of AFG's foreign subsidiaries.of $8.

Investment Portfolio.

This increase was primarily due to a Total Comprehensive Income during 2022 primarily driven by the net

income attributable to common stockholders for the year ended December 31, 2022, of $522, partially offset by unrealized losses on investments of $225 and translation losses on the consolidation of AFG's foreign subsidiaries.of $85.

Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan, Ambac UK and AFG.

5 unchanged sentences

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

Investment Portfolio

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

($ in millions)

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

December 31, 2022

Fixed maturity securities $ 1,281 $ 102 $ — $ 12 $ 1,395

Fixed maturity securities - trading 59 — — — 59

Short-term 303 29 — 175 507

Other investments 552 — — 16 568

Securities pledged as collateral 120 140

Fixed maturity securities pledged as collateral 64 — — — 64

Total investments (1)

$ 2,259 $ 131 $ — $ 203 $ 2,593

December 31, 2021

Fixed maturity securities $ 1,630 $ 72 $ — $ 28 $ 1,730

Fixed maturity securities - trading — — — — —

Short-term 258 32 — 124 414

Other investments 679 — — 11 690

Fixed maturity securities pledged as collateral 120 — — — 120

Total investments (1) $ 2,687 $ 104 $ — $ 164 $ 2,955

(1) Includes investments denominated in non-US dollar currencies with a fair value of £296 ($357) and €39 ($42) as of December 31, 2022 and £341 ($462) and €38 ($43) as of December 31, 2021.

4 unchanged sentences

Item 8 for information about fixed maturity securities and pooled funds by asset class.

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The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at December 31, 2022 and 2021.

3 unchanged sentences

(2) Below investment grade and not rated bonds insured by Ambac represented 19% and 32% of the 2022 and 2021 combined fixed maturity investment portfolios, respectively.

The decrease is primarily due to the impact of the Secured Note Refinancing described in Note 1.

Background and Business Description to the Consolidated Financial Statements in this Annual Report Form 10-K located in Part II.

The decrease is primarily due to the impact of the settlement of insured Puerto Rico bonds described above, under Financial Guarantees in Force.

Premium Receivables.

2 unchanged sentences

Insurance Contracts to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II.

Item 8, the decrease is due to premium

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receipts and adjustments for changes in expected and contractual cash flows on financial guarantee insurance contracts, partially offset by decreases to the allowance for credit losses, accretion of the financial guarantee premium receivable discount and premium receivables on the Specialty P&C business.

Item 8, the decrease is due to premium receipts and adjustments for changes in expected and contractual cash flows on financial guarantee insurance contracts, partially offset by decreases to the

allowance for credit losses, accretion of the financial guarantee premium receivable discount and increases to premium receivables on the Specialty Property and Casualty Insurance business due to increased volume of policy issuances.

Premium receivables by payment currency were as follows:

4 unchanged sentences

Reinsurance Recoverable on Paid and Unpaid Losses.

Ambac has reinsurance in place pursuant to surplus share treaty and facultative agreements.

Ambac has reinsurance in place pursuant to quota share, surplus share treaty and facultative agreements.

To minimize its exposure to losses from reinsurers, Ambac (i) monitors the financial condition of its reinsurers;

4 unchanged sentences

As of December 31, 2022 and 2021, reinsurance recoverable on paid and unpaid losses were $115 and $55, respectively.

The increase was primarily a result of reinsurance recoverables of $30 added in connection with the PWIC transaction, offset by favorable development in financial guarantee insured exposures.

Special Property and Casualty Insurance amounted to $82 and $32 at December 31, 2022 and 2021, respectively.

Legacy Financial Guarantee amounted to $33 and $23 at December 31, 2022 and 2021, respectively.

The increase was primarily a result of the growth of the Special Property and Casualty Insurance business.

Intangible Assets.

Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities, (ii) intangible assets established as part of the acquisition of Xchange on December 31, 2020 and (iii) an indefinite-lived intangible assets established as part of the acquisition of PWIC.

Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities, (ii) intangible assets established as part of the acquisition of Xchange in 2020, (iii) indefinite-lived intangible assets established as part of the acquisition of admitted carriers in both 2021 and 2022, and (iv) intangible assets established as part of the acquisition of All Trans and Capacity Marine in 2022.

Refer to Note 4.

Business Combination to the Consolidated Financial Statements,

in this Annual Report Form 10-K located in Part II.

Item 8 for further information relating to the Xchange acquisition.

Business Combination to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II.

Item 8 for further information relating to the acquisitions of Xchange, All Trans and Capacity Marine.

As of December 31, 2022 and 2021, the net intangible asset was $326 and $362, respectively.

The decline is driven by amortization and translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK), partially offset by the indefinite-lived asset established in 2021.

The decline is driven by amortization and translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK), partially offset by the new assets established in 2022.

Derivative Assets and Liabilities.

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

Derivative assets and liabilities on the balance sheet primarily reflect the portion of the portfolio that is not subject to daily cash variation margin payments.

Derivative assets and

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liabilities on the balance sheet primarily reflect the portion of the portfolio that is not subject to daily cash variation margin payments.

Derivative assets decreased from $76 at December 31, 2021, to $27 as of December 31, 2022.

1 unchanged sentence

The decreases resulted primarily from higher interest rates during the year ended December 31, 2022, with the decline in assets partially offset by lower counterparty credit adjustments.

Loss and Loss Expense Reserves and Subrogation Recoverable.

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

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

Loss and Loss Adjustment Expense Reserves and Subrogation Recoverable.

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

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

Refer to the "Critical Accounting Policies and Estimates" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2.

Basis of Presentation and Significant Accounting Policies and Note 8.

Insurance Contracts, respectively, to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for further information on loss and loss expenses.

The loss and loss expense reserves net of subrogation recoverables and before reinsurance as of December 31, 2021 and 2020 were $(522) and $(397), respectively.

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

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Insurance Contracts, respectively, to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for further information on loss and loss adjustment expenses.

The loss and loss adjustment expense reserves net of subrogation recoverables and before reinsurance as of December 31, 2022 and 2021 were $534 and $(522), respectively.

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

Specialty Property and Casualty Legacy Financial Guarantee

Present Value of Expected

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Revenue Gross Loss

($ in millions)

Balance Sheet Line Item Claims and

Balance Sheet Line Item Gross Loss

Reserves Claims and

Expenses Recoveries (1)

December 31, 2022:

Loss and loss expense reserves $ 1,781 $ (155) $ (56) $ 1,570

Loss and loss adjustment expense reserves $ 90 $ 787 $ (44) $ (28) $ 805

Subrogation recoverable — 5 (276) — (271)

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December 31, 2021:

Loss and loss expense reserves $ 2,060 $ (229) $ (72) $ 1,759

Loss and loss adjustment expense reserves $ 32 $ 1,749 $ (155) $ (56) $ 1,570

Subrogation recoverable — 88 (2,180) — (2,092)

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(1) Present value of future recoveries include R&W subrogation recoveries of $140 and $1,730 at December 31, 2022 and 2021, respectively.

(2) Loss and loss expense reserves at December 31, 2021 includes financial guarantee and specialty P&C of $1,538 and $32, respectively.

Subrogation recoverable includes financial guarantee and specialty P&C of $(2,092) and $—, respectively.

All balances at December 31, 2020 relate to the financial guarantee business

Financial Guarantee:

Legacy Financial Guarantee Insurance.

Ambac has exposure to various bond types issued in the debt capital markets.

Our experience has shown that, for the majority of bond types, we have not experienced significant claims.

The bond types that have experienced significant claims, including through commutations, are residential mortgage-backed securities (“RMBS”), student loan securities and public finance securities.

The bond types that have experienced significant claims, including through commutations, are RMBS, student loan securities and public finance securities.

These bond types represent 91% of our ever-to-date insurance claims recorded with RMBS comprising 63%.

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at December 31, 2021 and 2020:

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

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Present Value of Expected

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Domestic Public Finance (3)

1,215 96 (11) (10) 75

Other 782 23 (12) (8) 3

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Totals $ 6,302 $ 1,837 $ (2,335) $ (56) $ (554)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $784 and $24, respectively, at December 31, 2021 and $739 and $33, respectively at December 31, 2020.

Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses.

(2) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss adjustment expense reserves were $472 and $33, respectively, at December 31, 2022 and $784 and $24, respectively at December 31, 2021.

Ceded loss and loss adjustment expense reserves are included in Reinsurance recoverable on paid and unpaid losses.

(2) Loss reserves are included in the balance sheet as loss and loss adjustment expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

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

Additionally, as a result of the Puerto Rico restructuring and subsequent consolidation of VIE's of AAC insured HTA bonds gross par outstanding was reduced by $410.

The table below reflects the timing of expected financial guarantee claim payments based on deal specific cash flows, excluding expected recoveries.

These deal specific cash flows are based on the expected cash flows of the underlying transactions.

These deal specific cash flows are based on the expected cash flows of the underlying transactions with the majority of these payments expected at or close to the final maturity of the related insurance policy.

The timing of expected claim payments for credits with reserves that were established using our statistical loss reserve method is determined based on the weighted average expected life of the exposure.

Refer to the Loss Reserves section in Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion of our statistical loss reserve method.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further discussion of our statistical loss reserve method.

The timing of these payments may vary significantly from the amounts shown above, especially for credits that are based on our statistical loss reserve method.

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Payments Due by Period

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

While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions, such as COVID-19.

Accordingly, it is possible that our estimated loss reserves, gross of reinsurance, for financial guarantee insurance policies could be understated.

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The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at December 31, 2022, and assumes an inability to execute any commutation transactions with issuers and/or investors.

Such stress scenarios are developed based on management’s view about all possible outcomes relating to losses and recoveries.

Such stress scenarios are developed based on management’s view

about all possible outcomes relating to losses and recoveries.

In arriving at such view, management makes considerable judgments about the possibility of various future events.

Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases.

See “Risk Factors” in Part I, Item 1A of this Form 10-K as well as the descriptions of "Structured Finance Variability," "Public Finance Variability," and "Other Credits, including Ambac UK, Variability," below for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes appearing below.

The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for Ambac, including (without limitation) impairing the ability of AAC to honor its financial obligations, particularly its outstanding debt and preferred stock obligations;

See “Risk Factors” in Part I, Item 1A in this Annual Report on Form 10-K as well as the descriptions of "Structured Finance Variability," "Public Finance Variability," and "Other Credits, including Ambac UK, Variability," below for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes appearing below.

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the initiation of rehabilitation proceedings against AAC;

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

In the case of both first and second-lien exposures, the possible stress case assumes a lower housing

price appreciation projection, which in turn drives higher defaults and severities.

We established a representation and warranty subrogation recovery as further discussed in Note 7.

Insurance Contracts to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Our ability to realize RMBS representation and warranty recoveries is subject to significant uncertainty, including risks inherent in litigation, collectability of such amounts from counterparties (and/or their respective parents and affiliates), delays in realizing such recoveries, including delays in getting to trial due to court closures caused by COVID-19 or other events, intervention by the OCI, which could impede our ability to take actions required to realize such recoveries, and uncertainty inherent in the assumptions used in estimating such recoveries.

Additionally, our R&W actual subrogation recoveries could be significantly lower than our estimate of $1,704, net of reinsurance, as of December 31, 2021, if the sponsors of these transactions:

(i) fail to honor their obligations to repurchase the mortgage loans, (ii) successfully dispute our breach findings or claims for damages, (iii) no longer have the financial means to fully satisfy their obligations under the transaction documents, or (iv) our pursuit of recoveries is otherwise unsuccessful due to any of the factors described in this Form 10-K in Part I, Item 1A Risk Factors - Risks Related to Capital, Liquidity and Markets .

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

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

Student Loans:

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

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

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Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at December 31, 2022, could be approximately $15.

Combined with the absence of any R&W subrogation recoveries, a possible increase in loss reserves for structured finance credits could be approximately $1,729.

A loss of this magnitude may render AAC insolvent.

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

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

Additionally, the

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structured finance portfolio is sensitive to the COVID-19 related forbearances and delinquencies caused by the general economic downturn.

Due to the uncertainties related to the economic effects of the COVID-19 pandemic and other risks associated with structured finance credits, there can be no assurance that losses may not exceed our stress case estimates.

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

Public Finance

public finance portfolio predominantly consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities;

however, the portfolio also includes a wide array of non-municipal types of bonds, including financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests.

public finance portfolio consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities;

however, the portfolio also includes a wide array of non-municipal types of bonds, including transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests, the largest sector of which is U.S.

military housing.

It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends.

Additionally, our loss reserves may be under-estimated because of the continuing effects of COVID-19 pandemic.

The COVID-19 related economic downturn put a strain on municipal issuers, particularly those dependent upon narrow sources of revenues or dedicated taxes to support debt service, such as hotel occupancy taxes, parking revenues, tolls, etc.

While the economy has been in recovery since mid-2020, the lingering impact of the pandemic continues to negatively impact certain of these municipal issuers that are dependent upon narrow sources of revenue.

A further prolonged recovery from the COVID-19 pandemic could put additional stresses on these issuers and result in increased defaults and potential additional losses for Ambac.

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

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

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

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

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These factors could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities and issuers are all now subject to plan support agreements and plans of adjustment or qualifying modifications.

The Eighth Amended POA has been confirmed, and the PRIFA QM and the CCDA QM have been approved.

All are expected to become effective on or before March 15, 2022.

However, uncertainty remains as to (i) whether the effective date will be stayed pending the appeal of the order confirming Eighth Amended POA;

(ii) the result of the pending First Circuit appeal of the order confirming the Eighth Amended POA;

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

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

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

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

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

Losses may exceed current reserves in a material manner due to favorable or unfavorable developments or results with respect to these factors.

Commitments and Contingencies to the Consolidated Financial Statements in Part II, Item 8 and "Financial Guarantees in Force" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 in this Annual Report on Form 10-K for further updates relating to Puerto Rico.

Material additional losses on our public finance credits caused by the aforementioned factors, including the possibility of a protracted recovery related to the COVID-19 crisis would have a material adverse effect on our results of operations and financial condition.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at December 31, 2021, the possible increase in loss reserves could be approximately $355 and there can be no assurance that losses may not exceed our stress case estimates.

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Following the December 6, 2022, consummation of the PRHTA POA all of Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities have now been restructured and AAC's exposures to Puerto Rico has been reduced to $244 of net par outstanding at December 31, 2022.

AAC has further reduced its Puerto Rico exposure since year-end through accelerations and redemptions.

However, some uncertainty remains as it relates to the extent and timing to which exposure management strategies, such as commutation and acceleration, will be executed to further reduce exposure to Puerto Rico, and, to a lesser extent, market conditions such as interest rate movements, credit spread changes on remaining plan consideration supporting AAC-insured Puerto Rico exposure in trusts, such as COFINA bonds and PRHTA '98 CVI instruments.

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

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at December 31, 2022, the possible increase in loss reserves could be approximately $115 and there can be no assurance that losses may not exceed our stress case estimates.

Other Credits, including Ambac UK, Variability

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For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $295 greater than the loss reserves at December 31, 2022.

Additionally, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19.

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

Long-term Debt.

Long-term debt consists of surplus notes issued by AAC, the Sitka AAC Note (which refinanced the LSNI Ambac Note), the Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions (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 Ambac UK debt issued in connection with the 2019 commutation of its exposure with respect to Ballantyne Re plc.

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

($ in millions)

December 31, 2022 2021

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Sitka AAC Note — 1,154

Tier 2 Notes 146 333

Ambac UK Debt 16 15

Total Long-term Debt $ 639 $ 2,230

(1) Includes Junior Surplus Notes as of December 31, 2020.

All Junior Surplus Notes were retired in 2021.

The decrease in long-term debt from December 31, 2020 resulted from the impact of the Secured Note Refinancing and 2021 Surplus Note Exchanges, described further in Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, partially offset by issuances of surplus notes from AFG sales, accretion on the carrying value of surplus notes and Ambac UK debt and paid-in-kind interest on Tier 2 Notes.

Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may opportunistically purchase or sell surplus notes and/or other Ambac issued securities, and may consider opportunities to exchange securities issued by it from time to time (including newly issued securities) for other securities issued by it.

The decrease in long-term debt from December 31, 2021 resulted from repurchases of surplus notes and the impact of the redemption of secured notes in 2022, described further in Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, partially offset by accretion on the carrying value of surplus notes and Ambac UK debt, and paid-in-kind interest on Tier 2 Notes.

Redeemable Noncontrolling Interest .

The increase during 2021 was the result of the remeasurement of the redemption value of the put option provided to the minority owners (noncontrolling interest holders) of Xchange as if it were exercisable on December 31, 2021.

The increase during 2022 was the result the acquisition of All Trans and Capacity Marine partially offset by the remeasurement of the redemption value of the put option provided to the minority owners (noncontrolling interest holders) of Xchange as if it were exercisable on December 31, 2022.

Refer to Note 4.

Business Combination for further information relating to this acquisition.

Business Combination for further information relating to Ambac's acquisitions.

ACCOUNTING STANDARDS

The following accounting standards have been issued, but have not yet been adopted.

We do not expect these accounting standards to have a consequential impact on Ambac's financial statements.

Equity-classified Written Call Options

In May 2021, the FASB issued ASU 2021-04, Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options .

The ASU clarifies and reduces diversity in practice for an issuer's accounting for modifications or exchanges of equity-classified written call options (e.g.

warrants) that remain equity-classified after the modification or exchange.

The ASU requires an issuer to account for the modification or exchange based on the economic substance of the transaction.

For example, if the modification or exchange is related to the issuance of debt or equity, any change in the fair value of the written call option would be accounted for as part of the debt issuance cost in accordance with the debt guidance or equity issuance cost in accordance with the equity guidance, respectively.

The ASU is effective for fiscal years beginning after December 15, 2021, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2022.

Convertible Instruments and Contracts in an Entity's Own Equity

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity .

The ASU i) simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models, and amends certain disclosures, ii) amends and simplifies the derivative scope exception guidance for contracts in an entity's own equity, including share-based compensation, and iii) amends the diluted earnings per share calculations for convertible instruments and contracts in an entity's own equity.

The ASU is effective for fiscal years ending after December 15, 2021, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2022.

Please refer to Note 2.

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

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

STATUTORY BASIS FINANCIAL RESULTS ($ in millions)

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For further information, see Note 9.

Insurance Regulatory Restrictions to the Consolidated

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Financial Statements included in Part II, Item 8 in this Annual Report Form 10-K.

Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report Form 10-K.

Ambac Assurance Corporation

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preferred stock;

and all other liabilities, including insurance claims, $1,175 principal balance of Sitka AAC Notes (refinanced the LSNI Ambac Note as described in Note 1.

Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K) and $333 principal balance of Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC.

The significant drivers to the net decrease in policyholder surplus were statutory net losses of $127 for the year ended December 31, 2021 and contributions to contingency reserves of $17, partially offset by an increase in the fair value of pooled investments of $35.

AAC’s statutory surplus is sensitive to multiple factors, including:

(i) loss reserve development, (ii) payments on surplus notes, if approved by OCI, (iii) on-going interest costs associated with the Sitka AAC Note and Tier 2 Notes, including changes to the interest rates as the Sitka AAC Note is a floating rate obligation, (iv) deterioration in the financial position of AAC subsidiaries that have their obligations guaranteed by AAC, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies or credit derivative contracts at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded, (viii) changes to the fair value of pooled fund and other investments carried at fair value, (ix) settlements of representation and warranty breach claims at amounts that differ from amounts recorded, including failures to collect such amounts, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, and (xi) future changes to prescribed SAP practices by the OCI.

and all other liabilities, including insurance claims, and $146 principal balance of Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC.

The significant drivers to the net decrease in policyholder surplus were surplus note repurchases at a cost of $440, contributions to contingency reserves of $28 and a decrease in the fair value of pooled investments of $16, partially offset by statutory net income of $328 for the year ended December 31, 2022.

Statutory net income for the year ended December 31, 2022 was positively impacted by (i) the R&W litigation settlements at amounts in excess of our carrying value;

(ii) the Puerto Rico restructuring;

and (iii) AFS' repayment of its intercompany loan with AAC that was previously impaired.

AAC's statutory surplus and therefore AFG's ultimate ability to realize residual value and/or dividends from AAC is sensitive to

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multiple factors, including:

(i) loss reserve development, (ii) approval by OCI of payments on surplus notes, (iii) ongoing interest costs associated with surplus notes, (iv) swap gains and losses at AFS, the financial position of which is supported by certain guarantees and financing arrangements from AAC, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded, (viii) changes to the fair value of pooled fund and other investments carried at fair value, (ix) realized gains and losses, including losses arising from other than temporary impairments of investment securities, (x) the ultimate residual value of Ambac UK, which may be impacted by numerous factors including foreign exchange rates, and (xi) future changes to prescribed practices by the OCI.

The significant differences between GAAP and SAP are that under SAP:

• Loss reserves are only established for losses on guaranteed obligations that have experienced a payment default in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights (5.1% as prescribed by OCI).

Under GAAP, in addition to the establishment of loss reserves for defaulted obligations, loss reserves are established (net of GAAP basis unearned premium revenue) for obligations

that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 1.2%.

Under GAAP, in addition to the establishment of loss reserves for defaulted obligations, loss reserves are established (net of GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 3.9%.

• Mandatory contingency reserves are required based upon the type of obligation insured, whereas GAAP does not require such a reserve.

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Everspan Indemnity Insurance Company’s statutory policyholder surplus was $107 at December 31, 2022, as compared to $106 at December 31, 2021.

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The significant drivers to the increase in policyholder surplus for the year ended December 31, 2021 were capital contributions of $92 partially offset by operating expenses and changes in investment in subsidiaries, primarily due to a limitation on the amount of goodwill that may be admitted in accordance with SAP.

The significant drivers to the increase in policyholder surplus for the year ended December 31, 2022, were capital contributions of $16, primarily to support the acquisition of three admitted carriers and the growth of Everspan while maintaining a policyholders surplus in excess of $100, partially offset by a net loss and changes in investment in subsidiaries, primarily due to a limitation on the amount of goodwill that may be admitted in accordance with SAP.

The significant differences between GAAP and SAP are that under SAP:

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Under GAAP, all fixed maturity investments are reported at fair value.

• Wholly owned subsidiaries are not consolidated;

• Majority owned subsidiaries are not consolidated;

rather, the equity basis of accounting is utilized and the carrying values of these investments are subject to admissibility tests.

• The acquisition of PWIC was recorded as an equity method investment, which includes a goodwill component representing the acquisition cost in excess of PWIC's statutory surplus.

Goodwill will be amortized over a period not to exceed ten years.

Under GAAP, the acquisition of PWIC was recorded as an asset acquisition, which requires i) all net assets to initially be recorded at fair value and ii) the acquisition cost in excess of the fair value of net assets to be allocated to the bases of certain types of assets based on their relative fair values, if applicable.

• The acquisition of Providence Washington Insurance Company ("PWIC") and the 21st Century Companies were recorded as equity method investments, which include a goodwill component representing the acquisition cost in excess of the related entity's statutory surplus.

Goodwill is being amortized over ten years.

Under GAAP, the acquisition of the companies were recorded as asset acquisitions, which require i) all net assets to initially be recorded at fair value, and ii) the acquisition cost in excess of the fair value of net assets to be allocated to the bases of certain types of assets based on their relative fair values, if

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Acquired assets include intangible assets with indefinite lives.

Such assets are not amortized but their estimated useful lives are reevaluated each reporting period.

No goodwill is recorded for asset acquisitions.

• Acquisition costs and ceding commissions, other than excess ceding commissions, are expensed or recognized at the time of a transaction.

Under GAAP, acquisition costs and ceding commissions are deferred and recognized over the life of the related transaction.

• Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts.

AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES

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Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were £468 at December 31, 2022, as compared to £444 at December 31, 2021.

At December 31, 2021, the carrying value of cash and investments was £500, a increase from £481 at December 31, 2020.

The increase in shareholders’ funds and cash and investments was primarily due to the continued receipt of premiums and investment income, partially offset by loss expenses, foreign exchange losses within Ambac UK's investment portfolio, operating expense and tax payments.

At December 31, 2022, the carrying value of cash and investments was £508, an increase from £500 at December 31, 2021.

The increase in shareholder funds and cash and investments was primarily due to the continued receipt of premiums and investment income, and from foreign exchange gains within Ambac UK's investment portfolio, partially offset by loss expenses, operating expenses and tax payments.

The significant differences between US GAAP and UK GAAP are that under UK GAAP:

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A loss provision is established in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights.

The discount rate is equal to the lower of the rate of return on invested assets for either the current year or the period covering the current year plus the four previous years, currently at 4.7%.

GAAP, loss reserves are established (net of US GAAP basis unearned premium

revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate.

The discount rate for loss provisions is equal to the lower of the rate of return on invested assets for either the current year or the period covering the current year plus the four previous years, currently at 0%.

The discount rate used for estimated recoveries under subrogation rights is reflective of the credit risk of the counterparty from which subrogation will be received, currently 5.3%.

GAAP, loss reserves are established (net of US GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 3.5%.

• Investments in fixed maturity securities are stated at amortized cost, subject to an other-than-temporary impairment evaluation.

2 unchanged sentences

Under US GAAP, as noted under AAC Statutory Basis Financial Results above, VIE's with certain characteristics are required to be consolidated.

For several VIEs Ambac UK has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under U.S.

For several VIEs Ambac

UK has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under U.S.

• Upfront premiums written are earned on a basis proportionate to the remaining scheduled debt service to the total principal and interest insured.

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Under US GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date.

• Insurance intangibles that arose as a result of the implementation of Fresh Start reporting is not a concept within UK GAAP.

• Insurance intangibles that arose as a result of the implementation of Fresh Start reporting are not a concept within UK GAAP.

Under US GAAP, this insurance intangible asset is amortized as an expense on a level yield basis over the life of the related insurance risks.

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The basis of preparation of this information is significantly different from both US GAAP and UK GAAP.

The calculation of capital resources, regulatory capital requirements and regulatory capital surplus / deficit under Solvency II at December 31, 2021, will be published on Ambac's website during March 2022.

Final annual Solvency II data and Ambac UK's annual Solvency and Financial Condition Report will be published on Ambac's website during April 2022.

Available capital resources under Solvency II were a surplus of £245 at September 30, 2021, the most recently published position, of which £237 are eligible to meet solvency capital requirements.

This is an increase from December 31, 2020, when available capital resources were a surplus of £196 of which £184 were eligible to meet solvency capital requirements.

Eligible capital resources at September 30, 2021 and December 31, 2020, are in comparison to regulatory capital requirements of £247 and £256, respectively.

Therefore, Ambac UK was in a deficit position in terms of compliance with applicable regulatory capital requirements by £10 at September 30, 2021 and was deficient in terms of compliance by £72 at December 31, 2020.

The deficit was reduced as at September 30, 2021, due to the combined impact of (i) the increase in long term interest rates, which resulted in a decrease in technical provision liabilities and hence an increase in eligible own funds and (ii) a decrease in capital requirements for non-life risk due to the maturity and de-risking of certain policies, together with

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56 2021 FORM 10-K |

natural run-off of the insured portfolio in the year.

The regulators are fully aware of the deficiency in capital resources as compared to capital requirements as at September 30, 2021 and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for strengthening the capital position further.

Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £338 at December 31, 2022.

This is an increase from December 31, 2021, when available capital resources were £250 of which £240 were eligible to meet solvency capital requirements.

Eligible capital resources at December 31, 2022 and December 31, 2021, are in comparison to regulatory capital requirements of £213 and £238, respectively.

Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £125 at December 31, 2022 and was in a surplus position by £1 at December 31, 2021.

The surplus increased as of December 31, 2022, due to the combined impact of (i) the increase in long term interest rates, which resulted in a decrease in technical provision liabilities and hence an increase in eligible own funds and (ii) a decrease in capital requirements for non-life risk due to the maturity and de-risking of certain policies, together with natural run-off of the insured portfolio in the year.

Dialogue between Ambac UK management and its regulators remains ongoing with respect to options for strengthening the capital position further.

Final annual Solvency II data and Ambac UK's annual Solvency and Financial Condition Report will be published on Ambac's website in April 2023.

NON-GAAP FINANCIAL MEASURES

($ in millions)

In addition to reporting the Company's financial results under GAAP, the Company currently reports two non-GAAP financial measures:

adjusted earnings and adjusted book value.

The most directly comparable GAAP measures are net income attributable to common stockholders for adjusted earnings and Total Ambac Financial Group, Inc.

In addition to reporting the Company's financial results under GAAP,the Company currently reports three non-GAAP financial measures:

EBITDA, adjusted earnings and adjusted book value.

The most directly comparable GAAP measures are pre-tax net income for EBITDA, net income attributable to

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common stockholders for adjusted earnings and Total Ambac Financial Group, Inc.

stockholders’ equity for adjusted book value.

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

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

Adjusted earnings and adjusted book value are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.

We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community that provides greater transparency and enhanced visibility into the underlying drivers of our businesses on a basis that may not be otherwise apparent on a GAAP basis.

We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis.

These non-GAAP financial measures are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.

Ambac has a significant U.S.

tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements.

As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments;

As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments for both Adjusted Earnings and Adjusted Book Value;

which is subject to change.

The following paragraphs define each non-GAAP financial measure and describe why it is useful.

The following paragraphs define each non-GAAP financial measure.

A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.

EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization of intangible assets.

EBITDA is also adjusted for noncontrolling interests in subsidiaries where Ambac does not own 100%.

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

Year Ended December 31, 2022

Pretax income (loss) (1)

$ 540 $ (6) $ 5 $ (14) $ 525

Interest expense 168 — — — 168

Depreciation 2 — — — 2

Amortization of intangible assets 44 — 3 — 47

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

Earnings before interest, taxes, depreciation and amortization $ 754 $ (6) $ 6 $ (14) $ 740

Year Ended December 31, 2021

Pretax income (loss) (1)

$ 20 $ (8) $ 4 $ (15) $ 2

Interest expense 187 — — — 187

Depreciation 2 — — — 2

Amortization of intangible assets 52 — 3 — 55

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

Earnings before interest, taxes, depreciation and amortization $ 262 $ (8) $ 5 $ (15) $ 245

(1) Pretax income (loss) is prior to the impact of noncontrolling interests.

Adjusted Earnings (Loss).

Adjusted earnings (loss) is defined as net income (loss) attributable to common stockholders, as reported under GAAP, adjusted on an after-tax basis for the following:

• Non-credit impairment fair value (gain) loss on credit derivatives:

Elimination of the non-credit impairment fair value gains (losses) on credit derivatives, which is the amount in excess of the present value of the expected estimated credit losses.

Such fair value adjustments are affected by, and in part fluctuate with changes in market factors such as interest rates and credit spreads, including the market’s perception of Ambac’s credit risk (“Ambac CVA”), and are not expected to result in an economic gain or loss.

These adjustments allow for all financial guarantee contracts to be accounted for consistent with the Financial Services – Insurance Topic of ASC, whether or not they are subject to derivative accounting rules.

This adjustment has become negligible and we will discontinue reporting it beginning in the first quarter of 2022.

• Insurance intangible amortization:

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

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

1 unchanged sentence

($ in millions, except per share data)

Year Ended December 31, $ Amount Per Diluted Share $ Amount Per Diluted Share $ Amount Per Diluted Share

Year Ended December 31,

$ Amount Per Diluted Share (1)

Net income (loss) attributable to common stockholders $ 522 $ 11.31 $ (17) $ (0.61) $ (437) $ (9.47)

4 unchanged sentences

$ 555 $ 12.01 $ 43 $ 0.66 $ (378) $ (8.19)

(1) Adjusted earnings per diluted share is calculated as adjusted earnings less the change in the redemption value of redeemable noncontrolling interest, divided by the GAAP weighted average number of diluted shares outstanding.

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

Adjusted Book Value.

1 unchanged sentence

stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following:

• Non-credit impairment fair value losses on credit derivatives:

Elimination of the non-credit impairment fair value loss on credit derivatives, which is the amount in excess of the present value of the expected estimated

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57 2021 FORM 10-K |

economic credit loss.

GAAP fair values are affected by, and in part fluctuate with, changes in market factors such as interest rates, credit spreads, including Ambac’s CVA that are not expected to result in an economic gain or loss.

These adjustments allow for all financial guarantee contracts to be accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC, whether or not they are subject to derivative accounting rules.

This adjustment has become negligible and we will discontinue reporting it beginning in the first quarter of 2022.

• Insurance intangible asset:

3 unchanged sentences

Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance.

This non-GAAP adjustment presents the economics of UPR and expected

losses for financial guarantee contracts on a consistent basis.

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

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

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

they exceed UPR.

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

10 unchanged sentences

stockholders’ equity $ 1,252 $ 27.85 $ 1,038 $ 22.42

Non-credit impairment fair value losses on credit derivatives — 0.01 — 0.01

Insurance intangible asset (266) (5.91) (320) (6.91)

2 unchanged sentences

Adjusted Book Value $ 1,272 $ 28.29 $ 874 $ 18.88

The decrease in Adjusted Book was primarily attributable to the $10 reduction to retained earnings from the increase to the carrying value of redeemable NCI, the impact on expected future premiums from reinsurance and de-risking transactions partially offset by Adjusted earnings for the year ended December 31, 2021 (excluding earned premium previously included in Adjusted Book Value).

Factors that impact changes to Adjusted Book Value include many of the same factors that impact Adjusted Earnings, including the majority of revenues and expenses, but generally exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net unearned premiums and fees in excess of expected losses adjustment.

The increase in Adjusted Book was primarily attributable to Adjusted earnings for the year ended December 31, 2022 (excluding earned premium previously included in Adjusted Book Value), partially offset by translation losses on the consolidation of AFG's foreign subsidiaries.

unearned premiums and fees in excess of expected losses adjustment.

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

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

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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 7. Management’s Discussion and Analysis