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Item 8. Financial Statements and Supplementary Data

2023-03-01 compared with 2022-02-24 · 1244 added, 1437 removed, 2402 unchanged (53% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Account Firm KPMG LLP , New York, NY , PCAOB ID 185 62

Reports of Independent Registered Public Account Firm KPMG LLP , New York, NY , PCAOB ID 185 60

Consolidated Financial Statements

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Background and Business Description 67

Variable Interest Entities 113

Goodwill and Intangible Assets 112

Basis of Presentation and Significant Accounting Policies 70

Variable Interest Entities 112

Segment Information 83

Long-term Debt 115

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Commitments and Contingencies 124

Intangible Assets 113

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Report of Independent Registered Public Accounting Firm

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedules I, II and IV (collectively, the consolidated financial statements), and our report dated February 24, 2022 expressed an unqualified opinion on those consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I, II and III (collectively, the consolidated financial statements), and our report dated February 28, 2023 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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Report of Independent Registered Public Accounting Firm

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We have audited the accompanying consolidated balance sheets of Ambac Financial Group, Inc.

and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedules I, II and IV (collectively, the consolidated financial statements).

and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and financial statement schedules I, II and III (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with U.S.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be

communicated to the audit committee and that:

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Estimate of loss and loss expense reserves and subrogation recoverable

Estimate of loss and loss adjustment expense reserves and subrogation recoverable

As described in Notes 2 and 8 to the consolidated financial statements, the Company estimates financial guarantee loss and loss expense reserves and subrogation recoverable (loss reserves) on a policy-by-policy basis based upon the present value of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates.

Expected net claim cash outflows represent the present value of expected claim cash outflows, less the present value of expected recovery cash inflows.

For such policies, a loss and loss expense reserves liability is recorded for the present value of expected net claim cash outflows in excess of the related unearned premium revenue.

For such policies, a loss and loss adjustment expense reserves liability is recorded for the present value of expected net claim cash outflows in excess of the related unearned premium revenue.

Expected net recovery cash inflows represent the present value of expected recovery cash inflows, less the present value of expected claim cash outflows.

For such policies, a subrogation recoverable asset is recorded.

As of December 31, 2021, the Company recorded loss and loss expense reserves of $1,538 million and subrogation recoverable of $2,092 million.

We identified the evaluation of loss reserves as a critical audit matter.

As of December 31, 2022, the Company recorded loss and loss adjustment expense reserves of $805 million and subrogation recoverable of $271 million.

We identified the evaluation of loss adjustment reserves as a critical audit matter.

The evaluation encompassed the assessment of the loss reserves methodologies, including those methods used to estimate the following assumptions:

(1) credit worthiness of the issuer of the insured security, (2) the likelihood of possible outcomes regarding the probability of default by the issuer of the insured security, (3) the expected loss severity for each insurance policy, (4) the probability of remediation, settlement and restructuring outcomes, and (5) the probability of successful litigation or related settlement outcomes, as well as the percentage of the breach rates of representations and warranties underlying certain insured residential mortgage backed securities.

The evaluation of the methods and the impact of these assumptions required specialized skills and subjective and complex auditor judgment due to a high level of estimation uncertainty.

The following are the primary procedures we performed to address this critical audit matter.

With the involvement of professionals with specialized industry knowledge and experience, when necessary, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's estimation of loss reserves.

This included controls related to the determination of the sources of data and assumptions and the analysis of the loss reserves and historical trends.

We inquired of internal and external

With the assistance of credit risk and valuation professionals with specialized industry knowledge and experience, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Company's estimation of loss reserves.

This included controls related to the determination of the assumptions and the sources of data and the analysis of the loss reserves.

We involved credit risk professionals with specialized skills and

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legal counsel and read letters received directly from the Company’s internal and external legal counsel regarding the status of litigation underlying certain insurance policies.

We involved credit risk professionals with specialized skills and knowledge, who assisted in assessing the individual issuer ratings and credit classifications for certain policies by evaluating the financial performance of the issuer of the insured security and underlying collateral.

We involved forensics professionals with specialized skills and knowledge, who assisted in inspecting underwriting documentation for certain mortgage loans underlying insured residential mortgage backed securities, which were examined by the Company’s consultants engaged to determine breach rates of representations and warranties.

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knowledge, who assisted in assessing the individual issuer ratings and credit classifications for certain policies by evaluating the financial performance of the issuer of the insured security and underlying collateral.

We also involved valuation professionals with specialized skills and knowledge, who assisted in:

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generally accepted accounting principles,

• evaluating, for certain policies, the sources of data and assumptions used in the calculation of loss reserves by comparing to internal experience and related historical and industry trends

• developing, for certain policies, an independent estimate of the loss reserves and comparing it to the recorded estimate.

• evaluating, for certain policies, the assumptions, including:

the likelihood of possible outcomes regarding the probability of default by the issuer of the insured security;

the expected loss severity for each insurance policy;

and, the probability of remediation, settlement and restructuring outcomes, and the sources of data and assumptions used in the calculation of loss reserves by comparing to the Company’s internal experience and related historical and industry trends.

We have served as the Company’s auditor since 1985.

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AMBAC FINANCIAL GROUP, INC.

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Fixed maturity securities pledged as collateral, at fair value (amortized cost of $ — and $ 15 )

Fixed maturity securities - trading, at fair value 59 —

Short-term investments, at fair value (amortized cost of $ 507 and $ 415 )

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Total investments (net of allowance for credit losses of $ 0 and $ 0 )

Cash and cash equivalents 17 20

Restricted cash 5 13

Cash and cash equivalents (including $ 14 and $ 5 of restricted cash)

Premium receivables (net of allowance for credit losses of $ 5 and $ 9 )

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Deferred ceded premium 124 90

Deferred acquisition costs 3 —

Subrogation recoverable 271 2,092

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Loans, at fair value 1,829 2,718

Derivative assets 38 41

Other assets 2 2

Derivative and other assets 241 40

Total assets $ 7,973 $ 12,303

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Unearned premiums $ 372 $ 395

Loss and loss expense reserves 1,570 1,759

Loss and loss adjustment expense reserves 805 1,570

Ceded premiums payable 39 33

Deferred program fees and reinsurance commissions 5 —

Long-term debt 639 2,230

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Derivative liabilities 1,048 1,940

Other liabilities 5 —

Total liabilities 6,647 11,187

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Additional paid-in capital 274 257

Accumulated other comprehensive income 58 79

Accumulated other comprehensive income (loss) ( 253 ) 58

Retained earnings 1,245 726

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AMBAC FINANCIAL GROUP, INC.

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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 27 3 134

Net realized gains on extinguishment of debt 81 33 —

Income (loss) on variable interest entities 21 7 5

Total revenues 282 156 496

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

Other income 10 1 3

Litigation recoveries 126 — —

Total revenues and other income 505 282 156

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

Total expenses ( 20 ) 281 596

Pre-tax income (loss) 2 ( 440 ) ( 183 )

Pretax income (loss) 525 2 ( 440 )

Provision (benefit) for income taxes 2 18 ( 3 )

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

gain on purchase of auction market preferred shares 1 — —

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

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Unrealized gains (losses) on securities, net of income tax provision (benefit) of $( 6 ), $( 2 ) and $ 1

( 225 ) ( 12 ) 15

Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $ — , $ — and $ —

( 85 ) ( 8 ) 23

Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $ — , $ —

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Total other comprehensive income (loss), net of income tax ( 310 ) ( 21 ) 37

Total comprehensive income (loss) ( 38 ) ( 400 ) ( 125 )

comprehensive (loss) gain attributable to the noncontrolling interest:

Net gain (loss) ( 1 ) — —

Total comprehensive income (loss), net of income tax 212 ( 38 ) ( 400 )

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

gain on purchase of auction market preferred shares 1 — —

Total comprehensive income (loss) attributable to common stockholders $ 212 $ ( 38 ) $ ( 400 )

Net income (loss) per share attributable to common stockholders:

Net income (loss) per shared attributable to common stockholders

Basic $ 11.48 $ ( 0.61 ) $ ( 9.47 )

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AMBAC FINANCIAL GROUP, INC.

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Comprehensive

Income Preferred

Income (Loss) Preferred

Stock Additional Paid-in

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Total comprehensive income (loss) ( 400 ) ( 437 ) 37 — — — — —

Adjustment to initially apply ASU 2016-13 ( 4 ) ( 4 ) — — — — — —

Stock-based compensation 11 — — — — 11 — —

Cost of shares (acquired) issued under equity plan ( 3 ) ( 2 ) — — — — ( 1 ) —

Re-issuance of Ambac Assurance auction market preferred shares 19 — — — — — — 19

Balance at December 31, 2020 $ 1,140 $ 759 $ 79 $ — $ — $ 242 $ ( 1 ) $ 60

Total comprehensive income (loss) ( 38 ) ( 17 ) ( 21 ) — — — — —

Adjustment to initially apply ASU 2016-13 ( 4 ) ( 4 ) — — — — — —

Stock-based compensation 14 — — — — 14 — —

Cost of shares (acquired) issued under equity plan ( 6 ) ( 4 ) — — — — ( 2 ) —

Changes to redeemable noncontrolling interest ( 12 ) ( 12 ) — — — — — —

Balance at December 31, 2021 $ 1,098 $ 726 $ 58 $ — $ — $ 257 $ ( 3 ) $ 60

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Cost of shares (acquired) issued under equity plan ( 4 ) ( 5 ) — — — — 2 —

Cost of shares repurchased ( 14 ) — — — — — ( 14 ) —

Changes to Redeemable noncontrolling interest 3 3 — — — — — —

Sale of noncontrolling interest in subsidiary 2 — — — — — — 2

Purchase of Ambac Assurance auction market preferred shares ( 8 ) 1 — — — — — ( 9 )

Balance at December 31, 2022 $ 1,305 $ 1,245 $ ( 253 ) $ — $ — $ 274 $ ( 15 ) $ 53

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AMBAC FINANCIAL GROUP, INC.

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Cash flows from operating activities:

Net income (loss) attributable to common stockholders $ ( 17 ) $ ( 437 ) $ ( 216 )

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

Redeemable noncontrolling interest ( 1 ) ( 1 ) —

Net income (loss) ( 16 ) ( 437 ) ( 216 )

Repurchase of auction market preferred shares 1 — —

Net income 522 ( 16 ) ( 437 )

Adjustments to reconcile net income to net cash used in operating activities:

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Share-based compensation 17 14 11

Deferred income taxes 6 ( 9 ) 1

Current income taxes ( 4 ) 17 35

Unearned premiums, net ( 58 ) ( 82 ) ( 48 )

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Amortization of intangible assets 47 55 57

Net realized investment gains ( 7 ) ( 22 ) ( 81 )

Net investment gains (losses), including impairments ( 31 ) ( 7 ) ( 22 )

(Gain) loss on extinguishment of debt ( 81 ) ( 33 ) —

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Other, net ( 152 ) ( 33 ) 67

Net cash used in operating activities ( 131 ) ( 175 ) ( 311 )

Net cash provided by (used in) operating activities 1,335 ( 131 ) ( 175 )

Cash flows from investing activities:

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Proceeds from paydowns of consolidated VIE assets 504 171 178

Acquisition of Xchange, net of cash acquired — ( 74 ) —

Acquisitions, net of cash acquired ( 18 ) — ( 74 )

Other, net 9 ( 5 ) 1

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Cash flows from financing activities:

Proceeds from issuance of Ambac UK Debt — — 12

Proceeds from issuance of Sitka AAC Note — 1,163 —

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Payments for debt issuance costs — ( 12 ) —

Issuance of auction market preferred shares of Ambac Assurance — — 19

Payments for purchases of common stock ( 14 ) — —

Payments for purchase of surplus notes ( 191 ) — —

Payments for redemption of Sitka AAC Note ( 1,210 ) — —

Payments for redemption of Tier 2 Notes ( 143 ) — —

Payments for auction market preferred shares ( 8 ) — —

Tax payments related to shares withheld for share-based compensation plans ( 4 ) ( 6 ) ( 3 )

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Ambac's business operations include:

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

• Specialty Property & Casualty Program Insurance ("SPCP") — Currently includes five admitted carriers (Everspan Insurance Company, Providence Washington Insurance Company, 21st Century Indemnity Insurance Company, 21st Century Pacific Insurance Company and 21st Century Auto Insurance Company of New Jersey) and an excess and surplus lines (“E&S” or “nonadmitted”) insurer Everspan Indemnity Insurance Company (collectively, “Everspan”).

The 21st Century companies were acquired in 2022.

Everspan carriers that are currently part of the intercompany pooling agreement (Everspan Indemnity Insurance Company ("Everspan Indemnity") and Everspan Insurance Company) received an AM Best rating of 'A-' (Excellent) in February 2021.

Everspan launched its first insurance program in May 2021.

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

Refer to Note 3.

Business Combination for further information relating to this acquisition.

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

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

• Legacy Financial Guarantee Insurance — Ambac's financial guarantee business includes the activities of Ambac Assurance Corporation ("AAC") and its wholly owned subsidiaries, including Ambac Assurance UK Limited (“Ambac UK”) and Ambac Financial Services LLC ("AFS").

Both AAC and Ambac UK have financial guarantee insurance portfolios that have been in runoff since 2008.

AFS uses derivatives to hedge interest rate risk in AAC's insurance and investment portfolios.

• Specialty Property and Casualty Insurance — Ambac's Specialty Property and Casualty Insurance program business includes five admitted carriers and an excess and surplus lines (“E&S” or “nonadmitted”) insurer (collectively, “Everspan”).

Three of the five admitted carrier were acquired in 2022.

Everspan carriers have an AM Best rating of 'A-' (Excellent).

• Insurance Distribution — Ambac's specialty property and casualty ("P&C") insurance distribution business, which could include Managing General Agents and Underwriters (collectively "MGA/Us"), insurance wholesalers, and other distribution businesses, currently includes (i) Xchange Benefits, LLC (“Xchange”), a P&C MGA/U specializing in accident and health products, (ii) All Trans Risk Solutions, LLC ("All Trans"), a full service managing general underwriter specializing in commercial automobile insurance for specific "for-hire" auto classes, and (iii) Capacity Marine Corporation ("Capacity Marine"), a wholesale retail brokerage and reinsurance intermediary specializing in marine and international risk.

Both All Trans and Capacity Marine Corporation were acquired in November 2022, refer to Note 4.

Business Combination for further information relating to these acquisitions.

Beginning in 2022, the Company began reporting these three business operations as segments;

Segment Information for further information.

Limitations on Voting and Transfer of Common Stock

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Article XII contains substantial restrictions on the ability to transfer AFG’s common stock.

In order to preserve certain tax benefits, subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons shall become a holder of 5 % or more of the Company’s common stock or (ii) the percentage stock ownership interest in AFG of any holder of 5 % or more of the Company’s common stock shall be increased (a “Prohibited Transfer”).

In order to preserve certain tax benefits, subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons shall become a holder of 5 % or more of AFG’s common stock or (ii) the percentage stock ownership interest in AFG of any holder of 5 % or more of AFG’s common stock shall be increased (a “Prohibited Transfer”).

These restrictions shall not apply to an attempted transfer if the transferor or the transferee obtains the written approval of AFG’s Board of Directors to such transfer.

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Strategies to Enhance Shareholder Value

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

Specialty P&C Insurance Program Platform strategic priorities include:

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

• Building a leading federation of specialty MGA/U partners through additional acquisitions and de novo builds,

The Company's primary goal is to maximize long-term shareholder value through the execution of key strategies for its (i) Specialty Property and Casualty Insurance and Insurance Distribution businesses and (ii) Legacy Financial Guarantee Insurance.

Specialty Property and Casualty Insurance and Insurance Distribution strategic priorities include:

• Growing a Specialty Property and Casualty Insurance business which generates underwriting profits and an attractive return on capital from a diversified portfolio of

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(Dollar Amounts in Millions, Except Share Amounts)

supported by a centralized business services unit including core technology solutions.

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

Financial Guarantee Insurance companies’ strategic priorities include:

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

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

commercial and personal liability risks accessed through program administrators.

• Building an Insurance Distribution business based on deep domain knowledge in specialty and niche classes of risk which generate attractive margins at scale.

This will be achieved through acquisitions, new business “de-novo” formation and incubation, and product expansion supported by a centralized technology led shared services offering.

• Making opportunistic investments that are strategic to both the Specialty Property and Casualty Insurance and Insurance Distribution businesses.

Legacy Financial Guarantee Insurance strategic priorities include:

• Actively managing, de-risking and mitigating insured portfolio risk, and pursuing recovery of previously paid losses.

• Improving operating efficiency and optimizing our asset and liability profile.

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

The execution of Ambac’s strategy to increase the value of its investment in AAC is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC;

as well as the Stipulation and Order among the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”), AFG and AAC that became effective on February 12, 2018, as amended (the “Stipulation and Order”);

and the indenture for the Tier 2 Notes (as defined below), each of which requires OCI and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of AAC.

• Exploring strategic options to further maximize value for AFG.

The execution of Ambac’s strategy to increase the value of its investment in AAC is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010, as amended (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC, as well as the Stipulation and Order among the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”), AFG and AAC that became effective on February 12, 2018, as amended (the “Stipulation and Order”), each of which requires OCI and, under certain circumstances, holders of surplus notes, to approve certain actions taken by or in respect of AAC.

In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of AFG.

Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of AAC’s creditworthiness, the structure of the underlying risk and associated policy as well as other counterparty specific factors.

AAC's ability to commute policies or purchase certain investments may also be limited by available liquidity.

The Segregated Account and the Rehabilitation Exit Transactions

In March 2010, AAC established a Segregated Account pursuant to Wisc.

§611.24 (2) (the “Segregated Account”) to segregate certain segments of AAC’s liabilities, and the Wisconsin Insurance Commissioner, acting as rehabilitator (the "Rehabilitator") commenced rehabilitation proceedings in the Dane County, Wisconsin Circuit Court (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account.

On October 8, 2010, OCI filed a plan of rehabilitation for the Segregated Account (the “Segregated Account Rehabilitation Plan”) in the Rehabilitation Court, which was confirmed on January 24, 2011.

On June 11, 2014, the Rehabilitation Court approved amendments to the Segregated Account Rehabilitation Plan and the Segregated Account Rehabilitation Plan, as amended, became effective on

June 12, 2014.

Policy obligations not allocated to the Segregated Account remained in the General Account of AAC, and such policies in the General Account were not subject to and, therefore, were not directly impacted by the Segregated Account Rehabilitation Plan.

On February 12, 2018, the rehabilitation of the Segregated Account was concluded pursuant to an amendment to the Segregated Account Rehabilitation Plan (the "Second Amended Plan of Rehabilitation").

The conclusion of the rehabilitation followed the successful completion of Ambac's surplus note exchange offers and consent solicitation, which, together with the satisfaction of all conditions precedent to the effectiveness of the Second Amended Plan of Rehabilitation, including the discharge of all unpaid policy claims of the Segregated Account, including accretion amounts thereon ("Deferred Amounts"), completed the restructuring transactions (the "Rehabilitation Exit Transactions").

In connection with the discharge of all unpaid policy claims, AAC issued the secured notes and the Tier 2 notes.

Long-term Debt for additional information regarding the secured notes and Tier 2 Notes.

Bank Settlement Agreement

As part of the Rehabilitation Exit Transactions, AFG and AAC received sufficient consents from holders of surplus notes for a waiver and amendment (the "BSA Waiver and Amendment") of the Settlement Agreement.

After giving effect to the BSA Waiver and Amendment, the Settlement Agreement continues to limit certain activities of AAC and its subsidiaries, such as issuing indebtedness;

The Settlement Agreement limits certain activities of AAC and its subsidiaries, such as issuing indebtedness;

engaging in mergers and similar transactions;

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The Settlement Agreement includes certain allowances with respect to these activities and generally requires the approval of OCI and, in some cases, holders of surplus notes issued pursuant to the Settlement Agreement, for consents, waivers or amendments.

Stipulation and Order

Upon consummation of the Rehabilitation Exit Transactions, the Stipulation and Order became effective.

The Stipulation and Order includes affirmative covenants, as well as restrictions on certain business activities and transactions, of AFG and AAC.

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OCI reserved the right to modify or terminate the Stipulation and Order in a manner consistent with the interests of policyholders, creditors and the public generally.

2021 Surplus Note Exchanges

On January 19, 2021, AAC entered into a purchase agreement (the “Purchase Agreement”) with AFG and certain funds or accounts (the “Note Holders”), pursuant to which (i) the Note Holders agreed to sell to AAC all of the individual beneficial interests (the “Interests”) in the 5.1 % senior notes due August 28, 2039 (the “Corolla Notes”), issued by the Corolla Trust, a Delaware statutory trust formed by AFG in 2014, (see Note 11.

Variable Interest Entities for a discussion of the establishment

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

of the Corolla Trust) (ii) AFG agreed to sell to AAC the owner trust certificate for the Corolla Trust (the “Corolla Certificate”), which constituted all of the equity interests in the Corolla Trust, and (iii) AAC agreed to exchange the Interests and the Corolla Certificate for AAC’s surplus notes (collectively, the “Corolla Note Exchange”).

The execution of Ambac’s strategy to increase the value of its investment in AAC may also be affected by a new capital framework being developed by OCI ("OCI's Runoff Capital Framework") to assist OCI with making decisions related to capital and liquidity management at AAC.

OCI's Runoff Capital Framework is not yet complete and therefore we are not able to predict the results of such and what it may mean for our Legacy Financial Guarantee strategy, particularly as it relates to deleveraging AAC and distributing capital to AFG.

AAC's ability to commute policies or purchase certain investments may also be limited by available liquidity.

Surplus Note Exchanges and Repurchases

Variable Interest Entities for a discussion of the establishment of the Corolla Trust), (ii) AFG agreed to sell to AAC the owner trust certificate for the Corolla Trust (the “Corolla Certificate”), which constituted all of the equity interests in the Corolla Trust, and (iii) AAC agreed to exchange the Interests and the Corolla Certificate for AAC’s surplus notes (collectively, the “Corolla Note Exchange”).

The Note Holders held 100 % of the outstanding Corolla Notes.

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In February 2021, AAC entered into a purchase agreement pursuant to which the holder of $ 15 principal amount of 5.1 % junior surplus notes issued by AAC agreed to sell such notes to AAC in exchange for surplus notes (the "JSN Exchange").

Pursuant to the purchase agreement, each $ 1.00 principal amount of the junior surplus notes (and the associated amount of accrued and unpaid interest thereon) was exchanged for $ 0.8581 principal amount of surplus notes (and the associated amount of accrued and unpaid interest thereon).

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

accrued and unpaid interest thereon).

The closing of the JSN Exchange occurred on February 11, 2021, when AAC issued approximately $ 13 aggregate principal amount of surplus notes.

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In addition, the Company recorded a gain of $ 4 for the year ended December 31, 2021, from the exchange of the Corolla Certificate held by AFG above its carrying value, which is reported within Net realized investment gains (losses) in the Consolidated Statements of Total Comprehensive Income (Loss).

During 2022, AAC repurchased $ 266 current par of surplus notes from third party holders below the carrying value of the surplus notes including accrued interest, resulting in a gain of $ 134 which is reported within Net realized gains (losses) on extinguishment of debt in the Consolidated Statements of Total Comprehensive Income (Loss) for the year ended December 31, 2022.

In addition, in November 2022, AAC purchased all of the remaining surplus notes received by AFG following execution of the Corolla Trust Purchase Agreement described above.

AAC's repurchase of surplus notes from AFG had no impact on the consolidated financial statements of the Company.

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

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

Bankruptcy laws.

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

Secured Note Refinancing

On July 6, 2021, a newly formed variable interest entity and wholly-owned subsidiary of AFG, Sitka Holdings, LLC (“Sitka”), issued $ 1,175 par amount of LIBOR plus 4.5 % senior secured notes due 2026 (the “Sitka Senior Secured Notes”).

In connection with the issuance and sale of the Sitka Senior

Secured Notes, AAC issued a secured note to Sitka in the same amount and with the same interest rate and maturity date as the Sitka Senior Secured Notes (the "Sitka AAC Note").

The proceeds from this offering of $ 1,163 were used to fund a portion of the full redemption of the Ambac LSNI Secured Notes due 2023 (the “LSNI Secured Notes”) and the secured note issued by AAC concurrently with the issuance of the LSNI Secured Notes (the "LSNI Ambac Note").

In connection with the issuance and sale of the Sitka Senior Secured Notes, AAC issued a secured note to Sitka in the same amount and with the same interest rate and maturity date as the Sitka Senior Secured Notes (the "Sitka AAC Note").

The proceeds from this offering of $ 1,163 were used to fund a

portion of the full redemption of the Ambac LSNI Secured Notes due 2023 (the “LSNI Secured Notes”) and the secured note issued by AAC concurrently with the issuance of the LSNI Secured Notes (the "LSNI Ambac Note").

The remaining balance of the LSNI Secured Notes were redeemed utilizing other available temporary sources of liquidity.

Ambac does not consolidate Sitka since it does not have a variable interest in the trust.

Accordingly, the Sitka AAC Note is reported within Long-term debt on the Consolidated Balance Sheet.

Ambac did not consolidate Sitka since it does not have a variable interest in the trust.

Accordingly, the Sitka AAC Note was reported within Long-term debt on the Consolidated Balance Sheet.

The Sitka AAC Note and the Sitka Senior Secured Notes were fully redeemed with the proceeds (net of reinsurance) of the BOA Settlement Payment from the BOA Parties (as such terms are defined below).

Settlement of RMBS Litigations and Redemption of Secured Notes:

Settlement of RMBS Litigations:

In October 2022, AAC entered into a Settlement Agreement and Release (the “BOA Settlement Agreement”) with Bank of America Corporation and certain affiliates thereof (together, the “BOA Parties”) pursuant to which the BOA Parties paid AAC the sum of $ 1,840 (the “BOA Settlement Payment”) following the dismissal of AAC’s lawsuits against the BOA Parties concerning certain residential mortgage-backed securities (“RMBS”) trusts, and the withdrawal by AAC of its objections, including any pending appeals, concerning the settlements that were the subject of certain trust instructional proceedings.

The BOA Settlement Payment received in October 2022 significantly reduced the subrogation recoverable asset on the Consolidated Balance Sheet.

In exchange for the BOA Settlement Payment, AAC, on its own behalf and on behalf of its affiliates, agreed to release the BOA Parties and related parties (the “Released Parties”) from claims asserted or which could have been asserted in AAC’s pending litigations against the BOA Parties as well as claims that AAC and its affiliates ever had, may currently have or may have in the future against the Released Parties, subject to certain limited exceptions.

The BOA Settlement Agreement also requires AAC to dismiss other pending claims against the Released Parties, and to generally refrain from, and in certain situations hold the Released Parties harmless with respect to, certain actions taken by AAC with respect to RMBS trusts created prior to the date of the BOA Settlement Agreement involving the Released Parties.

The BOA Settlement Payment included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties.

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

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

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

(“Nomura”) to settle its litigation against Nomura concerning certain RMBS trusts (the “Trusts”).

Pursuant to the Nomura Settlement Agreement, Nomura made a cash payment to AAC of $ 140 (the "Nomura Settlement Payment"), and AAC and Nomura agreed to release

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each other and their respective affiliates and related persons from any claims relating to the Trusts, the financial guaranty policies issued by AAC in connection with Trusts (other than AAC’s obligations to pay insurance claims under such policies), the securities related to the Trusts, and the mortgage loans related to the Trusts.

The Nomura Settlement Payment received in January 2023 will further reduce the subrogation recoverable asset on the Consolidated Balance Sheet.

Redemption of Notes:

During 2022 and 2023, AAC wholly redeemed its secured debt, in accordance with the terms of such debt, utilizing the BOA Settlement Payment, the Nomura Settlement Payment and other resources as follows:

• Effective October 29, 2022, AAC wholly redeemed the Sitka AAC Note from the BOA Settlement Payment, for $ 1,218 (a price equal to 103 % of the principal amount plus accrued and unpaid interest) and Sitka wholly redeemed the Sitka Senior Secured Notes for the same amount.

Ambac recorded a loss of $ 53 reported in Net realized gains (losses) on extinguishment of debt in the Consolidated Statements of Total Comprehensive Income (Loss) for difference between the carrying value of the Sitka AAC Note and the redemption amount paid, excluding accrued interest.

• Effective October 29, 2022, AAC applied Net Proceeds (as defined below) of approximately $ 213 from the BOA Settlement Payment to partially redeem Tier 2 Notes plus accrued and unpaid interest as of the date of redemption.

The Tier 2 Notes were secured by proceeds from RMBS litigations net of reinsurance (“Net Proceeds”) in excess of $ 1,600 and were subject to mandatory redemption from Net Proceeds in excess of $ 1,600 .

• Effective January 15, 2023, AAC applied the Net Proceeds of $ 140 from the Nomura Settlement Payment plus approximately $ 6 from other sources to fully redeem the remaining Tier 2 Notes plus accrued and unpaid interest in the amount of approximately $ 146 as of the date of redemption.

Long-term Debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for the year ended December 31, 2022, for a description of Sitka, the Sitka AAC Note, the Sitka Senior Secured Notes and the Tier 2 Notes.

AAC also invested a portion of its assets in the Sitka Senior Secured Notes, reported as Fixed maturity securities - available-for-sale on the Consolidated Balance Sheet and recorded a realized investment gain of $ 5 in the Consolidated Statements of Total Comprehensive Income (Loss) on the redemption date.

Impact to the Consolidated Statement of Comprehensive Income (Loss):

The total gain recognized in net income attributable to common stockholders related to entering into the BOA Settlement Agreement and the Nomura Settlement Agreement, including the redemption of the Sitka AAC Note following the BOA Settlement, was as follows:

Quarter Fourth

Losses and loss benefit (1)

$ 319 $ 43 $ 362

Litigation recoveries — 126 126

Net realized gains (losses) on extinguishment of debt — ( 53 ) ( 53 )

Net investment gains (losses), including impairments — 5 5

Impact to net income attributable to common stockholders $ 319 $ 121 $ 440

(1) Full year 2022 losses and loss benefit relating to R&W recoveries were $ 123 .

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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AFG Unconsolidated Financial Information

Financial information of AFG is presented in Schedule II to this Form 10-K as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019.

Financial information of AFG is presented in Schedule II in this Annual Report on Form 10-K as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020.

Investments in subsidiaries are accounted for using the equity method of accounting in Schedule II.

Measurement of Credit Losses on Financial Instruments (CECL)

On January 1, 2020 Ambac adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, subsequently amended by ASU 2018-19 , Codification Improvements to Topic 326, Financial Instruments - Credit Losses;

ASU 2019-04 , Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ;

ASU 2019-05, Financial Instruments—Credit Losses (Topic 326):

Targeted Transition Relief ;

and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (collectively the Current Expected Credit Loss standard or "CECL").

The CECL standard affects how reporting entities measure credit losses for financial assets that are not accounted for at fair value through net income.

For Ambac, these financial assets include available-for-sale debt securities and amortized cost assets, specifically premium receivables, reinsurance recoverables and loans.

Ambac measures credit losses on financial assets that are not accounted for at fair value through net income in accordance with the Current Expected Credit Loss standard or "CECL".

The CECL impact on available-for-sale debt securities is discussed in the Investments sub-section below.

The CECL impact on amortized cost assets is addressed in the Premium, Reinsurance Recoverables and Loan sub-sections below.

These amortized cost assets reflect management's current estimate of all expected lifetime credit losses.

The estimate of expected lifetime credit losses considers historical information, current information, as well as reasonable and supportable forecasts.

Expected lifetime credit losses for amortized cost assets are recorded as an allowance for credit losses, with subsequent increases or decreases in the allowance reflected in net income each period.

CECL does not apply to subrogation recoveries of previously paid and unpaid losses on insurance contracts accounted for under ASC 944 nor does it apply to equity method investments accounted for under ASC 323.

• For available-for-sale debt securities, credit losses under CECL are measured similarly to other-than-temporary impairments under prior GAAP.

The updated guidance was applied prospectively.

• For financial instruments measured at amortized cost, CECL replaces the "incurred loss" model, which generally delayed recognition of the full amount of credit losses until the loss was probable of occurring, with an "expected loss" model, which reflects an entity's current estimate of all expected lifetime credit losses.

The estimate of expected lifetime credit losses should consider historical information, current information, as well as reasonable and supportable forecasts.

Expected lifetime credit losses for amortized cost assets will be recorded as an allowance for credit losses, with subsequent increases or decreases in the allowance reflected in net income each period.

The updated guidance was applied by a cumulative effect adjustment to the opening balance of retained earnings at January 1, 2020.

This adjustment was not material to retained earnings

or any individual balance sheet line item.

Refer to the discussion below for each asset type.

As a result of adopting CECL, management revised its policies and procedures around the credit impairment evaluation process.

CECL also introduced new disclosures related to the credit impairment process, including certain accounting policy elections that Ambac made under the new standard.

The Investments - Debt Securities Topic of the ASC requires that all debt instruments be classified in Ambac’s Consolidated Balance Sheets according to their purpose and, depending on that classification, be carried at either cost or fair market value.

Ambac’s non-VIE debt investment portfolio is accounted for on a trade-date basis and consists primarily of investments in fixed maturity securities that are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC.

Ambac’s non-VIE debt investment portfolio is accounted for on a trade-date basis and consists primarily of:

• Investments in fixed maturity securities are either classified as available-for-sale or trading as defined by the Investments - Debt Securities Topic of the ASC.

Available-for-sale debt securities are reported in the financial statements at fair value with unrealized gains and losses, net of deferred taxes, reflected in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity and computed using amortized cost as the basis.

For purposes of computing amortized cost, premiums and discounts are accounted for using the effective interest method over a term of the security.

For structured debt securities with a large underlying pool of homogenous loans, such as mortgage-backed and asset-backed securities, premiums and discounts are adjusted for the effects of actual and anticipated prepayments.

For purposes of computing amortized cost, premiums and discounts are accounted for using the effective interest method over the term of the security.

For structured debt securities with a large underlying pool of homogenous loans, such as

mortgage-backed and asset-backed securities, premiums and discounts are adjusted for the effects of actual and anticipated prepayments.

For other fixed maturity securities, such as corporate and municipal bonds, discounts are amortized or accreted over the remaining term of the securities and premiums are amortized to the earliest call date.

Ambac’s non-VIE investment portfolio also includes equity interests in pooled investment funds which are accounted for in accordance with the Investments - Equity Securities Topic of the ASC and reported as Other investments on the Consolidated Balance Sheet with income reported through Net investment income on the Statement of Total Comprehensive Income (Loss).

Investments in fixed maturity securities classified at trading are reported in the financial statements at fair value with unrealized gains and losses included in Net investment income on the Statement of Total Comprehensive Income (Loss).

• Equity interests in pooled investment funds which are accounted for in accordance with the Investments - Equity Securities Topic of the ASC and reported as Other investments on the Consolidated Balance Sheet with income reported through Net investment income on the Statement of Total Comprehensive Income (Loss).

Equity interests in the form of common stock or in-substance common stock are classified as trading securities and reported at fair value while limited partner interests in such funds are reported using the equity method.

• Preferred equity investments that do not have readily determinable fair values and are carried at cost, less any impairments as permitted under the Investments — Equity Securities Topic of the ASC.

VIE investments in fixed maturity securities are carried at fair value as they are classified as either available-for-sale or trading as defined by the Investments — Debt Securities Topic of the ASC, or accounted for under the fair value option election.

For additional information about VIE investments, including fair value by asset-type, see Note 12.

Variable Interest Entities .

Fair value is based primarily on quotes obtained from independent market sources.

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Fair Value Measurements for further description of the methodologies used to determine the fair value of investments, including model inputs and assumptions where applicable.

Ambac has a formal credit impairment review process for fixed maturity available-for-sale securities in its investment portfolio.

Ambac conducts a review each quarter to identify and evaluate investments that have indications of impairment in accordance with the Investments - Debt Securities Topic of the ASC.

Under CECL, factors considered to identify and assess securities for other than temporary impairment included:

(i) fair values that have declined by 20 % or more below amortized cost;

(ii) recent downgrades by rating agencies;

(iii) the financial condition of the issuer and financial guarantor, as applicable,

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(Dollar Amounts in Millions, Except Share Amounts)

VIE investments in fixed maturity securities are carried at fair value as they are either considered as available for sale securities or under the fair value option election.

For additional information about VIE investments, including fair value by asset-type, see Note 11.

Variable Interest Entities .

Ambac has a formal credit impairment review process for fixed maturity available-for-sale securities in its investment portfolio.

Ambac conducts a review each quarter to identify and evaluate investments that have indications of impairment in accordance with the Investments - Debt Securities Topic of the ASC.

• Prior to the adoption of CECL, factors considered to identify and assess securities for other than temporary impairment included:

(i) fair values that have declined by 20% or more below amortized cost;

(ii) market values that have declined by 5% or more but less than 20% below amortized cost for a continuous period of at least six months;

(iii) recent downgrades by rating agencies;

(iv) the financial condition of the issuer and financial guarantor, as applicable, and an analysis of projected defaults on the underlying collateral;

(v) whether scheduled interest payments are past due;

(vi) whether Ambac has the intent to sell the security;

and (vii) whether it is more likely than not that Ambac will be required to sell a security before the anticipated recovery of its amortized cost basis.

If we believed a decline in the fair value of a particular investment is not credit-related, we recorded the decline as an unrealized loss net of tax in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity on our Consolidated Balance Sheets.

If it was determined that a credit impairment existed, the credit impairment loss was recognized in earnings, and the other-than-temporary amount related to all other factors was recognized in other comprehensive income.

For fixed maturity securities that had credit impairments in a period, the previous amortized cost of the security less the amount of the credit impairment recorded through earnings became the investment’s new amortized cost basis.

Ambac accreted the new amortized cost basis to par or to the estimated future cash flows to be recovered over the expected remaining life of the security.

• Under CECL, credit losses are evaluated and measured similarly, however the recognition of credit impairment losses for available-for-sale debt securities are recorded as an allowance for credit losses with an offsetting charge to net income, rather than as a direct write-down of the security as was required under prior GAAP.

As a result, improvements to estimated credit losses for available-for-sale debt securities are recognized immediately in net income rather than as interest income over time.

Furthermore, as required under CECL, Ambac no longer considers the length of time a security has continuously been in an unrealized loss in the credit impairment process.

and an analysis of projected defaults on the underlying collateral;

(iv) whether scheduled interest payments are past due;

(v) whether Ambac has the intent to sell the security;

and (vi) whether it is more likely than not that Ambac will be required to sell a security before the anticipated recovery of its amortized cost basis.

The recognition of credit impairment losses for available-for-sale debt securities are recorded as an allowance for credit losses with an offsetting charge to net income.

Improvements to estimated credit losses for available-for-sale debt securities are recognized immediately in net income.

If we believe a decline in the fair value of a particular fixed maturity available-for-sale investment is not credit impaired, we record the decline as an unrealized loss net of tax in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity on our Consolidated Balance Sheets.

If management either:

(i) has the intent to sell its investment in a debt security or (ii) determines that the Company more likely

than not will be required to sell the debt security before its anticipated recovery of the amortized cost basis less any current period credit impairment, then an impairment charge is recognized in earnings, with the amortized cost of the security being written-down to fair value.

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

The evaluation of securities for credit impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether, and to what extent, declines in the fair value of investments should be recognized in current period earnings.

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If that judgment changes, Ambac may ultimately record a charge for credit impairment in future periods.

Ambac has made certain accounting policy elections related to accrued interest receivable ("AIR") for available-for-sale investments under CECL, which are consistent with past practices under prior GAAP.

Ambac has made certain accounting policy elections related to accrued interest receivable ("AIR") for available-for-sale investments under CECL.

Elections include:

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Investments for further credit impairment disclosures.

Financial Guarantee:

Legacy Financial Guarantee Insurance:

Gross premiums were received either upfront or in installments.

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dollar exposures are discounted using U.S.

Treasury rates while exposures denominated in a foreign

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currency are discounted using the appropriate risk-free rate for the respective currency.

Treasury rates while exposures denominated in a foreign currency are discounted using the appropriate risk-free rate for the respective currency.

The weighted average risk-free rate at December 31, 2022 and 2021, was 3.0 %.

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For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue.

Certain obligations insured by Ambac have been legally defeased whereby government securities are purchased by the issuer with the proceeds of a new bond issuance, or less frequently with other funds of the issuer, and held in escrow.

Certain obligations insured by Ambac have been legally defeased whereby government securities are purchased by the issuer with the proceeds of a new bond

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issuance, or less frequently with other funds of the issuer, and held in escrow.

The principal and interest received from the escrowed securities are then used to retire the Ambac-insured obligations at a future date either to their maturity date (a refunding) or a specified call date (a pre-refunding).

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Although premium revenue recognition has not been accelerated in the period of the pre-refunding, it results in an increase in the rate at which the policy's remaining UPR is to be recognized.

For financial guarantee contracts, the issuer's ability and willingness to pay its insured debt obligation impacts the

payment of policy losses by Ambac as well as the receipt of premiums from the issuer.

For financial guarantee contracts, the issuer's ability and willingness to pay its insured debt obligation impacts the payment of policy losses by Ambac as well as the receipt of premiums from the issuer.

As such, management leverages its existing loss reserve estimation process to evaluate credit impairment for premium receivables.

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Ambac has a formal quarterly credit impairment review process for premium receivables.

• Prior to the adoption of CECL, Ambac assessed collectability of premium receivables in accordance with ASC 944 and recorded an allowance for uncollectible premiums.

Under CECL, management utilizes either a discounted cash flow ("DCF") or probability of default/loss given default ("PD/LGD") approach to estimate credit impairment.

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Insurance Contracts for further credit impairment disclosures.

AAC has reinsurance in place pursuant to surplus share treaty and facultative reinsurance agreements.

AAC has reinsurance in place pursuant to surplus share treaties and facultative reinsurance agreements.

Similar to gross premiums, premiums ceded to reinsurers were paid either upfront or in installments.

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i) the present value of future contractual premiums due or ii) if the underlying insured obligation is a homogenous pool of assets, the present value of expected premiums to be paid over the life of the transaction.

An appropriate risk-free rate corresponding to the weighted average life of each policy and exposure currency is used to discount the future premiums contractually due or expected to be collected.

An appropriate risk-free rate corresponding to the weighted average life of each policy and

exposure currency is used to discount the future premiums contractually due or expected to be collected.

Premiums ceded to reinsurers reduce the amount of premiums earned by Ambac from its financial guarantee insurance policies.

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For premiums paid to reinsurers on an installment basis, Ambac records the present value of future ceding commissions as an offset to ceded premiums payable, using the same assumptions noted above for installment premiums.

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(Dollar Amounts in Millions, Except Share Amounts)

Specialty P&C:

Gross written premiums on Everspan insurance policies are recorded at the inception of the policy and can be received on an upfront basis or an installment basis.

Specialty Property and Casualty Insurance:

Gross written premiums on insurance policies are recorded at the inception of the policy and can be received on an upfront or installment basis.

Ceded premiums written are based on contractual terms applied against related gross written premiums.

Premiums, net of reinsurance, are recognized as revenue on a daily pro-rata basis over the term of the insured risk.

Unearned premiums represents the portion of gross premiums written that relate to unexpired risk.

Deferred ceded premium represents the portion of ceded premiums written that relate to unexpired risk.

Unearned premiums and Deferred ceded premiums represents the portion of gross and ceded premiums written that relate to unexpired risk, respectively.

Premium receivables represent balances currently due and amounts not yet due from policyholders, managing general agents or producers issuing insurance policies on Everspan's behalf.

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A loan is considered impaired when, based on the financial condition of the borrower, it is probable that Ambac will be unable to collect all principal and interest due according to the contractual terms of the loan agreement.

Under CECL, Ambac has a formal quarterly credit impairment review process for these loans.

Ambac has a formal quarterly credit impairment review process for these loans.

The key factors in assessing credit impairment are internal credit ratings and loss severities.

Management utilizes a PD/LGD approach, similar to the one described above for financial guarantee premium receivables, which is applied to the loan carrying value.

• Loans held by VIEs consolidated as required under the Consolidation Topic of the ASC are carried at fair value under the fair value option election with changes in fair value recorded in Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

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Income (Loss).

Such loans are reported as Loans, at fair value within the Variable interest entity assets section of the Consolidated Balance Sheet.

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While this portfolio also includes certain legacy interest rate swaps executed in connection with financial guarantee client financings, the interest rate derivatives portfolio is managed on the basis of its net sensitivity to changes in interest rates.

Changes in the fair value of these interest rate derivatives are recorded, along with changes in fair value of Ambac's remaining credit derivatives, within Net gains (losses) on derivative contracts on the Consolidated Statements of Total Comprehensive Income (Loss).

Changes in the fair value of these interest rate derivatives are recorded, along with changes in fair value of other derivative contracts, within Net gains (losses) on derivative contracts on the Consolidated Statements of Total Comprehensive Income (Loss).

• VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within their securitization structure.

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Fair Value Measurements for further description of the methodologies used to determine the fair value of derivative contracts, including model inputs and assumptions where applicable.

Goodwill of $ 46 is attributable to the Xchange acquisition, further discussed in Note 3.

Deferred Acquisition Costs, Ceding Commissions and Deferred Program Fees

The Specialty Property and Casualty Program business defers acquisition costs incurred that are related directly to the

successful acquisition of new or renewal insurance contracts, including commissions paid to managing general agents.

Ceding commissions received from reinsurers represent a recovery of related acquisition costs.

Deferred acquisition costs, net of ceding commissions, are amortized over the related policy period, generally one year, and recognized in amortization of deferred acquisition costs.

Ceding commissions received in excess of the related direct acquisition costs are deferred and amortized over the related policy period, and recognized as program fees.

Goodwill is attributable to acquisitions, discussed in Note 4.

Business Combination and represents the acquisition cost in excess of the fair value of net assets acquired, including identifiable intangible assets.

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Management also has the option to bypass the qualitative evaluation and proceed directly to the quantitative evaluation.

The quantitative test compares the estimated fair

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value of the reporting unit with its carrying value (including goodwill and identifiable intangible assets).

The quantitative test compares the estimated fair value of the reporting unit with its carrying value (including goodwill and identifiable intangible assets).

An impairment is recognized for the excess of the carrying amount of the reporting unit over it estimated fair value.

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Upon Ambac's emergence from bankruptcy in 2013, an insurance intangible asset was recorded which represented the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities.

The carrying values of our financial guarantee insurance and reinsurance contracts continue to be reported and measured in accordance with their existing accounting policies.

The carrying values of financial guarantee insurance and reinsurance contracts continue to be reported and measured in accordance with their existing accounting policies.

Pursuant to the Financial Services-Insurance Topic of the ASC, the insurance intangible is to be measured on a basis consistent with the related financial guarantee insurance and reinsurance contracts.

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Finite-lived intangibles:

Ambac acquired $ 36 of identifiable intangible assets attributable to the Xchange acquisition, further discussed in Note 3.

Ambac acquired identifiable intangible assets attributable to the Xchange, All Trans and Capacity Marine acquisitions further discussed in Note 4.

Business Combination .

The intangible assets are primarily related to distribution relationships, non-compete agreements and trade names, all of which have finite lives and are amortized over their estimated useful lives using the straight-line method.

The intangible assets primarily relate to distribution relationships, non-compete agreements and trade names, all of which have finite lives and are amortized over their estimated useful lives using the straight-

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The Company tests finite-lived acquired intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable.

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Indefinite-lived intangibles

Ambac acquired $ 9 of identifiable intangible assets attributable to its acquisition of Providence Washington Insurance Company, which was accounted for as an asset acquisition.

Ambac acquired identifiable intangible assets attributable to its acquisitions of admitted carriers in both 2021 and 2022, which were accounted for as asset acquisitions.

The intangible assets relate to insurance licenses which have indefinite lives and therefore are not amortized.

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If, after assessing qualitative factors, management believes it is more likely than not that the intangible assets are impaired, a quantitative impairment evaluation is performed.

Management also has the option to bypass the qualitative evaluation and

proceed directly to the quantitative evaluation.

Management also has the option to bypass the qualitative evaluation and proceed directly to the quantitative evaluation.

The quantitative test compares the estimated fair value of the intangible asset with its carrying value.

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Cash that we do not have the right to use for general purposes is recorded as restricted cash in our consolidated balance sheets.

Restricted cash includes (i) consolidated variable interest entity cash restricted to support the obligations of the consolidated VIEs, (ii) cash held by AAC received from its investment in LSNI Secured Notes and pledged for the benefit of holders of LSNI Secured Notes (other than AAC) and (iii) fiduciary cash held by Xchange described below.

Fiduciary Assets and Liabilities:

In Xchange's capacity as an MGU, it collects premiums from insureds and remits the premiums to the respective insurance carriers, net of fees to other parties, including its commissions.

Xchange also collects claims or refunds from carriers on behalf of insureds.

Unremitted insurance premiums and claims proceeds are held by Xchange in a fiduciary capacity.

Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as an offset to fiduciary liabilities, which are reported in Other liabilities.

Restricted cash includes (i) consolidated variable interest entity cash restricted to support the obligations of the consolidated VIEs and (ii) fiduciary cash held by Ambac's insurance distribution subsidiaries as described below.

Fiduciary Funds:

As an intermediary, we hold funds, generally in a fiduciary capacity, for the account of third parties, typically as the result of premiums received from retail brokers or insureds that are in transit to insurers and claims due that are in transit from insurers.

Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as restricted cash and we present an equal and corresponding fiduciary liability relating to these funds representing amounts or claims or premiums due on our consolidated balance sheets (included in Other liabilities).

Fiduciary funds are generally required to be kept in bank accounts subject to guidelines which emphasize capital preservation and liquidity.

The Company is entitled to retain

investment income earned on certain of these fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds.

Restricted cash for net uncollected premiums and claims and the related fiduciary liabilities were $ 14 and $ 5 at December 31, 2022 and 2021, respectively.

Loss and Loss Expenses

Financial Guarantee:

The loss and loss expense reserve (“loss reserve”) policy relates only to Ambac’s non-derivative financial guarantee insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Loss and Loss Adjustment Expenses

Legacy Financial Guarantee:

The loss and loss adjustment expense reserve (“loss reserve”) policy relates only to Ambac’s non-derivative financial guarantee insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Losses and loss expenses are based upon estimates of the ultimate aggregate losses inherent in the insured portfolio as of the reporting date.

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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

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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 breaches of contractual representations and warranties by RMBS transaction sponsors (prior to the settlements as more fully described in Note 1.

Background and Business Description ), remediation strategies and other contractual or subrogation-related cash flows.

• Net claim cash outflow policies represent contracts where the PV of expected cash outflows are greater than the PV of expected recovery cash inflows.

For such policies, a “Loss and loss expense reserves” liability is recorded for the excess of the PV of expected net claim cash outflows over the unearned premium revenue.

For such policies, a “loss and loss adjustment expense reserves” liability is recorded for the excess of the PV of expected net claim cash outflows over the unearned premium revenue.

• Net recovery cash inflow policies represent contracts where the PV of expected recovery cash inflows are greater than the PV of expected claim cash outflows.

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Non-adversely classified credits are assigned a Class I rating while adversely classified credits are assigned a rating of Class IA through Class V.

The criteria for an exposure to be assigned an adversely classified credit rating includes the deterioration of an issuer’s financial condition, underperformance of the underlying collateral (for collateral dependent transactions such as mortgage-backed or student loan securitizations), poor performance by the servicer of the underlying collateral and other adverse economic events or trends.

The criteria for an exposure to be assigned an adversely classified credit rating includes the deterioration of an issuer’s financial condition, underperformance of the underlying

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

collateral (for collateral dependent transactions such as mortgage-backed or student loan securitizations), poor performance by the servicer of the underlying collateral and other adverse economic events or trends.

The servicer of the underlying collateral of an insured securitization transaction is a consideration in assessing credit quality because the servicer’s performance can directly impact the performance of the related issue.

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• Survey List - credits that may lack information or demonstrate a weakness but further deterioration is not expected.

• Watch List - credits that demonstrate the potential for future material adverse development due to such factors as long-term uncertainty about a particular sector, a certain

structural element or concern related to the issuer or transaction or the overall financial and economic sustainability.

• Watch List - credits that demonstrate the potential for future material adverse development due to such factors as long-term uncertainty about a particular sector, a certain structural element, large exposure concentration or concern related to the issuer or transaction or the overall financial and economic sustainability.

CLASS IA – “Potential Problem with Risks to be Dimensioned” - Credits that are fully current and monetary default or claims-payment are not anticipated.

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• The first approach is a statistical expected loss approach, which considers the likelihood of all possible outcomes.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The “base case” statistical expected loss is the product of:

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This approach can include the utilization of internal or third party models and tools to project future losses and resultant claim payment estimates.

We utilize cash flow models for RMBS, student loan, Puerto Rico and other exposures.

RMBS and student loan models use historical performance of the collateral pools in order to then derive future performance characteristics, such as default and voluntary prepayment rates, which in turn determine projected future claim payments.

In other cases, such as many public finance exposures, including our Puerto Rico exposures, we do not specifically forecast resources available to pay debt service in the cash flow model itself.

Rather, we consider the issuers’ overall ability and willingness to pay, including the fiscal, economic, legal and political framework.

We utilize cash flow models for RMBS, student loans and other exposures.

RMBS and student loan models use historical performance of the collateral pools in order to then derive future performance characteristics, such as

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

default and voluntary prepayment rates, which in turn determine projected future claim payments.

In other cases, such as many public finance exposures, including Puerto Rico, we do not specifically forecast resources available to pay debt service in the cash flow model itself.

Rather, we consider the issuers’ overall ability and willingness to pay, including the fiscal, economic, legal and political framework to develop projected future claim payment estimates.

In this approach, a probability-weighted expected loss estimate is developed based on assigning probabilities to multiple claim payment scenarios and applying an appropriate discount factor.

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For the cash flow scenario approach, discount factors are applied based on a risk-free discount rate term structure and correspond to the date of each respective cash flow payment or recovery and the exposure currency.

factors are updated for the current risk-free rate each reporting period.

Discount factors are updated for the current risk-free rate each reporting period.

Ambac establishes loss expense reserves based on our estimate of expected net cash outflows for loss expenses, such as legal and consulting costs.

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(i) the transaction’s underlying loans' characteristics and status, (ii) projected home price appreciation (“HPA”) and (iii) projected interest rates.

Depending on the amount of collateral information available for each transaction, we project such performance either at the loan-level or the deal-level.

In the absence of specific loan-level information, the deal-level approach evaluates a loan pool as if it were a single loan, selecting certain aggregated deal-level characteristics to then perform a series of statistical analyses.

The deal-level approach projects performance using a roll-rate that evaluates the possible future state of a loan based on its current status and three variables:

average FICO (credit score), average current consolidated loan to value ratio (“CLTV”) and an overall quality indicator.

Depending on the amount of collateral information available for each transaction, we project such performance either at the loan-level or the deal-level using a variety of data that helps dimension the risk of the loans and/or

Observed servicer-level behavior may also have an impact on projected transaction performance.

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On a monthly basis, we compare monthly claims submitted against the trustees’ reports, waterfall projections and our understanding of the transactions’ structures to identify and resolve discrepancies.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

In our experience, market performance and model characteristics change and therefore need to be updated and reflected in our models through time.

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RMBS Representation and Warranty Subrogation Recoveries

Ambac records, as a component of its loss reserve estimate, subrogation recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W") described herein.

Prior to the settlement of all representation and warranty ("R&W") litigation settlements in 2022, as discussed in Note 1.

Background and Business Description, Ambac recorded, as a component of its loss reserve estimate, subrogation recoverables related to securitized loans in RMBS transactions that breached certain R&W described herein.

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

In such cases, the sponsor of the transaction is obligated, in accordance with the underlying contract, to repurchase, cure or substitute collateral for any loan that breaches the R&W.

Ambac or its counsel engaged consultants with significant mortgage underwriting experience to review the underwriting documentation for mortgage loans underlying certain insured RMBS transactions with significant collateral losses, resulting in significant claims payments by Ambac, and for which Ambac believes it has enforceable contractual rights under the relevant transaction documents against the counterparty and the counterparty has the financial ability to honor its contractual repurchase obligations.

Generally, subsequent to the forensic exercise of examining loan files to ascertain whether the loans conformed to the R&W, we submitted nonconforming loans for repurchase to the contractual counterparty bearing the repurchase obligation, typically the transaction sponsor.

In certain cases the loans were repurchased by a sponsor.

In such cases the sponsor paid the "repurchase price" to the securitization trust which holds the loan.

Ambac may also have received payments directly from transaction sponsors in settlement of their repurchase obligations pursuant to negotiated settlement agreements or otherwise as a result of related litigation.

While the obligation of sponsors to repurchase loans with material breaches is clear, generally the sponsors have not honored those obligations without actual or threatened litigation.

Ambac has utilized the results of the above-described loan file examinations to make demands for loan repurchases from sponsors or their successors and, in certain instances, as a part of the basis for litigation.

Ambac’s approach to resolving these disputes has included negotiating with individual sponsors at the transaction level and in some cases at the individual loan level and has resulted in the repurchase of some loans.

Ambac has initiated and continues to prosecute lawsuits seeking compliance with the repurchase obligations in the securitization documents.

Ambac has performed the above-mentioned, detailed examinations on a variety of transactions that have experienced exceptionally poor performance.

However, the loan file examinations and related estimated recoveries we have reviewed and recorded to date have been limited to only those transactions whose sponsors (or their successors) are subsidiaries of large

financial institutions, all of which carry an investment grade rating from at least one nationally recognized rating agency, or are otherwise deemed to have the financial wherewithal to live up to their repurchase obligations.

While our contractual recourse is generally to the sponsor/subsidiary, rather than to the parent, each of these large institutions has significant financial resources and may have an ongoing interest in mortgage finance, and we therefore believe that the financial institution/parent would ultimately assume financial responsibility for these obligations if the sponsor/subsidiary is unable to honor its contractual obligations or pay a judgment that we may obtain in litigation.

Additionally, in the case of successor institutions, we are not aware of any provisions that explicitly preclude or limit the successors’ ability to honor the obligations of the original sponsor.

Certain successor financial institutions have made significant payments to certain claimants to settle breaches of R&W perpetrated by sponsors that have been acquired by such financial institutions.

For example, Ambac received a significant payment in 2016 from JP Morgan to settle RMBS-related litigation.

As a result of these factors, we do not make significant adjustments to our estimated subrogation recoveries with respect to the credit risk of these sponsors or their successors.

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

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

timing of receipt of any such recoveries;

intervention by 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.

Failure to realize RMBS R&W subrogation recoveries for any reason or the realization of RMBS 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 and may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations, particularly its outstanding debt and preferred stock obligations;

the initiation of rehabilitation proceedings against AAC;

eliminating or reducing the likelihood of AAC delivering value to Ambac, through dividends or otherwise;

and a significant drop in the value of securities issued and/or insured by Ambac or AAC.

The approach used to estimate RMBS R&W subrogation recoveries is based on obtaining loan files from the original pool and conducting loan file re-underwriting to derive a breach rate to be extrapolated to determine an estimated repurchase obligation.

We limit the estimated repurchase obligation by ever-to-date incurred losses.

Multiple probability-weighted scenarios are developed by applying various realization factors to the estimated repurchase obligation.

The realization factors in these scenarios reflect Ambac’s own assumptions about the likelihood of outcomes based on all the information available to it including, but not limited to, (i) discussions with external legal counsel and their

• Ambac or its counsel engaged consultants with significant mortgage underwriting experience to review the underwriting documentation for mortgage loans underlying certain insured RMBS transactions with significant collateral losses, resulting in significant claims payments by Ambac.

• Ambac's approach used to estimate RMBS R&W subrogation recoverables was based on obtaining loan files from the original pool and conducting loan file re-underwriting to derive a quantum of breaches and an estimated repurchase obligation..

• Multiple probability-weighted scenarios were developed by applying various realization factors to the estimated

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(Dollar Amounts in Millions, Except Share Amounts)

views on ultimate settlement and/or litigation outcomes;

repurchase obligation.

The realization factors in these scenarios reflected Ambac’s own assumptions about the likelihood of outcomes based on all the information available to it including, but not limited to, (i) discussions with external legal counsel and their views on ultimate settlement and/or litigation outcomes;

(ii) assessment of the strength of the specific case;

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and (iv) experience in settling similar claims.

The probability weightings are developed based on the unique facts and circumstances for each transaction.

The sum of these probability-weighted scenarios represents the undiscounted RMBS R&W subrogation recovery, which is then discounted using a factor derived from a risk-free discount rate term structure that corresponds to the estimated date of each respective recovery.

The probability weightings were developed based on the unique facts and circumstances for each transaction.

The sum of these probability-weighted scenarios represented the undiscounted RMBS R&W subrogation recovery, which was then discounted using a factor derived from a risk-free discount rate term structure that corresponds to the estimated date of each respective recovery.

Student Loan Expected Loss Estimate

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The calculation of loss reserves for our student loan portfolio involves evaluating numerous factors that can impact ultimate losses.

Since our policy covers timely interest and ultimate principal payment, our loss projections must make assumptions for many factors covering a long horizon.

Since our policies cover timely interest and ultimate principal payment, our loss projections must make assumptions for many factors covering a long horizon.

Key assumptions that will impact ultimate losses include, but are not limited to, the following:

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As appropriate, we also develop other cases that incorporate various upside and downside scenarios that may include changes to defaults and recoveries.

Specialty P&C:

Loss and loss expense reserves for Everspan represent management's estimate of the ultimate liability for unpaid losses and loss expenses for claims that have been reported and claims that have been incurred but not yet reported ("IBNR") as of the balance sheet date.

Specialty Property and Casualty:

loss and loss adjustment expense reserves for Everspan represent management's estimate of the ultimate liability for unpaid losses and loss expenses for claims that have been reported and claims that have been incurred but not yet reported ("IBNR") as of the balance sheet date.

The reserves are estimated based upon experience and using a variety of actuarial methods.

These estimates are continually reviewed and are subject to the impact of future changes in factors such as claim severity and frequency, underwriting and claims practices, changes in social and economic conditions including the impact of inflation, legal and judicial developments, medical cost trends and upward trends in damage awards.

The ultimate amount for loss and loss expenses may be in excess, or less than, the amounts recorded on our financial statements.

Adjustments will be reflected as part of the net increase or reduction in loss and loss expense reserves in the periods in which they become known.

Ceded Reinsurance

Loss and loss expense reserve reported on the balance sheet relates only to gross insurance policies.

The corresponding reserve ceded to reinsurers is reported as reinsurance recoverable on paid and unpaid losses.

These estimates are reviewed and are subject to the impact of future changes in factors such as claim severity and frequency, underwriting and claims practices, changes in social and economic conditions including the impact of inflation, legal and

judicial developments, medical cost trends and upward trends in damage awards.

The ultimate amount for loss and loss adjustment expenses may be in excess, or less than, the amounts recorded on our financial statements.

Adjustments will be reflected as part of the net increase or reduction in loss and loss adjustment expense reserves in the periods in which they become known.

The Company performs a continuing review of its loss and loss adjustment expense reserves, including its reserving techniques and the impact of reinsurance.

The reserves are also reviewed by qualified actuaries, including actuaries employed by the Company and third party actuaries.

Since the reserves are based on estimates, the ultimate liability may be more or less than such reserves.

Reinsurance Recoverable

The corresponding loss and loss adjustment expense reserve ceded to reinsurers is reported as reinsurance recoverable on paid and unpaid losses.

The reinsurance recoverable from reinsurers is estimated in a manner consistent with the associated loss and loss adjustment expense reserve.

Ambac has reinsurance in place pursuant to quota share, surplus share treaty and facultative reinsurance agreements.

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The key factors in assessing credit impairment for reinsurance recoverables are independent rating agency credit ratings and loss severities.

Management utilizes a PD/LGD approach, which is applied to the net unsecured reinsurance recoverable amount.

Management utilizes a probability of default/loss given default ("PD/LGD") approach, which is applied to the net unsecured reinsurance recoverable amount.

Refer to Note 8.

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Long-term debt issued by Ambac is carried at par value less unamortized discount.

Accrued interest and discount accretion on long-term debt is reported as Interest expense on the Consolidated Statements of Total Comprehensive Income (Loss).

To the extent Ambac repurchases or redeems its long-term debt, such repurchases or redemptions may be settled for an amount different than the carrying value of the obligation.

Any difference between the payment and carrying value of the obligation is reported in Net realized gains (losses) on extinguishment of debt on the Consolidated Statements of Total Comprehensive Income (Loss).

For long-term debt issued by consolidated VIEs in which Ambac's variable interest arises from financial guarantees written by Ambac's subsidiaries ("FG VIEs"), we may elect to use the fair value option on an instrument by instrument basis.

Accrued interest and discount accretion

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the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

on long-term debt is reported as Interest expense on the Consolidated Statements of Total Comprehensive Income (Loss).

To the extent Ambac repurchases or redeems its long-term debt, such repurchases or redemptions may be settled for an amount different than the carrying value of the obligation.

For surplus note repurchases, the pro-rata purchase price related to principal and accrued interest is reported as a financing and operating activity, respectively, on the Statement of Cash Flows.

When the fair value option is elected, changes in the fair value of the FG VIEs' long-term debt is reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

In cases where the fair value option has not been elected, the FG VIEs' long-term debt is carried at par less unamortized discount, with interest expense reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

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Nonredeemable noncontrolling interests

At December 31, 2021 and 2020, AAC had 5,501 shares of issued and outstanding AMPS with a liquidation preference of $ 138 (reported as nonredeemable noncontrolling interest of $ 60 on Ambac's balance sheet).

At December 31, 2022 and 2021, AAC had 4,596 and 5,501 shares of issued and outstanding Auction Market Preferred Shares ("AMPS") with a liquidation preference of $ 115 and $ 138 (reported as nonredeemable noncontrolling interest of $ 53 and $ 60 on Ambac's balance sheet), respectively.

In 2022, Ambac purchased 905 shares of AMPS for $ 8 .

The difference between this amount paid to AMPS holders and the carrying amount was reflected as an increase to Net income attributable to common shareholders for approximately $ 1 .

The auction occurs every 28 days and the dividend rate has continuously been reset at the maximum rate of one-month LIBOR plus 200 basis points.

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Redeemable noncontrolling interests

The Xchange acquisition, further described in Note 3.

Business Combination, resulted in 80 % ownership of the acquired entities by Ambac.

Under the terms of the acquisition agreement, Ambac has a call option to purchase the remaining 20 % from the minority owners (i.e., noncontrolling interests) and the minority owners have a put option to sell the remaining 20 % to Ambac.

The call and put options are exercisable after different time periods elapse.

Because the exercise of the put option is outside the control of Ambac, in accordance with the Distinguishing Liabilities from Equity Topic of the ASC, Ambac reports redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheet.

The All Trans, Capacity Marine and Xchange acquisitions, further described in Note 4.

Business Combination, resulted in 85 %, 80 % and 80 %, respectively, ownership of the acquired entities by Ambac.

Under the terms of the acquisition agreements, Ambac has a call option to purchase the remaining 15 %, 20 % and 20 %, respectively, from the minority owners (i.e., noncontrolling interests) and the minority owners have a put option to sell the remaining 15 %, 20 % and 20 %, respectively, to Ambac.

Because the exercise of the put options are outside the control of Ambac, in accordance with the Distinguishing Liabilities from Equity Topic of the ASC, Ambac reports redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheet.

The redeemable noncontrolling interest is remeasured each period as the greater of:

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Revenue Recognition:

Revenues for the MGA/U business operations are recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC.

Revenues for the Insurance Distribution business operations are recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC.

The following steps are applied to recognize revenue:

identify the contract(s) with the customer, identify the performance obligations in the contract(s), determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation.

(i) identify the contract(s) with the customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, and (iv) allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the entity satisfies a performance obligation.

A performance obligation is satisfied either at a point in time or over time depending on the nature of the product or service provided, and the specific terms of the contract with customers.

MGA/U performance obligations consist of placing policies with insurers and, for certain products, providing claims servicing.

Revenue from limited and short-term medical policies sold through affinity groups ("Affinity") are recognized up front as no further performance obligations exist after policy placement.

Insurance Distribution performance obligations consist of underwriting and placing policies with insurers and, for certain products, providing claims servicing.

Revenue from insurance policies covering i) limited and short-term medical sold through affinity groups ("Affinity"), ii) commercial and "for hire" auto,

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Notes to Consolidated Financial Statements

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and iii) marine and international risks are recognized up front as no further performance obligations exist after policy placement.

Revenue from employer stop loss policies ("ESL") is apportioned to policy placement and claims servicing based on the relative stand-alone selling price of the respective performance obligations with policy placement revenue recognized upfront while claims servicing revenue is recognized over the claim adjustment period.

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Base and profit-sharing commissions are estimated with a constraint applied such that a significant reversal of revenue in the future is not probable.

MGA/U revenue is reported in other income (expense) on the Consolidated Statement of Total Comprehensive Income.

Revenue is reported in Commissions income on the Consolidated Statement of Total Comprehensive Income.

Contract assets represent the Company's right to future consideration for services it has already transferred to the customer, which is subject to certain contingencies such as the achievement of loss ratios on underlying insurance policies.

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Contract assets and contract liabilities are reported as other assets and other liabilities, respectively, on the Consolidated Balance Sheet.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The Company’s costs to fulfill contracts with its insurance company customers relate to certain commissions paid to independent agents for procuring policies.

The Company’s costs to fulfill customer contracts relate to certain commissions paid to independent agents for procuring policies.

As these costs relate to the Company’s policy placement performance obligation to its customers, they are expensed as incurred.

These costs are reported in Commission expenses on the Consolidated Statement of Total Comprehensive Income.

The Company does not incur costs related to obtaining customer contracts.

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Incentive compensation has two components:

short term incentive compensation (consisting of an annual cash bonus and, prior to 2020, awards of deferred stock units for certain officers) and long term incentive plan awards (consisting of deferred cash and awards of restricted and performance stock units).

Annual decisions with regard to incentive compensation are generally made in the first quarter of each year and are based on the prior year's performance for the Company, the employee and the employee's business unit.

short term incentive compensation (consisting of an annual cash bonus) and long term incentive plan awards (consisting of deferred cash and awards of restricted and performance stock units).

Annual decisions with regard to incentive compensation

are generally made in the first quarter of each year and are based on the prior year's performance for the Company, the employee and the employee's business unit.

In 2020, the Ambac 2013 Incentive Compensation Plan (the “2013 Incentive Plan”) was superseded by the 2020 Incentive Compensation Plan ("2020 Incentive Plan").

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The types of equity awards granted to employees are as follows:

• Deferred stock units - vest upon grant and will settle and convert to Ambac common stock annually over a two-year

period ( 50 % on the first anniversary of the grant date and 50 % on the second anniversary of the grant date).

The fair value of these grants is recognized as compensation expense on the date of grant since no future service is required.

These awards have not been granted since 2019.

• Restricted stock units — only require future service and accordingly the respective fair value is recognized as compensation expense over the relevant service period.

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Changes in the estimated or actual outcome of a performance condition are recognized by reflecting a retrospective adjustment to compensation cost in the current period.

In 2015, Ambac UK's Board of Directors adopted a long term incentive plan which provided cash based performance awards to Ambac UK employees.

Since all performance conditions under this plan were met, the Ambac UK Board of Directors adopted a new long term incentive plan for Ambac UK employees in 2020, which includes both performance and time based awards.

Compensation costs for all performance based awards are based on the probable outcome of the performance conditions and adjusted for subsequent changes in the estimated or actual outcome each reporting period as necessary.

In 2020, the Ambac UK Board of Directors adopted a long term incentive plan for Ambac UK employees, which includes both performance and time based awards.

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Compensation costs for time-based awards are recognized evenly over the service period.

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For such operating leases, Ambac recognizes a right-of-use ("ROU") asset and a lease liability, initially measured at the present value of the lease payments.

The discount rate used to initially measure the ROU assets and lease liabilities reflects the estimated secured

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

borrowing rate of the applicable Ambac subsidiary, which considers the rate of existing or recent debt obligations of the entity.

The discount rate used to initially measure the ROU assets and lease liabilities reflects the estimated secured borrowing rate of the applicable Ambac subsidiary, which considers the rate of existing or recent debt obligations of the entity.

All cash payments are classified within operating activities in the statement of cash flows.

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If a loss is not "probable and reasonably estimable," but is reasonably possible, disclosure of the contingency and an estimate of the loss or range of loss is required if such an estimate can be determined.

management judgment is required to apply this guidance.

Significant management judgment is required to apply this guidance.

As a legal contingency develops, the Company, in conjunction with outside counsel, evaluates what level of accrual and/or disclosure is required under the guidance.

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The effect on current and deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

In July 2020, United Kingdom legislation increasing the tax rate from 17 % to 19 % was fully enacted.

In June 2021, the United Kingdom legislation increasing the tax rate from 19 % to 25 % was fully enacted.

As such, we incorporated the effects of the tax rate increase in our current and deferred tax evaluation for the years ended December 31, 2021 and 2022.

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In making such judgments, significant weight is given to evidence that can be objectively verified.

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

Net Income Per Share

Basic net income per share is computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable noncontrolling interest, by the weighted-average number of common shares outstanding and vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").

Diluted net income per share is computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable controlling interest, by the Basic Weighted-Average Shares Outstanding plus all potential dilutive common shares outstanding during the period.

All potential dilutive common shares outstanding consider common stock deliverable pursuant to warrants, vested and unvested options, unvested restricted stock units and performance stock units granted under existing compensation plans.

The level of deferred tax asset recognition is influenced by management’s assessment of future profitability, which depends on the existence of sufficient

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taxable income within the carry forward periods available under the tax law.

Net Income Per Share

Diluted net income per share is

computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable controlling interest, by the Basic Weighted-Average Shares Outstanding plus all potentially dilutive common shares outstanding during the period.

All potentially dilutive common shares outstanding consider common stock deliverable pursuant to warrants, vested and unvested options, unvested restricted stock units and performance stock units granted under existing compensation plans.

Supplemental Disclosure of Cash Flow Information

5 unchanged sentences

Decrease in long-term debt as a result of surplus notes exchanges — 71 —

Securities acquired in transactions related to Puerto Rico restructurings 508 — —

Loans acquired through financial guarantee subrogation 20 — —

VIE long-term debt issued related to Puerto Rico restructurings 583 — —

2022 2021 2020

4 unchanged sentences

Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows 61 23 35

| Ambac Financial Group, Inc.

82 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Reclassifications and Rounding

2 unchanged sentences

Adopted Accounting Standards

Effective January 1, 2021, the Company adopted the following accounting standards:

Simplifying Income Tax Accounting

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes .

The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards.

The ASU removes certain exceptions in the guidance related to investments, intra-period allocations and interim period allocations.

It further adds new guidance related to the allocation of consolidated income taxes and evaluating a step-up in the tax basis of goodwill.

The ASU did not have a consequential impact on Ambac's financial statements.

Future Application of Accounting Standards:

The Company adopted the following accounting standards in 2022:

Contracts Assets and Liabilities in a Business Combination

In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Asset and Contract Liabilities from Contracts with Customers .

The business combination guidance in ASC 805 generally requires a company to recognize and measure the assets and the liabilities it acquires at fair value on the acquisition date.

ASC 805 further requires the acquired assets and liabilities to be subsequently measured in accordance with other relevant GAAP standards.

ASU 2021-08 creates an exception to the general rule and requires contract assets and liabilities acquired in a business combination to be recognized in accordance with ASC 606 at the acquisition date.

The ASU aligns the business combination accounting at the acquisition date with the subsequent accounting for contract assets and liabilities under ASC 606.

The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted, including early adoption in an interim period.

Ambac early-adopted the ASU on November 1, 2022, and applied it to the acquisitions of All-Trans and Capacity Marine.

The adoption did not have a consequential impact on Ambac's financial statements.

Reference Rate Reform

3 unchanged sentences

The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The ASU can be applied prospectively as of the beginning of the interim period

that includes or is subsequent to March 12, 2020 or any date thereafter, but does not apply to contract modifications and other transactions entered into or evaluated after December 31, 2022.

In December 2021, the FASB voted to extend the sunset date to December 31, 2024 and expects to issue a formal proposal for public comment in the first quarter of 2022.

Management has not determined when it will adopt this ASU, and the impact on Ambac's financial statements is being evaluated.

The ASU can be applied prospectively as of the beginning of the interim period that includes or is subsequent to March 12, 2020, or any date thereafter, but does not apply to contract modifications and other transactions entered into or evaluated after December 31, 2022.

In December 2022, the FASB issued ASU 2022-06 which extends the sunset date to December 31, 2024.

The ASU was adopted in 2022 for applicable financial instruments and contracts that transitioned to new reference rates and the adoption did not 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 was adopted on January 1, 2022 and did not have a consequential impact on Ambac's financial statements.

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 was adopted on January 1, 2022 and did not have a consequential impact on Ambac's financial statements.

Future Application of Accounting Standards:

There are no material future accounting standards currently being evaluated.

SEGMENT INFORMATION

The Company reports its results of operations in three segments:

Legacy Financial Guarantee Insurance, Specialty Property and Casualty Insurance and Insurance Distribution, separate from Corporate and Other, which is consistent with the manner in which the Company's chief operating decision maker ("CODM") reviews the business to assess performance and allocate resources.

Background and Business Description for a description of each of the Company's business segments.

The following tables summarize the components of the Company’s total revenues and expenses, pretax income (loss) and total assets by reportable business segment.

Information provided below for “Corporate and Other” primarily relates to the operations of AFG, which will include investment income on its investment portfolio and costs to maintain the operations of AFG, including public company reporting, capital management and business development costs for the acquisition and development of new business initiatives.

| Ambac Financial Group, Inc.

83 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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

Year Ended December 31, 2022

Net premiums earned $ 42 $ 14 $ 56

Commission income $ 31 31

Program fees 3 3

Net Investment income 12 2 $ 3 17

Net investment gains (losses), including impairments 32 — — 31

Net gains (losses) on derivative contracts 128 — 1 129

Net realized gains (losses) on extinguishment of debt 81 81

Other income (1)

Litigation recoveries 126 126

Total revenues and other income 451 18 31 4 505

Loss and loss adjustment expenses (benefit) ( 406 ) 9 ( 396 )

Amortization of deferred acquisition costs, net — 3 3

Commission expenses 18 18

General and administrative expenses 102 13 6 17 139

Depreciation expense 2 — — — 2

Intangible amortization 44 3 47

Interest expense 168 168

Total expenses ( 89 ) 25 27 17 ( 20 )

Pretax income (loss) $ 540 $ ( 6 ) $ 5 $ ( 14 ) $ 525

Total Assets (2)

$ 7,292 $ 316 $ 138 $ 226 $ 7,973

(1) Other revenues include the following line items on the Consolidated Statements of Total Comprehensive Income:

Income (loss) on variable interest entities and other income (expense).

| Ambac Financial Group, Inc.

84 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated (2)

Year Ended December 31, 2021

Net premiums earned $ 46 $ 1 $ 47

Commission income $ 26 26

Program fees — —

Net Investment income 138 1 $ 1 139

Net investment gains (losses), including impairments 3 — 4 7

Net gains (losses) on derivative contracts 22 — 22

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

Other income (expense) (1)

Litigation recoveries — —

Total revenues and other income 250 2 26 5 282

Loss and loss adjustment expenses (benefit) ( 89 ) — ( 88 )

Amortization of deferred acquisition costs, net — — 1

Commission expenses 15 15

General and administrative expenses 77 9 5 19 110

Depreciation expense 2 — — — 2

Intangible amortization 52 3 55

Interest expense 187 187

Total expenses 230 9 22 19 281

Pretax income (loss) $ 20 $ ( 8 ) $ 4 $ ( 15 ) $ 2

Total Assets (2)

$ 11,871 $ 156 $ 93 $ 182 $ 12,303

(1) Other revenues include the following line items on the Consolidated Statements of Total Comprehensive Income:

Income (loss) on variable interest entities and other income (expense).

(2) Inter-segment revenues and inter-segment pre-tax income (loss) amounts are insignificant and are not presented separately.

Total assets noted in the Corporate and Other Column is net of AFG's investment in surplus notes issued by the Legacy Financial Guarantee Segment with fair values of $90 at December 31, 2021.

Prior to 2021, Ambac's business operations consisted solely of Legacy Financial Guarantee Insurance.

BUSINESS COMBINATION

Ambac has acquired the following entities that were accounted for as business combinations and advance Ambac's strategy of expanding into the Insurance Distribution sector.

• Effective November 1, 2022, Ambac completed the acquisition of 85 % of All Trans and 80 % of Capacity Marine for a combined purchase price of $ 26 in cash.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company's Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period as defined by ASC 805.

• On December 31, 2020, Ambac completed the acquisition of 80 % of the membership interests of Xchange for a purchase price of $ 81 in cash.

The acquisition was accounted for as a business combination and advances Ambac's strategy of expanding into the MGU and MGA sector.

All amounts recorded at the time of acquisition are final and no subsequent adjustments were made within the permitted measurement period as defined by ASC 805.

The following table summarizes the consideration paid for Xchange and the estimated fair values of the aggregate assets and liabilities acquired, as well as the fair value of the noncontrolling interest, at the acquisition date:

All amounts recorded at the time of the acquisitions are final and no subsequent adjustments were made within the permitted measurement period as defined by ASC 805.

The following table summarizes the consideration paid for these acquisitions and the estimated fair values of the aggregate assets and liabilities acquired, as well as the fair value of the noncontrolling interest, at the acquisition dates:

| Ambac Financial Group, Inc.

85 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Fair Value All Trans & Capacity Marine Xchange

Restricted cash 4 4

Intangible assets 16 36

Goodwill 15 46

Other assets 6 8

4 unchanged sentences

Total consideration $ 26 $ 81

Goodwill was recorded to reflect the excess purchase consideration over net assets acquired and primarily consists of the future economic benefits that we expect to receive as a result

| Ambac Financial Group, Inc.

84 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

of the acquisition, driven by the value of Xchange's potential future distribution and carrier relationships, and synergies with other Ambac business operations.

Tax deductible goodwill totaled $ 65 , of which $ 4 was deducted in 2021.

The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed were based on management’s estimates and assumptions at the time of acquisition.

The fair value of the redeemable non-controlling interest of $ 7 on the acquisition date was estimated based on the non-controlling interest’s respective share of Xchange's enterprise value, adjusted for the value of Ambac's call option to purchase, and the minority owners' put option to sell to Ambac, respectively, the remaining 20 % membership interests in Xchange.

Goodwill was recorded to reflect the excess purchase consideration over net assets acquired and primarily consists of the future economic benefits that we expect to receive as a result of the acquisitions, driven by the value potential future distribution and carrier relationships, and synergies with other Ambac business operations.

Tax deductible goodwill totaled $ 21 and $ 65 , deductible over 15 years for each of the All Trans and Capacity Marine and Xchange acquisitions, respectively.

The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed were based on management’s estimates and assumptions at the time of the acquisitions.

The fair value of the redeemable non-controlling interest of $ 5 and $ 7 , respectively on the acquisition dates for the All Trans and Capacity Marine and Xchange acquisitions were estimated based on the non-controlling interest’s respective share of each acquiree's enterprise value, adjusted for the value of Ambac's call options to purchase, and the minority owners' put options to sell to Ambac, respectively, the remaining non-controlling interests.

Please refer to the Noncontrolling Interests section of Note 2.

Basis of Presentation and Significant Accounting Policies , for further information regarding the terms of the call and put option, as well as the redeemable noncontrolling interest balance sheet classification.

Basis of Presentation and Significant Accounting Policies, for further information regarding the terms of the call and put options, as well as the redeemable noncontrolling interest balance sheet classification.

The following table sets forth the estimated fair values of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition.

1 unchanged sentence

Remaining Useful

All Trans & Capacity Marine

Distribution relationships $ 15 15.0

Trade name 1 15.0

Distribution relationships $ 33 15.0

Non-compete agreements 1 5.0

Trade name 1 8.0

The distribution relationships intangible represents existing relationships Xchange maintains with a variety of brokers and distributors across its product lines.

The distribution relationships intangible represents existing relationships maintained with a variety of brokers and distributors across its product lines.

It excludes the value of potential future distribution relationships that may be developed, which is included in goodwill.

The non-compete agreements intangible relates to agreements entered into with certain key management personnel of Xchange.

The trade name intangible

represents the rights to the Xchange Group brand name which is well known in the marketplace Xchange competes in.

The overall weighted average useful life of the identified amortizable intangible assets acquired is fourteen years.

Because the acquisition occurred on last day of the reporting period, there were no revenues or earnings of Xchange included in Ambac's Consolidated Statements of Comprehensive Income for the period ended December 31, 2020.

As of December 31, 2020, pro forma information related to the acquisition was not been presented as the impact was not material to the Company’s financial results.

Ambac’s non-VIE invested assets are primarily comprised of fixed maturity securities classified as available-for-sale and interests in pooled investment funds which are reported within Other investments on the Consolidated Balance Sheets.

The trade name intangible represents the rights to the brand names which are well known in the marketplace that each company competes in.

The non-compete agreements intangible relates to agreements entered into with certain key management personnel.

The overall weighted average useful life of the identified amortizable intangible assets acquired is 15 years and 14 years for the All Trans and Capacity Marine and Xchange acquisitions, respectively.

Pro forma information related to the acquisitions was not presented as the impact was not material to the Company’s financial results.

Ambac’s non-VIE invested assets are primarily comprised of (i) fixed maturity securities classified as either available-for-sale or trading securities, (ii) interests in pooled investment funds which are reported within Other investments on the Consolidated Balance Sheets and (iii) preferred equity investments which are reported within Other investments on the Consolidated Balance Sheets.

Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method.

Other investments also included equity interests held by AFG, including the equity Certificates in Corolla Trust, an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100 % of the outstanding obligations and the Certificates of, and subsequently dissolved, the Corolla Trust.

Disclosures in this Note for the period ended December 31, 2021, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in Note 2.

Basis of Presentation and Significant Accounting Policies .

To the extent disclosures for periods prior to January 1, 2020, made in accordance with prior GAAP rules differ from disclosures under the new CECL standard, such differences are explained below.

Fixed maturity securities classified as trading are unrated municipal bond and other obligations of Puerto Rico issuing entities that are part of the the PROMESA restructuring process as described further in Note 8.

Insurance Contracts.

| Ambac Financial Group, Inc.

16 unchanged sentences

Residential mortgage-backed securities 230 — 28 19 238

Commercial mortgage-backed securities 15 — — — 15

Collateralized debt obligations 141 — — 4 137

5 unchanged sentences

Fixed maturity securities pledged as collateral:

government obligations 15 — — — 15

Short-term 64 — — — 64

120 — — — 120

Total available-for-sale investments $ 2,041 $ — $ 31 $ 106 $ 1,966

Cost Allowance for Credit Losses Gross

Losses Estimated

December 31, 2021

2 unchanged sentences

Corporate obligations 612 — 10 9 613

1,059 — 24 6 1,077

Foreign obligations 89 — — 2 87

12 unchanged sentences

Total available-for-sale investments 2,140 $ — $ 141 $ 16 $ 2,265

(1) Includes Ambac's holdings of the LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions.

(1) Consists primarily of Ambac's holdings of military housing and student loan securities.

12 unchanged sentences

Residential mortgage-backed securities 230 238

Commercial mortgage-backed securities 15 15

Collateralized debt obligations 141 137

16 unchanged sentences

Residential mortgage-backed securities 132 19 — — 132 19

Commercial mortgage-backed securities 3 — — — 3 —

Collateralized debt obligations 90 3 36 1 126 4

2 unchanged sentences

Short-term 78 — 8 — 86 —

768 14 41 1 810 16

Fixed maturity securities, pledged as collateral:

government obligations 15 — — — 15 —

Total collateralized investments 15 — — — 15 —

Total temporarily impaired securities $ 869 $ 53 $ 400 $ 53 $ 1,269 $ 106

21 unchanged sentences

768 14 41 1 810 16

Fixed maturity securities, pledged as collateral:

Fixed income securities, pledged as collateral:

government obligations 15 — — — 15 —

Total collateralized investments 15 — — — 15 —

Total securities $ 816 $ 7 $ 25 $ — $ 841 $ 8

Total temporarily impaired securities $ 783 $ 14 $ 41 $ 1 $ 825 $ 16

Management has determined that the securities in the above table do not have credit impairment as of December 31, 2022 and 2021 based upon (i) no actual or expected principal and interest payment defaults on these securities;

3 unchanged sentences

If that judgment changes, Ambac may record a charge for credit impairment in future periods.

Net Investment Gains (Losses), including Impairments

The declines in fair value and resultant unrealized losses across asset classes as of December 31, 2022 included in the above table resulted from the impact of increasing interest rates and market spreads.

Management has determined that the securities with unrealized losses are not credit impaired.

Further discussion of management's assessment with respect to security categories with larger unrealized loss balances is below.

Corporate obligations

The gross unrealized losses on corporate obligations as of December 31, 2022 resulted from an increase in interest rates and, to a lesser extent, market spreads since the securities were purchased.

Unrealized losses of $ 61 related to 584 investment grade securities with an average unrealized loss equal to 10 % of amortized cost at December 31, 2022.

Securities that have below investment grade credit ratings or are unrated comprise $ 2 of the gross unrealized loss and have an average unrealized loss equal to 8 % of amortized cost at December 31, 2022.

Management believes that the full and timely receipt of all principal and interest payment on corporate obligations with unrealized losses as of December 31, 2022 is probable.

Residential mortgage-backed securities and Other asset-backed securities

As of December 31, 2022, all of the $ 19 unrealized loss on residential mortgage-backed securities related to 13 Ambac-insured securities.

Five of these account for $ 18 of the unrealized loss and have an average unrealized loss equal to 15 % of amortized cost.

The $ 5 unrealized loss on other asset backed securities related to 14 Ambac-insured securities or resecuritization instruments collateralized with Ambac-insured securities and have an average unrealized loss equal to 2 % of amortized cost.

The majority of these unrealized losses for both residential mortgage-backed and other asset-backed securities relate to securities with long dated weighted average lives making their fair values more sensitive to interest rate changes.

Also, most of these securities have below investment grade credit ratings or are unrated.

The unrealized losses on these obligations resulted from adverse market conditions for long dated credit assets.

As noted above, expected cash flows used in evaluating credit impairment of Ambac-insured securities contemplate full and timely payment of all principal and interest payments on Ambac-insured securities.

This assumption is included in the projection of model based cash flows used in evaluating credit impairments on beneficial interests in securitized financial assets, including the residential mortgage backed and student loan asset backed securities included in this group.

| Ambac Financial Group, Inc.

89 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Investment Income (Loss)

Net investment income (loss) was comprised of the following for the affected periods:

Year Ended December 31, 2022 2021 2020

Fixed maturity securities $ 61 $ 78 $ 103

Short-term investments 11 — 5

Investment expense ( 6 ) ( 6 ) ( 6 )

Securities available-for-sale and short-term 66 74 103

Fixed maturity securities - trading ( 23 ) — —

Other investments ( 26 ) 66 19

Total net investment income (loss) $ 17 $ 139 $ 122

Net investment income (loss) from Other investments primarily represents changes in fair value on equity securities including certain pooled investment funds, and income from investment limited partnerships and other equity interests accounted for under the equity method.

Net Investments Gains (Losses), including Impairments

The following table details amounts included in net investment gains (losses) and impairments included in earnings for the affected periods:

2021 2020 2019

Year Ended December 31, 2022 2021 2020

Gross realized gains on securities $ 36 $ 14 $ 38

3 unchanged sentences

Intent / requirement to sell impairments — — —

Net realized gains (losses) $ 7 $ 22 $ 81

The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income under prior GAAP for the year ended December 31, 2019:

Year Ended December 31, 2019

Balance, beginning of period

Reductions for credit impairments previously recognized on:

Securities that matured or were sold during the period ( 1 )

Balance, end of period

Ambac had zero allowance for credit losses at December 31, 2021 and 2020.

Net investment gains (losses), including impairments $ 31 $ 7 $ 22

Ambac had an allowance for credit losses $ — and $— at December 31, 2022 and 2021, respectively.

Ambac did not purchase any financial assets with credit deterioration for the years ended December 31, 2022 and 2021.

| Ambac Financial Group, Inc.

88 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Counterparty Collateral, Deposits with Regulators and Other Restrictions

6 unchanged sentences

Securities carried at $ 23 and $ 17 at December 31, 2022 and 2021, respectively, were deposited by Ambac's insurance subsidiaries with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Invested assets

carried at $ 1 as December 31, 2021 were deposited as security in connection with a letter of credit issued for an office lease.

Securities with a fair value of $ — and $ 178 at December 31, 2021 and 2020, respectively, were pledged as collateral and as sources of funding to repay the LSNI Ambac Note.

AAC also pledged for the benefit of the holders of LSNI Secured Notes (other than AAC) the proceeds of interest payments and partial redemptions of the LSNI Secured Notes held by AAC.

The amount of such proceeds held by AAC was $ — and $ 9 at December 31, 2021 and 2020, respectively, and is included in Restricted cash on the Consolidated Balance Sheet.

As further described in Note 1.

Background and Business Description, on July 6, 2021, the LSNI Secured Notes were fully redeemed.

Securities with a fair value of $ 669 at December 31, 2021 were held by Ambac UK, the capital stock of which was pledged as collateral on the Sitka AAC Note.

Invested assets carried at $ 1 as December 31, 2022, were deposited as security in connection with a letter of credit issued for an office lease.

Securities with a fair value of $ 669 at December 31, 2021, were held by Ambac UK, the capital stock of which was pledged as collateral for the Sitka AAC Note.

The Sitka AAC Note was fully redeemed as of October 29, 2022, and therefore the pledge of Ambac UK's capital stock was subsequently released.

Refer to Note 13.

Long-term Debt for further information about the Sitka AAC Note.

| Ambac Financial Group, Inc.

90 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Guaranteed Securities

5 unchanged sentences

Obligations Corporate

Obligations (2)

Obligations Mortgage

Securities Total Weighted

1 unchanged sentence

Ambac Assurance Corporation $ 10 $ — $ 394 $ 403 B

National Public Finance Guarantee Corporation 2 — — 2 BBB-

Assured Guaranty Municipal Corporation 1 — — 1 A-

Total $ 10 $ — $ 394 $ 403 B

December 31, 2021:

Ambac Assurance Corporation $ 320 $ 465 $ 481 $ 1,266 CCC+

Ambac Assurance Corporation $ 316 $ — $ 439 $ 754 B

National Public Finance Guarantee Corporation 2 — — 2 BBB-

Assured Guaranty Municipal Corporation 1 — — 1 C

Total $ 327 $ 465 $ 481 $ 1,273 CCC+

Assured Guaranty Municipal Corporation 1 — — 1 A-

Total $ 318 $ — $ 439 $ 757 B

(1) Ratings are based on the lower of Standard & Poor’s or Moody’s rating.

If unavailable, Ambac’s internal rating is used.

(2) Represents Ambac's holdings of LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions.

These secured notes were insured by AAC.

As further described in Note 1.

Background and Business Description, on July 6, 2021, the LSNI Secured Notes were fully redeemed.

Other Investments

2 unchanged sentences

Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient.

Redemption of certain funds valued using NAV may be subject to

| Ambac Financial Group, Inc.

89 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

withdrawal limitations and/or redemption fees which vary with the timing and notification of withdrawal provided by the investor.

Redemption of certain funds valued using NAV may be subject to withdrawal limitations and/or redemption fees which vary with the timing and notification of withdrawal provided by the investor.

In addition to these investments, Ambac has unfunded commitments of $ 53 to private credit and private equity funds at December 31, 2022.

3 unchanged sentences

$ 186 $ 216 quarterly or semi-annually 90 days

Investment grade floating rate income (2)

107 73 weekly 0 days

Equity market investments (3) (10)

98 73 daily or quarterly 0 - 90 days

Private credit (4)

2 unchanged sentences

80 78 daily 0 - 30 days

Equity market investments (3) (11)

64 98 daily or quarterly 0 - 90 days

Investment grade floating rate income (2)

63 107 weekly 0 days

Private equity (6)

2 unchanged sentences

22 33 quarterly 10 business days

Convertible bonds (10)(11)

8 — daily 0 days

Emerging markets debt (8) (11)

14 unchanged sentences

Ambac has redeemed its investment to the extent permitted by the fund.

(10) These categories include fair value amounts totaling $ 106 and $ 89 at December 31, 2021 and 2020, respectively, that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products of $ — and $ 3 ;

for Equity market investments of $ 82 and $ 60 ;

for Emerging markets debt of $ 24 and $ 25 .

Ambac held preferred equity investments with a carrying value of $ 8 and $ — as of December 31, 2021 and 2020, respectively, that do not have readily determinable fair values and are carried at cost, less any impairments as permitted under the Investments — Equity Securities Topic of the ASC.

There were no impairments recorded on these investments or adjustments to fair value to reflect observable price changes in identical or similar investments from the same issuer during the periods presented.

Ambac held direct equity interests as of December 31, 2020, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which was accounted for under the equity method.

Investment Income (Loss)

Net investment income (loss) was comprised of the following for the affected periods:

2021 2020 2019

Fixed maturity securities $ 78 $ 103 $ 183

Short-term investments — 5 17

Investment expense ( 6 ) ( 6 ) ( 6 )

Securities available-for-sale and short-term 74 103 196

Other investments 66 19 32

Total net investment income (loss) $ 139 $ 122 $ 227

(10) This class seeks to generate total return from portfolios focused primarily on convertible securities

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

(11) These categories include fair value amounts totaling $ 61 and $ 106 at December 31, 2022 and 2021, respectively, that are readily determinable and are priced through pricing vendors, for Equity market investments of $ 53 and $ 82 ;

Convertible bonds investments $ 8 and $ — ;

and for Emerging markets debt of $ — and $ 24 .

Other investments also includes preferred equity investments with a carrying value of $ 12 and $ 8 as of December 31, 2022 and 2021, respectively, that do not have readily determinable fair values and are carried at cost, less any impairments as permitted under the Investments — Equity Securities Topic of the ASC.

The portion of net unrealized gains (losses) related to securities classified as trading and equity securities, excluding those reported using the equity method, still held at the end of each period is as follows:

2021 2020 2019

Year Ended December 31, 2022 2021 2020

Net gains (losses) recognized during the period on trading securities $ ( 48 ) $ 23 $ —

$ 23 $ — $ 24

net gains (losses) recognized during the reporting period on trading securities sold during the period ( 26 ) 1 ( 18 )

Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date $ ( 22 ) $ 22 $ 18

$ 22 $ 18 $ 17

FAIR VALUE MEASUREMENTS

5 unchanged sentences

l Level 1 Quoted prices for identical instruments in active markets.

Assets and liabilities classified as Level 1 include US Treasury and other foreign government obligations traded in highly liquid and transparent markets, certain highly liquid pooled fund investments, exchange traded futures contracts, variable rate demand obligations and money market funds.

l Level 2 Quoted prices for similar instruments in active markets;

4 unchanged sentences

This hierarchy requires the use of observable market data when available.

Assets and liabilities classified as Level 3 include credit derivative contracts, certain uncollateralized interest rate swap contracts, certain equity investments and certain investments in fixed maturity securities.

Assets and liabilities classified as Level 3 include certain uncollateralized interest rate swap contracts and certain investments in fixed maturity securities.

Additionally, Level 3 assets and liabilities generally include loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

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Residential mortgage-backed securities 238 238 — 238 —

Commercial mortgage-backed securities 15 15 — 15 —

Collateralized debt obligations 137 137 — 137 —

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Fixed maturity securities, pledged as collateral:

government obligations 15 15 15 — —

Short-term 64 64 64 — —

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Interest rate swaps—asset position 27 27 — 1 26

Warrants 1 1 — — 1

Other assets-loans 10 10 — — 10

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Fixed maturity securities:

Corporate obligations 3,320 3,320 — — 3,320

Corporate obligations, fair value option 1,828 1,828 — — 1,828

Fixed maturity securities:

Municipal obligations 136 136 — 136 —

Municipal obligation, trading 43 43 — 43 —

Fixed maturity securities:

Municipal obligations, available-for-sale 96 96 — 96 —

Restricted cash 17 17 17 — —

1 unchanged sentence

Derivative assets:

Interest rate swaps—asset position 190 190 — 190 —

Derivative assets:

Currency swaps—asset position 49 49 — 49 —

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690 683 106 — —

Cash and cash equivalents and restricted cash 33 33 32 2 —

Cash, cash equivalents and restricted cash 21 21 21 1 —

Derivative assets:

Interest rate swaps—asset position 76 76 — 5 71

Other assets - equity in sponsored VIE 1 1 — — 1

Other assets-loans 3 3 — — 3

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Fixed maturity securities:

Corporate obligations 3,215 3,215 — — 3,215

Corporate obligations, fair value option 3,320 3,320 — — 3,320

Fixed maturity securities:

Municipal obligations 139 139 — 139 —

Municipal obligations, available-for-sale 136 136 — 136 —

Restricted cash 2 2 2 — —

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Also excluded from the fair value measurements in the table above are equity securities with a carrying value of $ 12 and $ 8 as of December 31, 2022 and 2021, respectively, that do not have readily determinable fair values and have carrying amounts determined using the measurement alternative.

(2) The carrying value of net financial guarantees written includes the following balance sheet items:

(2) The carrying value of net financial guarantees written includes financial guarantee amounts in the following balance sheet items:

Premium receivables;

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Unearned premiums;

Loss and loss expense reserves;

Loss and loss adjustment expense reserves;

Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.

1 unchanged sentence

When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value and classifies such items within Level 1.

The determination of fair value for financial instruments categorized in Level 2 or 3 involves judgment due to the complexity of factors contributing

to the valuation.

Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments.

In addition, the use of internal valuation models may require assumptions

The determination of fair value for financial instruments categorized in Level 2 or 3 involves judgment due to the complexity of factors contributing to the valuation.

Third-party sources from which we obtain

independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different values for financial instruments.

In addition, the use of internal valuation models may require assumptions about hypothetical or inactive markets.

As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

about hypothetical or inactive markets.

As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value.

Ambac, may be significantly different from its recorded fair value.

Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed maturity securities, equity interests in pooled investment funds, derivative instruments, and certain variable interest entity assets and liabilities.

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At December 31, 2021, approximately 6 %, 90 %, and 4 % of the fixed maturity investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively.

Ambac performs various review and validation procedures to quoted and modeled prices for fixed maturity securities, including price variance analyses, missing and static price reviews, overall valuation analysis by portfolio managers and finance managers and reviews associated with our ongoing impairment analysis.

Ambac performs various review and validation procedures to quoted and modeled prices for fixed maturity securities, including price variance analyses, missing and static price

reviews, overall valuation analysis by portfolio managers and finance managers and reviews associated with our ongoing impairment analysis.

Unusual prices identified through these procedures will be evaluated further against alternative third-party quotes (if available), internally modeled prices and/or other relevant data, and the pricing source values will be challenged as necessary.

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This includes certain investments in convertible debt securities.

The fair value classified as Level 3 was $ 12 at December 31, 2021.

Fair value is determined by discounting principal and interest cash flows to maturity of 2.75 years, at a weighted average yield of 11.6 %, adjusted for the estimated fair value of the conversion feature.

The fair value classified as Level 3 was $ 12 and $ 12 at December 31, 2022 and 2021, respectively.

Fair value was calculated by discounting cash flows to average maturity of 1.75 years and yield of 11.3 % at December 31, 2022, and 2.75 years and a yield of 11.6 % at December 31, 2021.

Yields used are consistent with the security type and rating.

Other Investments

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such investments in pooled funds that are reported at fair value using NAV as a practical expedient.

At December 31, 2020, other investments also included Ambac's equity interest in the Corolla Trust, a non-consolidated VIE created in connection with Ambac's monetization of AAC junior surplus notes.

This equity interest was carried under the equity method and its fair value was internally calculated using a market approach and was classified as Level 3.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100 % of the outstanding obligations and the owner trust certificate of, and subsequently dissolved, the Corolla Trust.

Derivative Instruments

Ambac’s derivative instruments primarily comprise interest rate swaps, credit default swaps and exchange traded futures contracts.

Ambac’s derivative instruments primarily comprise interest rate swaps and exchange traded futures contracts.

Fair value is determined based upon market quotes from independent sources, when available.

When independent quotes are not available, fair value is determined using valuation models.

These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios.

These valuation models require market-driven inputs, including contractual terms, credit spreads and yield curves.

The valuation of certain derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market.

Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivatives and other liabilities.

Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivative liabilities.

Factors considered in estimating the amount of any Ambac credit valuation adjustment ("CVA") on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations.

The aggregate Ambac CVA impact reduced the fair value of derivative liabilities by less than a million dollars at both December 31, 2021 and 2020, respectively.

The aggregate Ambac CVA impact was not significant to the fair value of derivatives at both December 31, 2022 or 2021.

Interest rate swaps that are not centrally cleared are valued using vendor-developed models that incorporate interest rates and yield curves that are observable and regularly quoted.

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Counterparty credit risk related to such customer derivative assets is included in our determination of their fair value.

Ambac's credit derivatives ("CDS") are valued using an internal model that uses traditional financial guarantee CDS pricing to calculate the fair value of the derivative contract based on the reference obligation's current pricing, remaining life and credit rating and Ambac's own credit risk.

The model calculates the difference between the present value of the projected fees receivable under the CDS and our estimate of the fees a financial guarantor of comparable credit quality would charge to

provide the same protection at the balance sheet date.

Unobservable inputs used include Ambac's internal reference obligation credit ratings and remaining life, estimates of fees that would be charged to assume the credit derivative obligation and Ambac's CVA.

Ambac is party to only one remaining credit derivative with an internal credit rating of AA at December 31, 2021.

Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.

All of Ambac's credit derivatives ("CDS") positions have terminated as of June 30, 2022 and were not significant to Ambac's financial position or results of operations for the periods presented.

As of December 31, 2022 Ambac holds warrants to purchase preferred stock of a development stage company.

These warrants have a fair value of $ 1 as of December 31, 2022, determined using a standard warrant valuation model with internally developed input assumptions.

Financial Guarantees

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Long-term Debt

Long-term debt includes AAC surplus notes and junior surplus notes (cancelled in 2021 as part of the Surplus Note Exchanges described in Note 1.

Background and Business Description), the Sitka AAC Note, the LSNI Ambac Note (fully redeemed on July 6, 2021 as described in Note 1.

Background and Business Description ), Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the commutation of its exposure with respect to Ballantyne Re plc in 2019.

The fair values of surplus notes, Sitka AAC Note, LSNI Ambac Note and Tier 2 Notes are classified as Level 2.

The fair value of junior surplus notes and Ambac UK debt are classified as Level 3.

As of December 31, 2022, long-term debt includes AAC surplus notes, Tier 2 Notes issued in connection with the conclusion of the rehabilitation of the Segregated Account of AAC, and the Ambac UK debt issued in connection with the Ballantyne commutation.

As described in Note 1.

Background and Business Description , the Sitka AAC Note was wholly redeemed effective October 29, 2022, and Tier 2 Notes were partially redeemed effective October 29, 2022 and fully redeemed effective January 15, 2023.

The fair values of surplus notes, Sitka AAC Note and Tier 2 Notes are classified as Level 2.

The fair value of Ambac UK debt is classified as Level 3.

Other Financial Assets and Liabilities

Included in Other assets are loans and, at December 31, 2020, Ambac’s equity interest in an Ambac sponsored VIE established to provide certain financial guarantee clients with funding for their debt obligations.

The fair values of these financial assets are estimated based upon internal valuation models and are classified as Level 3.

Included in Other assets are loans, the fair values of which are estimated based upon internal valuation models and are classified as Level 3.

Variable Interest Entity Assets and Liabilities

The financial assets and liabilities of FG VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed maturity securities and loans held by the VIEs, derivative instruments and notes issued by the VIEs which are reported as long-term debt.

The financial assets and liabilities of Legacy Financial Guarantee Insurance VIEs ("FG VIEs") consolidated under the Consolidation Topic of the ASC consist primarily of fixed maturity securities and loans held by the VIEs, derivative instruments and notes issued by the VIEs which are reported as long-term debt.

As described in Note 12.

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For those instruments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models.

Comparable to the

Comparable to the sensitivities of investments in fixed maturity securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for FG VIE long-term debt.

FG VIE derivative asset and liability fair values are determined using vendor-developed valuation models, which incorporated observable market data related to specific derivative contractual terms including interest rates, foreign exchange rates and yield curves.

The fair value of FG VIE fixed maturity securities and loan assets are generally based on Level 2 market price quotes received from independent market sources when available.

When FG VIE asset fair values are not readily available from market quotes, values are estimated internally.

Internal valuations of FG VIE’s fixed maturity securities or loan assets are derived from the fair values of the notes issued by the respective VIE and the VIE’s derivatives, determined as described above, adjusted for the fair values of Ambac’s financial guarantees associated with the VIE.

The fair value of financial guarantees consist of:

(i) estimated future premium cash flows discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) estimates of future claim payments discounted at a rate that includes Ambac’s own

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

sensitivities of investments in fixed maturity securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for FG VIE long-term debt.

The fair value of FG VIE fixed maturity securities and loan assets are based on Level 2 market price quotes received from independent market sources when available.

Typically, FG VIE asset fair values are not readily available from market quotes

and are estimated internally.

Internal valuation of FG VIE’s fixed maturity securities or loan assets are derived from the fair values of the notes issued by the respective VIE and the VIE’s derivatives, determined as described above, adjusted for the fair values of Ambac’s financial guarantees associated with the VIE.

The fair value of financial guarantees consist of:

Estimated future premium payments to be paid by the VIEs were discounted at a weighted average rate of 6.8 % and 3.0 % at December 31, 2022 and 2021, respectively.

At December 31, 2022, the range of these discount rates was between 5.8 % and 8.5 %.

At December 31, 2021, the range of these discount rates was between 2.2 % and 4.1 %.

Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value

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Year ended December 31, 2022 Investments (1)

Derivatives Investments Loans Long-term

Assets Derivatives Investments Loans Total

Balance, beginning of period $ 91 $ — $ 70 $ 3,320 $ 2,718 $ 6,199

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The amount of total gains/(losses) included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ ( 12 ) $ — $ — $ ( 353 ) $ ( 279 ) $ ( 644 )

(1) Investments classified as Level 3 consist of a one other asset-backed security and two convertible notes purchased in 2021.

(2) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

| Ambac Financial Group, Inc.

96 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2020 Investments Other

Derivatives Investments Loans Long-term

Year Ended December 31, 2021 Investments (1)

Derivatives Investments Loans Total

Balance, beginning of period $ 78 $ 1 $ 84 $ 3,215 $ 2,998 $ 6,376

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Settlements ( 2 ) ( 1 ) ( 8 ) ( 38 ) ( 313 ) ( 362 )

Deconsolidations of VIEs — — — — — — —

Balance, end of period $ 91 $ — $ 70 $ 3,320 $ 2,718 $ 6,199

1 unchanged sentence

(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

| Ambac Financial Group, Inc.

97 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2019 Investments Other

Derivatives Investments Loans Long-term

Year Ended December 31, 2020 Investments (1)

Derivatives Investments Loans Total

Balance, beginning of period $ 72 $ 3 $ 66 $ 2,957 $ 3,108 $ 6,207

6 unchanged sentences

Settlements ( 1 ) — ( 7 ) ( 35 ) ( 290 ) ( 334 )

Deconsolidation of VIEs — — — — ( 851 ) 223 ( 627 )

Balance, end of period $ 78 $ 1 $ 84 $ 3,215 $ 2,998 $ 6,376

The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date $ 1 $ ( 2 ) $ 25 $ 183 $ 98 $ 305

(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

(1) Investments classified as Level 3 consist of a one other asset-backed security and two convertible notes acquired in 2021.

(2) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE liquidated in 2021.

Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable inputs are used to estimate fair value.

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There were no transfers of financial instruments into or out of Level 3 in the periods disclosed.

| Ambac Financial Group, Inc.

97 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported as follows:

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FINANCIAL GUARANTEES IN FORCE

Financial guarantees outstanding includes the exposures of policies that insure variable interest entities (“VIEs”) consolidated in accordance with ASC Topic 810, Consolidation.

Financial guarantees outstanding include the exposure of policies that insure capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.

Financial guarantees outstanding exclude the exposures of policies that insure bonds which have been called, pre-refunded or refunded and excludes exposure of the policies insuring the Sitka Senior Secured Notes and LSNI Secured Notes as defined in Note 1.

Legacy financial guarantees outstanding includes the exposures of policies that insure variable interest entities (“VIEs”) consolidated in accordance with ASC Topic 810, Consolidation.

Financial guarantees outstanding include the exposure of policies that insure capital appreciation bonds which are

reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds.

Background and Business Description.

The gross par amount of financial guarantees outstanding was $ 34,122 and $ 39,070 at December 31, 2021 and 2020, respectively.

The gross par amount of financial guarantees outstanding was $ 27,551 and $ 34,122 at

| Ambac Financial Group, Inc.

98 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

December 31, 2022 and 2021, respectively.

The par amount of financial guarantees outstanding, net of reinsurance, was $ 22,613 and $ 28,020 at December 31, 2022 and 2021, respectively.

As of December 31, 2022, the aggregate amount of financial guarantee insured par ceded 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.

As of December 31, 2021 and 2020, the financial guarantee portfolio consisted of the types of guaranteed bonds as shown in the following table:

As of December 31, 2022 and 2021, the legacy financial guarantee portfolio consisted of the types of guaranteed bonds as shown in the following table:

Net Par Outstanding December 31, (1)

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(2) Includes $ 5,400 and $ 5,490 of Military Housing net par at December 31, 2022 and 2021, respectively.

| Ambac Financial Group, Inc.

98 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

As of December 31, 2022 and 2021, the financial guaranteed portfolio by location of risk was as outlined in the table below:

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Austria 310 343

France 219 277

Australia 259 203

France 14 219

Other international

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Net financial guarantees in force (after giving effect to reinsurance) were $ 34,975 and $ 42,653 as of December 31, 2022 and 2021, respectively.

In the United States, Colorado and California were the states with the highest aggregate net par amounts in force, accounting for 8.3 % and 5.1 % of the total at December 31, 2021, respectively.

No other state accounted for more than 4 %.

The highest single insured risk represented 3.3 % of the aggregate net par amount guaranteed.

In the United States, no state accounted for more than 10% of the total net par outstanding at December 31, 2022.

The highest single insured risk represented 3.6 % of the total net par amount guaranteed.

INSURANCE CONTRACTS

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Earned 65 1 12 54

Ambac’s accelerated financial guarantee premium revenue for retired obligations for the years ended December 31, 2021, 2020 and 2019, was $ 1 , $ 12 and $ 10 , respectively.

Included in net earned premiums are accelerated financial guarantee premium revenues for retired obligations for the years ended December 31, 2022, 2021 and 2020, of $ 8 , $ 1 and $ 12 , respectively.

The following table summarizes net premiums earned by location of risk:

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Basis of Presentation and Significant Accounting Policies .

Management's evaluation of credit impairment under prior GAAP rules was not materially different.

Most credit impairment disclosures below were only made prospectively from the CECL adoption date as they were not required previously under GAAP.

As further discussed in Note 2.

Basis of Presentation and Significant Accounting Policies , the key indicator management uses to assess the credit quality of financial guarantee premium receivables is Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group.

The key indicator management uses to assess the credit quality of legacy financial guarantee premium receivables is Ambac's internal risk classifications for the insured obligation determined by the Risk Management Group.

| Ambac Financial Group, Inc.

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$ 277 $ 12 $ 6 $ 22 $ 12 $ 329

(1) Excludes specialty property and casualty premium receivables of $ 2 .

(1) Excludes specialty property and casualty premium receivables of $ 16 and $ 2 at December 31, 2022 and 2021, respectively.

(2) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.

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Beginning balance $ 9 $ 17

Current period provision (2)

Current period provision (benefit) ( 4 ) ( 6 )

Write-offs of the allowance — ( 2 )

Recoveries of previously written-off amounts — —

Ending balance $ 5 $ 9

(1) At January 1, 2020, $ 9 of premiums receivable were deemed uncollectible as determined under prior GAAP rules.

(2) The year ended December 31, 2020, includes $ 3 from the adoption of CECL.

At December 31, 2021 and 2020, a deminimis amount of premiums were past due.

Financial Guarantee Premium Receivables

Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:

2021 2020 2019

At December 31, 2022 and 2021, $ — and $ — of premiums were past due.

Legacy Financial Guarantee Premium Receivables

Gross premiums are received either upfront or in installments.

For premiums received upfront, an unearned premium revenue (“UPR”) liability is established, which is initially recorded as the cash amount received.

For installment premium policies, a premium receivable asset and offsetting UPR liability is initially established in an amount equal to:

(i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the assets underlying the insured obligation are homogenous pools which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method).

Below is the gross premium receivable roll-forward (direct contracts), net of the allowance for credit losses, for the affected periods:

December 31, 2022 2021 2020

Beginning premium receivable $ 320 $ 370 $ 416

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Premium receipts ( 36 ) ( 35 ) ( 46 )

Adjustments for changes in expected and contractual cash flows (1)

( 27 ) ( 6 ) ( 38 )

Accretion of premium receivable discount 8 9 11

Deconsolidation of certain VIEs — — 3

Adjustments for changes in expected and contractual cash flows for contracts (1) ( 31 ) ( 27 ) ( 6 )

Accretion of premium receivable discount for contracts 8 8 9

Changes to allowance for credit losses 4 8 ( 4 )

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receivable (3) $ 254 $ 320 $ 370

$ 320 $ 370 $ 416

(1) Adjustments for changes in expected and contractual cash flows are primarily due to reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.

(1) Adjustments for changes in expected and contractual cash flows are primarily due to higher discount rates and reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns .

(2) Includes foreign exchange gains/(losses) of ($ 13 ), ($ 2 ) and $ 4 for 2022, 2021,and 2020 respectively.

(3) Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros.

At December 31, 2022, 2021 and 2020 premium receivables include British Pounds of $ 71 (£ 59 ), $ 108 (£ 80 ) and $ 117 (£ 86 ), respectively, and Euros of $ 14 (€ 13 ), $ 16 (€ 14 ) and $ 19 (€ 16 ), respectively.

The table below summarizes the future gross undiscounted financial guarantee premiums to be collected and future premiums earned, net of reinsurance at December 31, 2021:

The following table summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at December 31, 2022:

Future Premiums

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(Dollar Amounts in Millions, Except Share Amounts)

Loss and Loss Expense Reserves

Ambac's loss and loss expense reserves ("loss reserves") are based on management's on-going review of the insured portfolio.

Below are the components of the loss and loss expense reserves and the subrogation recoverable asset at December 31, 2021 and 2020:

Loss and Loss Adjustment Expense Reserves

Ambac's loss and loss adjustment expense reserves ("loss reserves") are based on management's on-going review of the insured portfolio.

Below are the components of the loss and loss adjustment expense reserves and the subrogation recoverable asset at December 31, 2022 and 2021:

Legacy Financial Guarantee

Specialty Property and Casualty Present Value of Expected

Net Cash Flow

Balance Sheet Line Item Gross Loss and

Reserves Claims and

Loss Expenses Recoveries Unearned

Revenue Gross Loss and

December 31, 2022:

Loss and loss adjustment expense reserves $ 90 $ 787 $ ( 44 ) $ ( 28 ) $ 805

Subrogation recoverable — 5 ( 276 ) — ( 271 )

Totals $ 90 $ 791 $ ( 319 ) $ ( 28 ) $ 534

December 31, 2021:

Balance Sheet Line Item Claims and

Loss Expenses Recoveries Unearned

Revenue Loss and

Loss Expenses Recoveries Unearned

Revenue Loss and

Loss and loss expense reserves $ 1,781 $ ( 155 ) $ ( 56 ) $ 1,570 $ 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 )

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

(1) 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.

Below is the loss and loss reserve expense roll-forward, net of subrogation recoverable and reinsurance, for the affected periods.

Year Ended December 31, 2022 2021 2020

Beginning gross loss and loss expense reserves

$ ( 397 ) $ ( 482 ) $ ( 107 )

Beginning gross loss and loss adjustment expense reserves $ ( 522 ) $ ( 397 ) $ ( 482 )

Reinsurance recoverable

Beginning balance of net loss and loss expense reserves

( 430 ) ( 508 ) ( 130 )

Beginning balance of net loss and loss adjustment expense reserves ( 578 ) ( 430 ) ( 508 )

Losses and loss expenses (benefit) incurred:

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( 397 ) ( 88 ) 225

Loss and loss expenses (recovered) paid:

Loss and loss adjustment expenses (recovered) paid:

Prior years ( 1,867 ) 59 148

Foreign exchange effect

Ending net loss and loss expense reserves

( 1,860 ) 59 149

Foreign exchange effect

Ending net loss and loss adjustment expense reserves 883 ( 578 ) ( 430 )

Impact of VIE consolidation (3)

Reinsurance recoverable (4)

Ending gross loss and loss expense reserves

( 522 ) ( 397 ) ( 482 )

Ending gross loss and loss adjustment expense reserves 534 ( 522 ) ( 397 )

(1) Total losses and loss expenses (benefit) includes $( 41 ), $ 5 and $( 7 ) for the years ended December 31, 2022, 2021 and 2020, respectively, related to ceded reinsurance.

(2) Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain R&W's by transaction sponsors within losses and loss expenses (benefit).

The losses and loss expense (benefit) incurred associated with changes in estimated R&W's recoveries for the year ended December 31, 2021, 2020 and 2019 was $ 20 , $( 23 ) and $ 42 , respectively.

(3) Represents reinsurance recoverable on future loss and loss expenses.

Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $ 0 , $ 1 and $ 0 as of December 31, 2021, 2020 and 2019, respectively, related to previously presented loss and loss expenses and subrogation.

(2) Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W's") by transaction sponsors within losses and loss expenses (benefit) for the Legacy Financial Guarantee segment.

The losses and loss expense (benefit) incurred associated with changes in estimated R&W's for the year ended December 31, 2022, 2021 and 2020 was $( 123 ), $ 20 and $( 23 ),

respectively.

Refer to Note 1.

Background and Business Description to the Consolidated Financial Statements in this Annual Report on Form 10-K for details of the RMBS litigation settlements reached in October and December 2022.

(3) In connection with the Puerto Rico restructuring, three new trusts were established for the year ended December 31, 2022.

These trusts were consolidated by Ambac as further discussed in Note 12.

Variable Interest Entities.

(4) Represents reinsurance recoverable on future loss and loss adjustment expenses.

Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $ 0 , $ 0 and $ 0 as of December 31, 2022, 2021 and 2020, respectively, related to previously presented loss and loss adjustment expenses and subrogation.

For 2022, the positive development in prior years was primarily attributable to the Puerto Rico restructuring and favorable RMBS development due to the positive impact of discount rates and the impact of the litigation settlements with Bank of America Corporation and certain affiliates thereof and Nomura Credit & Capital, Inc.

as described in Note 1.

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

both in the legacy financial guarantee segment.

For 2022, prior years' loss and loss expenses recovered includes $ 1,687 related the litigation settlement with Bank of America Corporation and certain affiliates.

For 2021, the positive development in prior years was primarily due to favorable development in Public Finance credits (largely Puerto Rico) and the RMBS portfolio.

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(Dollar Amounts in Millions, Except Share Amounts)

Financial Guarantee Loss Reserves:

The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation recoverable at December 31, 2021 and 2020.

Legacy Financial Guarantee Loss Reserves:

The tables below summarize information related to policies currently included in Ambac’s loss and loss adjustment expense reserves or subrogation recoverable at December 31, 2022 and 2021, excluding consolidated VIEs.

Gross par exposures include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond.

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Remaining weighted-average contract period (in years) (1) 7 19 14 14 12 7 13

9 12 14 15 13 7 14

Gross insured contractual payments outstanding:

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Gross claim liability before all subrogation and before reinsurance $ 3 $ 3 $ 36 $ 284 $ 413 $ 43 $ 783

$ 5 $ 15 $ 42 $ 435 $ 1,238 $ 57 $ 1,792

Gross RMBS subrogation (2) $ — $ — $ — $ — $ ( 140 ) $ — $ ( 140 )

$ — $ — $ — $ — $ ( 1,737 ) $ — $ ( 1,737 )

Discount, RMBS subrogation — — — — — — —

Discounted RMBS subrogation, before reinsurance — — — — ( 140 ) — ( 140 )

— — — — ( 1,730 ) — ( 1,730 )

Gross other subrogation (3) ( 14 ) ( 4 ) — ( 31 ) ( 172 ) ( 12 ) ( 233 )

— ( 5 ) — ( 33 ) ( 583 ) ( 12 ) ( 633 )

Discount, other subrogation 2 — — 5 42 4 54

Discounted other subrogation, before reinsurance ( 12 ) ( 3 ) — ( 26 ) ( 130 ) ( 8 ) ( 179 )

— ( 5 ) — ( 31 ) ( 559 ) ( 10 ) ( 605 )

Gross claim liability, net of all subrogation and discounts, before reinsurance $ ( 9 ) $ — $ 36 $ 258 $ 143 $ 35 $ 464

$ 5 $ 10 $ 42 $ 404 $ ( 1,051 ) $ 47 $ ( 543 )

Unearned premium revenue $ ( 2 ) $ ( 2 ) $ ( 5 ) $ ( 8 ) $ ( 10 ) $ ( 1 ) $ ( 28 )

Loss expense reserves 1 1 — 2 4 — 8

Gross loss and loss expense reserves $ 3 $ 1 $ 38 $ 394 $ ( 1,036 ) $ 46 $ ( 554 )

Gross loss and loss adjustment expense reserves

$ ( 10 ) $ ( 2 ) $ 32 $ 252 $ 137 $ 34 $ 444

Reinsurance recoverable reported on

Balance Sheet (4) $ 1 $ — $ 8 $ 21 $ 3 $ — $ 33

$ 1 $ 1 $ 10 $ 22 $ ( 11 ) $ — $ 23

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

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(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $ 24 related to future loss and loss expenses and $ 0 related to presented loss and loss expenses and subrogation.

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $ 33 related to future loss and loss adjustment expenses and $ 0 related to presented loss and loss adjustment expenses and subrogation.

| Ambac Financial Group, Inc.

8 unchanged sentences

Remaining weighted-average contract period (in years) (1) 9 12 14 15 13 7 14

10 18 8 16 14 7 14

Gross insured contractual payments outstanding:

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Gross RMBS subrogation (2) $ — $ — $ — $ — $ ( 1,737 ) $ — $ ( 1,737 )

$ — $ — $ — $ — $ ( 1,753 ) $ — $ ( 1,753 )

Discount, RMBS subrogation — — — — 7 — 7

Discounted RMBS subrogation, before reinsurance — — — — ( 1,730 ) — ( 1,730 )

— — — — ( 1,751 ) — ( 1,751 )

Gross other subrogation (3) — ( 5 ) — ( 33 ) ( 583 ) ( 12 ) ( 633 )

— — — ( 36 ) ( 706 ) ( 12 ) ( 755 )

Discount, other subrogation — — — 2 24 2 28

Discounted other subrogation, before reinsurance — ( 5 ) — ( 31 ) ( 559 ) ( 10 ) ( 605 )

— — — ( 35 ) ( 689 ) ( 11 ) ( 735 )

Gross claim liability, net of all subrogation and discounts, before reinsurance $ 5 $ 10 $ 42 $ 404 $ ( 1,051 ) $ 47 $ ( 543 )

$ 3 $ 47 $ 39 $ 421 $ ( 963 ) $ 58 $ ( 394 )

Unearned premium revenue $ ( 3 ) $ ( 10 ) $ ( 5 ) $ ( 14 ) $ ( 24 ) $ ( 1 ) $ ( 56 )

Loss expense reserves 1 — — 4 40 — 45

Gross loss and loss expense reserves $ 2 $ 32 $ 35 $ 409 $ ( 933 ) $ 57 $ ( 397 )

Gross loss and loss adjustment expense reserves

$ 3 $ 1 $ 38 $ 394 $ ( 1,036 ) $ 46 $ ( 554 )

Reinsurance recoverable reported on

Balance Sheet (4) $ 1 $ 1 $ 10 $ 22 $ ( 11 ) $ — $ 23

$ — $ 6 $ 9 $ 24 $ ( 6 ) $ — $ 33

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

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(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $ 33 related to future loss and loss expenses and $ 1 related to presented loss and loss expenses and subrogation.

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

including, but not limited to, higher unemployment;

volatility in the capital markets;

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

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

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

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

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 FG 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 a modest 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

| Ambac Financial Group, Inc.

104 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

rates, which is expected to result in higher excess spread recoveries to Ambac.

We are continuously evaluating and updating our view of the macro economic environment as well as our specific credit view of each of our insured exposures considering the significant uncertainties brought upon us by the COVID-19 pandemic.

Accordingly, despite the current economic recovery, our loss reserves may be under-estimated as a result of the ultimate scope, duration and magnitude of the effects of COVID-19 pandemic.

Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities with total net par exposure of $ 1,054 .

Components of Puerto Rico net par outstanding include capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds.

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

The Commonwealth of Puerto Rico and certain of its instrumentalities are or were subject to Title III or Title VI proceedings under the Puerto Rico Oversight, Management and Stability Act ("PROMESA") and have suspended debt service payments, including payments owed on bonds insured by AAC.

AAC has made and will continue to be required to make significant amounts of policy payments over the next several years leading to material permanent losses.

The recoverability of a portion of these policy payments is still subject to some uncertainty as well as variability in terms of the value of certain components of the plan consideration to be made available under the various PROMESA plans of adjustment and qualifying modifications for the obligations AAC insures, which may lead to a material increase in permanent losses and cause a material adverse impact on our results of operations and financial condition.

Our exposure to Puerto Rico will be impacted by the pending consummation of the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico ("Eighth Amended POA"), the PRIFA Qualifying Modification ("PRIFA QM") and the CCDA Qualifying Modification ("CCDA QM") as well as the potential confirmation and implementation of the PRHTA plan of adjustment ("PRHTA POA").

On November 3, 2021, the Financial Oversight & 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 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, also incorporated settlements reflected in various plan support agreements

negotiated by and between creditors and the Oversight Board, as further described below.

A hearing to confirm the Commonwealth’s plan of adjustment was held over several days between November 8, 2021, and November 23, 2021.

The Eighth Amended POA was modified several times.

On January 10, 2022, Judge Laura Taylor Swain, 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.

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

Unless the Teachers' Unions', APJ's and the Credit Unions' requests for stay pending appeal are granted, the plan of adjustment together with the PRIFA QM and CCDA QM are expected to have an effective date on or before March 15, 2022.

The successful consummation of the Eighth Amended POA and Qualifying Modifications on the effective date will represent a significant step towards resolution of AAC's remaining Puerto Rico exposure.

The plan support agreements of the various instrumentalities of the Commonwealth of Puerto Rico provide the basis for the plan consideration to be made available to creditors, including Ambac, under the Eighth Amended POA, the PRIFA QM, the CCDA QM and the PRHTA POA.

The PRIFA Related Plan Support Agreement (“PRIFA PSA”), signed on July 27, 2021, provides consideration for PRIFA bondholders in the form of a combination of cash and a Contingent Value Instrument (the "Rum Tax CVI") that 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 and held for the benefit of PRIFA bondholders (the “PRIFA Trust”).

The Rum Tax CVI comprises potential cash payments related to outperformance of general fund rum tax collections relative to the certified 2021 Commonwealth Fiscal Plan's projections.

The PRIFA CVI Sub Trust will also be funded with approximately a 27 % share of the Clawback CVI (described below), which is tied to potential cash payments related to the outperformance of the Commonwealth's sales and use tax ("SUT") against the certified 2020 Commonwealth Fiscal Plan's projections.

The rum tax and SUT outperformance measures are subject to a joint lifetime nominal cap of 75% of the allowed PRIFA claim under the Eighth Amended POA.

Ambac executed its joinder to the PRHTA/CCDA PSA on July 15, 2021.

The PRHTA/CCDA Related Plan Support Agreement ("PRHTA/CCDA PSA"), dated May 5, 2021, provides consideration for holders of PRHTA and CCDA bonds on account of their claims against the Commonwealth.

This consideration consists of interests of approximately 69 % and 4 %, respectively, in a contingent value instrument tied to the outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections (the "Clawback CVI").

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $ 24 related to future loss and loss adjustment expenses and $ 0 related to presented loss and loss adjustment expenses and subrogation.

Ambac has remaining exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities on two different issuing entities with total net par exposure of $ 244 .

Components of the remaining Puerto Rico net par outstanding include capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy as opposed to the current accreted value of the bonds.

We have been paying claims for several years on most of our exposure to Puerto Rico, which had consisted of several different issuing entities.

These issuing entities had been part of the PROMESA restructuring process that began in 2016.

On December 6, 2022, the Fifth Amended Title III Plan of Adjustment of The Puerto Rico Highways and Transportation Authority ("PRHTA POA") became effective and concluded the debt restructuring of all AAC-insured Puerto Rico obligations under PROMESA.

The consummation of the PRHTA POA followed previous plans of adjustment and qualifying modifications related to AAC's insured Puerto Rico exposure, including the Eighth Amended Plan Title III Joint Plan of Adjustment for 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, in March 2022, which resolved the PROMESA restructuring process for the GO, PBA, PRIFA and CCDA issuing entities that had portions of their bonds insured by AAC;

and COFINA Plan of Adjustment in February 2019, which resolved the restructuring process for the COFINA issuing entity that had portions of their bonds insured by AAC.

PRHTA / CCDA PSA

Creditor recoveries under the PRHTA POA were based upon the PRHTA/CCDA PSA, which was originally executed on May 5, 2021, and provides for certain consideration for holders of bonds issued by certain Commonwealth instrumentalities, PRHTA, and CCDA on account of their claims against the Commonwealth arising from such bonds ("Clawback" claims).

Under the PRHTA/CCDA PSA, PRHTA creditors 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, subject to a lifetime nominal cap of $ 3,698 , of the Clawback Creditors' portion of the

| Ambac Financial Group, Inc.

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(Dollar Amounts in Millions, Except Share Amounts)

The Clawback CVI outperformance measures are subject to a lifetime nominal cap of 75 % of the allowed PRHTA and CCDA claims under the Eighth Amended POA.

Additionally, the PRHTA bondholders will receive consideration in the form of new PRHTA bonds and cash, and CCDA bondholders, will receive cash.

Ambac executed its joinder to the Amended and Restated Plan Support Agreement ("Amended and Restated GO/PBA PSA") on July 21, 2021.

Under the Amended and Restated GO/PBA PSA, dated as of July 12, 2021, consideration for holders of GO and PBA bonds comprised of a combination of cash, new GO bonds and a contingent value instrument intended to provide creditors with additional returns tied to the outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan's projections.

Substantial uncertainty still exists with respect to the ultimate outcome for AAC and other creditors in Puerto Rico due to, among other matters, (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.

There is no assurance that should one or more of these uncertainties negatively develop that it would not have a material adverse impact on Ambac's financial condition and results of operations.

While our reserving scenarios account for a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our material exposure to Puerto Rico and the economic, fiscal, legal, and political uncertainties associated therewith, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially having a material adverse effect on our results of operations and financial position, and may be subject to material volatility.

Conversely, Ambac’s loss reserves may prove to be overstated, due to favorable developments or results with respect to the factors described in the preceding paragraphs.

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, given the circumstances described herein.

Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition and may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations;

the initiation of rehabilitation proceedings against

eliminating or decreasing the likelihood of AAC delivering value to Ambac, through dividends or otherwise;

and a significant drop in the value of securities issued or insured by Ambac or AAC.

For public finance credits, including Puerto Rico, as well as other issuers, for which Ambac has an estimate of expected loss as of December 31, 2021, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $ 355 .

This possible increase in loss reserves under stress or other adverse conditions is very significant and if we were to experience such incremental losses, our stockholders’ equity as of December 31, 2021, would decrease from $ 1,098 to $ 743 .

However, there can be no assurance that losses may not exceed such amount.

Representation and Warranty Recoveries

Ambac records estimated RMBS R&W subrogation recoveries for breaches of R&W by sponsors of certain RMBS transactions.

For a discussion of the approach utilized to estimate RMBS R&W subrogation recoveries, see Note 2.

outperformance of the Commonwealth's sales and use tax ("SUT") relative to the certified 2020 Commonwealth Fiscal Plan's projections (the "Clawback CVI").

The Clawback CVI instrument was also distributed as part of the Interim Distribution on July 8, 2022.

PRHTA bondholder 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.

The new PRHTA bonds were distributed to creditors on December 6, 2022, upon the effective date of the PRHTA POA.

AAC and other PRHTA creditors also received restriction fees and consummation costs on 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.

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

(i) 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 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 in connection with the PRHTA POA.

PRHTA Effective Date Transactions

On December 6, 2022, 1) all remaining outstanding AAC-insured PRHTA '68 bonds or about $ 4 of net par exposure were fully satisfied and eliminated via acceleration, and 2), pursuant to bondholder election, about 21 % or $ 83 of net par exposure of AAC-insured PRHTA '98 bonds were fully satisfied and eliminated via commutation.

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 newly formed trust.

These trusts with initial net par exposure of about $ 312 were consolidated by Ambac as further discussed in Note 12.

Variable Interest Entities.

Following the effective date, trust units were redeemed, reducing the PRHTA '98 net par exposure to about $ 178 at December 31, 2022.

Since year-end, AAC-insured PRHTA exposure has been further reduced through redemptions of trusts units.

Eighth Amended POA Effective Date Transactions

On March 15, 2022, and pursuant to bondholder elections:

(i) all of the remaining outstanding AAC-insured GO and PBA bonds or about $ 94 in insured par were 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, or about $ 172 , were eliminated via commutation.

The AAC-insured PRIFA and CCDA bondholders who failed to elect commutation had their respective shares of consideration available under the Commonwealth Plan and the PRIFA QM, or CCDA QM, as applicable, deposited into newly

formed trusts.

These trusts were consolidated by Ambac as further discussed in Note 12.

Variable Interest Entities .

Since the effective date, the remainder of those PRIFA and CCDA bonds belonging to bondholders who elected not to commute their AAC insurance policies and that were deposited into trusts together with the related AAC policies have all been accelerated, satisfying and eliminating all of the Ambac-insured PRIFA and CCDA bonds.

Representation and Warranty Recoverable

Ambac records estimated RMBS R&W subrogation recoverables for breaches of R&W by sponsors of certain RMBS transactions.

For a discussion of the approach utilized to estimate RMBS R&W subrogation recoverables, see Note 2.

Basis of Presentation and Significant Accounting Policies.

Ambac has recorded RMBS R&W subrogation recoveries of $ 1,730 , ($ 1,704 net of reinsurance) and $ 1,751 , ($ 1,725 net of reinsurance) at December 31, 2021 and 2020, respectively.

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

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

timing of receipt of any such recoveries;

intervention by 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.

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.

If we were unable to realize R&W subrogation recoveries recorded on Ambac's consolidated balance sheet, our stockholders’ equity as of December 31, 2021, would decrease from $ 1,098 to $( 607 ).

Additionally, failure to realize R&W subrogation recoveries, or the realization of recoveries significantly below those recorded on the balance sheet, may result in adverse consequences such as impairing the ability of AAC to honor its financial obligations, particularly its outstanding debt and preferred stock obligations;

the initiation of rehabilitation proceedings against AAC;

AAC not being able to deliver value to Ambac, through dividends or otherwise;

and a significant drop in the value of securities issued or insured by Ambac or AAC.

Reinsurance Recoverables, Including Credit Impairment:

Amounts recoverable from reinsurers are estimated in a manner consistent with the associated loss and loss expense reserves.

Ambac has recorded RMBS R&W subrogation recoverables of $ 140 , ($ 140 net of reinsurance) and $ 1,730 , ($ 1,704 net of reinsurance) at December 31, 2022 and 2021, respectively.

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.

Reinsurance Recoverables, Including Credit Impairments:

The Company uses ceded reinsurance to transfer certain insurance risk, along with premiums written and earned, to other insurance carriers that agree to share in such risks.

The primary purpose of the reinsurance is to (i) protect the Company, at a cost, from losses in excess of amounts it is willing to accept, (ii) protect the Company's capital, and (iii) within the Specialty Property and Casualty Insurance operations, to manage the Company's net retention on individual risks and overall exposure to losses while providing the Company the ability to offer policies with sufficient limits to meet policyholder needs.

• Within its Specialty Property and Casualty Insurance segment, the Company generally enters into quota share reinsurance agreements whereby the Company cedes to the capacity providers (reinsurers) a substantial amount (generally 70 % or more) of its gross liability under all policies issued by and on behalf of the Company by the MGA/U.

Ambac is exposed to the credit risk of the reinsurer, or the risk that one of its reinsurers becomes insolvent or otherwise unable or unwilling to pay policyholder claims.

This credit risk is generally mitigated by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post collateral to secure the reinsured risks, which in some instances, exceeds the related reinsurance recoverable.

Amounts recoverable from reinsurers are estimated in a manner consistent with the associated loss and loss adjustment expense reserves.

The Company reports its reinsurance recoverables net of an allowance for amounts that are estimated to be uncollectible.

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For those reinsurance counterparties that do not currently post collateral, Ambac's reinsurers are well capitalized, highly rated, authorized capacity providers.

Additionally, while legacy liabilities from the PWIC acquisition were fully ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from the Enstar Holdings (US) to mitigate any residual risk to these reinsurers.

Additionally, while legacy liabilities from the PWIC acquisition and the three admitted carriers acquired by Everspan on January 3, 2022(the "21st Century Companies") were fully ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from Enstar Holdings (US) and 21st Century Premier Insurance Company, respectively, to mitigate any residual risk to these reinsurers.

The allowance for credit losses is based upon Ambac's ongoing review of amounts outstanding and the key indicators management uses to assess the credit quality of reinsurance recoverables are collateral posted by the reinsurers and independent rating agency credit ratings.

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Guarantee AA 30 —

Sompo Japan Nipponkoa Insurance, Inc.

Guarantee A+ 9 —

General Reinsurance Company Specialty P&C A++ 25 11

Total recoverables

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(2) Represents reinsurance recoverables on paid and unpaid losses.

Unsecured amounts from QBE Insurance Corporation is also

supported by an unlimited, uncapped indemnity from Enstar Holdings (US).

Unsecured amounts from QBE Insurance Corporation is also supported by an unlimited, uncapped indemnity from Enstar Holdings (US).

(3) Reinsurance recoverables reduced by ceded premiums payables due to reinsurers, letters of credit, and collateral posted for the benefit of Ambac.

Ambac has a credit allowance related to reinsurance recoverables of less than $1 at December 31, 2021 and 2020, respectively.

The allowance for credit losses is based upon Ambac's ongoing review of amounts outstanding.

Key indicators management uses to assess the credit quality of reinsurance recoverables are financial performance of the reinsurers, collateral posted by the reinsurers and independent rating agency credit ratings.

The evaluation begins with a comparison of the fair value of collateral posted by the reinsurer to the recoverable, net of ceded premiums payable.

Any shortfall of collateral posted is evaluated against our assessment of the reinsurer's financial strength, including its credit rating to determine whether an allowance is considered necessary.

Ambac has uncollateralized credit exposure of $ 60 and $ 32 and has recorded an allowance for credit losses of less than a million at December 31, 2022 and December 31, 2021, respectively.

The uncollateralized credit exposure includes legacy liabilities obtained from the acquisitions of PWIC and the 21st Century Companies of $ 45 and $ 30 at December 31, 2022 and December 31, 2021, respectively.

Legacy liabilities are also supported by an unlimited, uncapped indemnity from Enstar Holdings (US) and 21st Century Premier Insurance Company, respectively.

INSURANCE REGULATORY RESTRICTIONS

5 unchanged sentences

Insurance laws and regulations applicable to insurers vary by jurisdiction, but the insurance laws and regulations applicable to our insurance carriers generally require them to maintain minimum standards of business conduct and solvency;

to meet certain financial tests;

and to file policy forms, premium rate schedules and certain reports with regulatory authorities, including information concerning capital structure, ownership, financial condition (such as risk-based capital), corporate governance and enterprise risk.

AAC, because it is a financial guarantee insurer is not subject to risk-based capital requirements.

Regulated insurance companies are also required to file quarterly and annual statutory financial statements in each jurisdiction in which they are licensed.

The State Insurance Laws also require prior approval (or non-disapproval) of certain transactions between an insurance carrier and its affiliates.

The level of supervisory authority that may be exercised by non-domiciliary insurance regulators varies by jurisdiction.

Generally, however, non-domiciliary regulators are authorized to suspend or revoke the insurance license they issued and to impose restrictions on that license in the event that laws or regulations are breached by a regulated insurance company or in the event that continued or unrestricted licensing of the regulated insurance company constitutes a “hazardous condition” (or meets a similar standard) in the opinion of the non-domiciliary regulator.

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

certain financial tests;

AAC, because it is a financial guarantee insurer, is not subject to risk-based capital requirements.

As a run-off financial guarantor, AAC has been operating under the Stipulation and Order required by OCI.

OCI is developing OCI's Runoff Capital Framework to assist with decisioning related to capital and liquidity management at AAC.

Regulated insurance companies are also required to file quarterly and annual statutory financial statements in each jurisdiction in which they are licensed.

The State Insurance Laws also require prior approval (or non-disapproval) of certain transactions between an insurance carrier and its affiliates.

The level of supervisory authority that may be exercised by non-domiciliary insurance regulators varies by jurisdiction.

The domiciliary regulators have primary regulatory authority, including with respect to the initiation and administration of rehabilitation or liquidation proceedings.

Additionally, the accounts and operations of AAC and Everspan are subject to individual periodic comprehensive financial examinations by their domestic regulators, and may be examined collectively by the lead regulator of the affiliated insurance company group, which is currently OCI.

In December 2020, Everspan Insurance completed its re-domestication from Wisconsin to Arizona and obtained broad authority to write property and casualty insurance (while contemporaneously surrendering its authority to write financial guaranty insurance) in Arizona.

Everspan Insurance has sought similar amendments to its certificates of authority in all other states.

Everspan Insurance and its subsidiaries (Providence Washington Insurance Company, 21st Century Indemnity Insurance Company, 21st Century Pacific Insurance Company and 21st Century Auto Insurance Company of New Jersey) are subject to risk-based capital requirements.

Everspan Insurance issued surety policies in 2021.

Everspan Insurance thereafter sought similar amendments to its certificates of authority in all other states.

Everspan Insurance and its subsidiaries (Providence Washington Insurance Company, Greenwood Insurance Company, Consolidated National Insurance Company and 21st Century Auto Insurance Company of New Jersey) are subject to risk-based capital requirements.

Everspan Indemnity was formed in 2020 as a domestic surplus lines insurer in Arizona and, accordingly, is eligible to write property and casualty insurance as an excess and surplus lines insurance in all states by virtue of the U.S.

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All of Ambac's insurance subsidiaries are in compliance with the minimum capital and surplus levels required under the State Insurance Laws required to transact all business written to date.

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

In addition to the legal restrictions applicable to AAC as described herein, pursuant to the terms of the Settlement Agreement, the Stipulation and Order and the indenture for the Tier 2 Notes, AAC must seek prior approval by OCI of certain corporate actions.

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

Our Insurance Distribution businesses, like some other managing general agents, brokerages and program

administrators, may be subject to licensing requirements and regulation by insurance regulators in various states in which they conduct business.

In addition to the legal restrictions applicable to AAC as described herein, pursuant to the terms of the Settlement Agreement and the Stipulation and Order, AAC must seek prior approval by OCI of certain corporate actions.

The Settlement Agreement and Stipulation and Order include covenants which restrict the operations of AAC.

The Settlement Agreement will remain in force until the surplus notes that were issued pursuant to the Settlement Agreement have been redeemed, repurchased or repaid in full.

The Stipulation and Order will remain in force for so long as OCI determines it to be necessary.

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

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

Certain of the restrictions in the Settlement Agreement may be waived with the approval of the OCI and/or the requisite percentage of holders of AAC's surplus notes.

OCI's Runoff Capital Framework, when implemented, will assist OCI with making decisions related to capital and liquidity management at AAC.

Nevertheless, in the event that the OCI Runoff Capital Framework were to indicate that AAC is in a capital deficit position, OCI cannot require AFG or any other Ambac entity to contribute capital to or otherwise support AAC.

Although not domiciled in New York, AAC is nevertheless subject to the New York insurance law governing financial guarantee insurers.

New York’s comprehensive financial guarantee insurance law defines the scope of permitted financial guarantee insurance and governs the conduct of business of all

financial guarantors licensed to do business in New York, including AAC.

New York’s comprehensive financial guarantee insurance law defines the scope of permitted financial guarantee insurance and governs the conduct of business of all financial guarantors licensed to do business in New York, including AAC.

The New York financial guarantee insurance law also establishes single and aggregate risk limits with respect to insured obligations insured by financial guarantee insurers.

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Under the aggregate limits, policyholders’ surplus and contingency reserves must at least equal a percentage of aggregate net liability that is equal to the sum of various percentages of aggregate net liability for various categories of specified obligations.

At December 31, 2021, AAC is in compliance with applicable aggregate risk limits but not in compliance with applicable single risk limits.

Through run-off of the portfolio, AAC will continue to seek the reduction in its exposure for compliance with applicable single and aggregate risk limits, but may not be able to do so.

At December 31, 2022, AAC is in compliance with applicable aggregate risk limits and applicable single risk limits.

The financial statements of AAC and Everspan are prepared on the basis of accounting practices prescribed or permitted by the State Insurance Laws and the actions of regulatory authorities thereunder.

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The States in which AAC and Everspan are domiciled have adopted the National Association of Insurance Commissioners (“NAIC”) accounting practices and procedures manual (“NAIC SAP”) as a component of prescribed practices as codified in each State’s applicable law or regulation.

Statutory policyholder surplus differs from stockholder's equity determined under GAAP principally due to statutory accounting rules that treat financial guarantee premiums and loss reserves, investments, consolidation of subsidiaries or variable interest entities and surplus notes differently.

The following are details of statutory surplus for AAC and Everspan Indemnity:

• AAC’s statutory policyholder surplus was $ 757 at December 31, 2021, as compared to $ 865 as of December 31, 2020.

• Everspan Indemnity has statutory policyholder surplus of $ 106 as of December 31, 2021 as compared to $ 26 as of December 31, 2020.

The OCI has prescribed additional practices and has permitted accounting practices for AAC.

As a result of the prescribed and permitted practices discussed below, AAC’s statutory surplus at December 31, 2021 and 2020 was lower by $ 5 and higher by $ 40 , respectively, than if AAC had reported such amounts in accordance with NAIC SAP.

The Arizona Department of Insurance and Financial Institutions has permitted accounting practices for Everspan Indemnity and Everspan Insurance.

As a result of the permitted practice discussed below, Everspan Indemnity's statutory surplus at December 31, 2021 was higher by $ 18 than if Everspan had reported such amounts with NAIC SAP.

Everspan had no additional prescribed practices as at December 31, 2021 and no

| Ambac Financial Group, Inc.

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permitted or additional prescribed practices at December 31, 2020.

The following are details of statutory surplus for AAC and Everspan Indemnity:

• AAC’s statutory policyholder surplus was $ 598 at December 31, 2022, as compared to $ 757 as of December 31, 2021.

• Everspan Indemnity has statutory policyholder surplus of $ 107 as of December 31, 2022 as compared to $ 106 as of December 31, 2021.

The OCI has prescribed additional practices and has permitted accounting practices for AAC.

As a result of the prescribed and permitted practices discussed below, AAC’s statutory surplus at December 31, 2022 and 2021 was higher by $ 90 and lower by $ 5 , respectively, than if AAC had reported such amounts in accordance with NAIC SAP.

Everspan Indemnity and its subsidiaries do not have permitted or additional prescribed practices at December 31, 2022.

The Arizona Department of Insurance and Financial Institutions has permitted accounting practices for Everspan Indemnity and Everspan Insurance at December 31, 2021 As a result of the permitted practice discussed below, Everspan Indemnity's statutory surplus at December 31, 2021 was higher by $ 18 than if Everspan had reported such amounts with NAIC SAP.

Everspan had no additional prescribed practices as at December 31, 2021.

Additional Prescribed Accounting Practices

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AAC’s average rates of return on its admitted assets at December 31, 2022 and 2021 were 3.22 % and 5.28 %, respectively.

OCI has directed AAC to utilize a prescribed discount rate of 5.10 % for the purpose of discounting both its loss reserves and its probable losses on subsidiary guarantees.

OCI has directed AAC to utilize a prescribed discount rate of 5.10 % for the purpose of discounting both

its loss reserves and its probable losses on subsidiary guarantees.

• Paragraph 4 of Statement of Statutory Accounting Principles No.

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43R ”Loan-backed and Structured Securities” states that when an other-than-temporary impairment ("OTTI") has occurred, the amount of the OTTI recognized as a realized loss shall equal the difference between the investment’s amortized cost basis and the present value of cash flows expected to be collected, discounted at the loan-backed or structured security’s effective interest rate.

Beginning June 11, 2014, as a result of the amended Segregated Account Rehabilitation Plan, OCI has directed the Company to not evaluate investments in AAC insured securities with policies that were allocated to the Segregated Account for OTTI and require all such investments be reported at amortized cost regardless of its

NAIC risk designation.

This accounting determination was intended to recognize that AAC continues to maintains statutory loss reserves without adjustment for the economic effects of its ownership of the insured investment securities, improve transparency to the users of the statutory financial statements and to minimize operational risks.

Effective February 12, 2018, with the Segregated Account's exit from rehabilitation, this prescribed practice was no longer applicable for OTTI evaluations going forward.

From June 11, 2014 to February 12, 2018, OCI had directed AAC to not evaluate for OTTI investments in AAC insured securities with designated policies that were allocated to a segregated account of AAC in rehabilitation overseen by OCI, and required all such investments be reported at amortized cost regardless of its NAIC risk designation.

Permitted Accounting Practices

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97 “Investment in Subsidiary, Controlled and Affiliated Entities” (“SSAP 97”) states Investments in US insurance Subsidiary, Controlled and Affiliated entities shall be recorded based on the underlying audited statutory equity of the respective entity's financial statements adjusted for any unamortized goodwill.

Everspan has received permission from the Arizona Department of Insurance and Financial Institutions to admit its investment at December 31, 2021 of its wholly owned subsidiary, Providence Washington Insurance Company.

Providence Washington Insurance Company received a waiver from its regulator to file a statutory audit report issued for the year ended December 31, 2021.

United Kingdom

The Prudential Regulatory Authority (“PRA”) and Financial Conduct Authority (“FCA”) (and their predecessor regulator the Financial Services Authority (“FSA”)) are the dual statutory regulator responsible for regulating the financial services industry in the United Kingdom, with the purpose of maintaining confidence in the U.K.

financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime.

These regulators have exercised significant oversight of Ambac UK since 2008, after Ambac, AAC and Ambac UK began experiencing financial stress.

In 2009, Ambac UK’s license to write new business was curtailed by the FSA and the insurance license was limited to undertaking only run-off related activity.

Everspan has received permission from the Arizona Department of Insurance and Financial Institutions to admit its investment

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at December 31, 2021 of its wholly owned subsidiary, Providence Washington Insurance Company.

Providence Washington Insurance Company received a waiver from its regulator to file a statutory audit report issued for the year ended December 31, 2021.

United Kingdom

financial system, providing public understanding of the system, securing the proper degree of protection for consumers and helping to reduce financial crime.

These regulators have exercised significant oversight of Ambac UK since 2008, after Ambac, AAC and Ambac UK began experiencing financial stress.

In 2009, Ambac UK’s license to write new business was curtailed by the FSA and the insurance license was limited to undertaking only run-off related activity.

As such, Ambac UK is authorized to run-off its credit, suretyship and financial guarantee insurance portfolio in the United Kingdom.

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These solvency requirements were amended on January 1, 2016, in order to implement the European Union's "Solvency II" directive on risk-based capital.

Ambac UK had previously been in a capital shortfall position as compared to these solvency capital requirements, but met the requirements as at December 31, 2021.

Ambac UK's regulators are fully aware of the deficiency which previously existed, and dialogue between Ambac UK and its regulators remains ongoing with respect to options for strengthening the capital position further.

Ambac UK had previously been in a capital shortfall position as compared to these solvency capital requirements, but has met the requirements since December 31, 2021.

Dividend Restrictions, Including Contractual Restrictions

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Due to losses experienced by AAC, it has been unable to pay ordinary dividends to AFG since 2008 and will be unable to pay common dividends in 2023 without the prior consent of the OCI, which is extremely unlikely.

AAC’s ability to pay dividends is further restricted by the Settlement Agreement (as described below), by the indenture for the Tier 2 Notes (as described below), by the terms of its AMPS (as described below) and by the Stipulation and Order.

Background and Business

Description for further information.

AAC is not expected to make dividend payments to AFG for the foreseeable future.Pursuant to the Settlement Agreement, AAC may not make any “Restricted Payment” (which includes dividends from AAC to Ambac) in excess of $ 5 in the aggregate per annum, other than Restricted Payments from AAC to Ambac in an amount up to $ 8 per annum solely to pay operating expenses of Ambac.

AAC’s ability to pay dividends is further restricted by the Settlement Agreement (as described below), by the terms of its AMPS (as described below) and by the Stipulation and Order, and may be affected by OCI's Runoff Capital Framework, although OCI's Runoff Capital Framework has not yet been implemented and we cannot predict the results or implications thereof.

Background and Business Description for further information.

Accordingly, AAC's ability to pay dividends to AFG and the timing thereof remain subject to substantial uncertainty.

• Pursuant to the Settlement Agreement, AAC may not make any “Restricted Payment” (which includes dividends from AAC to Ambac) in excess of $ 5 in the aggregate per annum, other than Restricted Payments from AAC to Ambac in an amount up to $ 8 per annum solely to pay operating expenses of Ambac.

Concurrent with making any such Restricted Payment, a pro rata amount of AAC's surplus notes would also need to be redeemed at par.

The indenture for the Tier 2 Notes contains a similar restrictive covenant and further requires a proportional payment of the Tier 2 Notes (or interest thereon) when payments are made on the surplus notes.

• Under the terms of AAC’s AMPS, dividends may not be paid on the common stock of AAC unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling Ambac (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses.

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

• OCI's Runoff Capital Framework may be implemented in the near term.

While OCI's Runoff Capital Framework is not complete and we cannot predict the results and implications thereof, it is possible that OCI's Runoff Capital Framework and decisions based thereon may affect AAC's ability to reduce financial leverage or to pay dividends to AFG.

UK law prohibits Ambac UK from declaring a dividend to its shareholders unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution is based on its accumulated realized profits less its accumulated realized losses.

While the UK insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s and FCA’s capital requirements in practice act as a restriction on the payment of dividends.

Further, the FSA amended Ambac UK’s license in 2010 such that the PRA must specifically approve (“non-objection”) any transfer of value and/or assets from Ambac UK to AAC or any other Ambac group company, other than in respect of certain disclosed contracts between the two parties (such as in respect of a management services agreement between AAC and Ambac UK).

Ambac UK is not expected to pay any dividends to AAC for the foreseeable future.

While the UK insurance regulatory laws impose no statutory restrictions on a general insurer’s ability to declare a dividend, the PRA’s and FCA’s rules governing capital extraction by insurance firms in run off require Ambac UK to consider its future capital requirements over a 3 to 5 year period in both base case and downside stress scenarios before declaring a dividend.

Further, the FSA

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amended Ambac UK’s license in 2010 such that the PRA must specifically approve (“non-objection”) any transfer of value and/or assets from Ambac UK to AAC or any other Ambac group company, other than in respect of certain disclosed contracts

between the two parties (such as in respect of a management services agreement between AAC and Ambac UK).

Ambac UK is not expected to pay any dividends to AAC in the near future.

DERIVATIVE INSTRUMENTS

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Interest rate swaps $ 27 $ — $ 27 $ — $ 27

Warrants 1 — 1 — 1

Total non-VIE derivative assets $ 28 $ — $ 27 $ — $ 27

Derivative Liabilities:

Credit derivatives $ — $ — $ — $ — $ —

Interest rate swaps 38 — 38 38 —

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Variable Interest Entities Derivative Assets:

Interest rate swaps $ 190 $ — $ 190 $ — $ 190

Currency swaps 49 — 49 — 49

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Interest rate swaps Net gains (losses) on derivative contracts 65 13 ( 9 )

Warrants Net gains (losses) on derivative contracts 1 — —

Futures contracts Net gains (losses) on derivative contracts 62 9 ( 41 )

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Total derivative contracts $ 694 $ ( 128 ) $ ( 193 )

Credit Derivatives

Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation.

Credit derivatives issued by ACP are insured by AAC.

The outstanding credit derivative transaction at December 31, 2021, does not include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.

Our credit derivatives were written on a “pay-as-you-go” basis.

Similar to an insurance policy, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.

Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations.

The principal notional outstanding for credit derivative contracts was $ 201 and $ 257 as of December 31, 2021 and 2020, respectively, all of which had internal Ambac ratings of AA.

Interest Rate Derivatives

Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps, US Treasury futures contracts and other derivatives, to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures.

Ambac, through its subsidiary Ambac Financial Services (“AFS”), uses interest rate swaps, US Treasury futures contracts and other derivatives, to provide a partial economic hedge against the effects of rising interest rates elsewhere in the Legacy Financial Guarantee Insurance segment, including on Ambac’s financial guarantee exposures.

Additionally, AFS provided interest rate swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings.

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Interest rate swaps—receive-fixed/pay-variable 337 185

Other Derivatives:

The principal notional outstanding for credit derivative contracts was $ 0 and $ 201 as of December 31, 2022 and December 31, 2021, respectively.

As of December 31, 2022 Ambac holds warrants to purchase preferred stock of a development stage company.

Derivatives of Consolidated Variable Interest Entities

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Additionally, given that AAC is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

As of December 31, 2022 and 2021, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $ 38 and $ 93 , respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $ 54 and $ 109 , respectively.

All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts.

Assuming all such contracts terminated at fair value on December 31, 2022, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac.

If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.

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As of December 31, 2021 and 2020, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was $ 93 and $ 113 , respectively, related to which Ambac had posted cash and securities as collateral with a fair value of $ 109 and $ 130 , respectively.

All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by AFS while preserving counterparties’ rights to terminate the contracts.

Assuming all such contracts terminated at fair value on December 31, 2021, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac.

INTANGIBLE ASSETS

GOODWILL AND INTANGIBLE ASSETS

Basis of Presentation and Significant Accounting Policies for discussion of goodwill.

The following table presents the Company's goodwill.

December 31, 2022 2021

Beginning balance $ 46 $ 46

Business acquisitions 15 —

Impairments — —

Ending balance $ 61 $ 46

I ntangible asset and accumulated amortization are included in the Consolidated Balance Sheets, as shown below.

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Insurance intangible $ 44 52 $ 57

Other intangible 3 — —

Other intangibles 3 3 —

Total $ 47 $ 55 $ 57

The estimated future amortization expense for intangible assets is as follows:

Insurance Intangible Asset (1)

The estimated future amortization expense for finite-lived intangible assets is as follows:

Amortization Expense Insurance Intangible Asset (1)

Other Intangible Assets (1)

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Ambac, with its subsidiaries, has engaged in transactions with variable interest entities ("VIEs") in various capacities.

• Ambac provides financial guarantees for various debt obligations issued by special purpose entities, including VIEs ("FG VIEs");

• AAC and Ambac UK provide financial guarantees for various debt obligations issued by special purpose entities, including VIEs ("FG VIEs");

• Ambac sponsors special purpose entities that issued notes to investors for various purposes;

• Ambac is an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.

Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of VIEs.

Ambac’s primary variable interest exists through this financial guarantee insurance or credit derivative contract.

• AAC and Ambac UK invest in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and their ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE.

AAC and Ambac UK provide financial guarantees in respect of assets held or debt obligations of VIEs.

AAC and Ambac UK’s primary variable interest exists through this financial guarantee insurance.

The transaction structures provide certain financial protection to Ambac.

Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, Ambac will obtain certain control rights that enable Ambac to remediate losses.

These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance.

Under the 2018 Stipulation and Order, AAC is required to obtain OCI approval with respect to the exercise of certain significant control rights in connection with policies that had previously been allocated to the Segregated Account.

Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, AAC or Ambac UK will obtain certain control rights that enable them to remediate losses.

These rights may enable them to direct the activities of the entity that most significantly impact the entity’s economic performance.

Under the Stipulation and Order, AAC is required to obtain OCI approval with respect to the exercise of certain significant control rights in connection with policies that had previously been allocated to the Segregated Account, which was established in 2010 to segregate certain segments of AAC’s liabilities for purposes of the rehabilitation proceeding overseen by the Wisconsin Insurance Commissioner in order to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account (which ceased to exist in 2018).

Accordingly, AAC does not have the right to direct the most significant activities of those FG VIEs.

• We determined that AAC and Ambac UK generally have the obligation to absorb a FG VIE's expected losses given that they have issued financial guarantees supporting certain liabilities (and in some cases certain assets).

• We determined that AAC or Ambac UK generally have the obligation to absorb a FG VIE's expected losses given that they have issued financial guarantees supporting certain liabilities (and in some cases certain assets).

As further described below, Ambac consolidates certain FG VIEs in cases where we also have the power to direct the activities that most significantly impact the VIE’s economic performance due to one or more of the following:

(i) the transaction is experiencing deterioration and breaching performance triggers, giving Ambac the ability to exercise certain control rights, (ii) Ambac being involved in the design of the VIE and receiving control rights from its inception, such as may occur from loss remediation activities, or (iii) the transaction is not experiencing deterioration, however due to the passive nature of the VIE, Ambac's contingent control rights upon a future breach of performance triggers is considered to be the power over the most significant activity.

• A VIE is deconsolidated in the period that Ambac no longer has such control rights, which could occur in connection with the execution of remediation activities on the transaction or amortization of insured exposure, either

(i) the transaction experiencing deterioration and breaching performance triggers, giving AAC or Ambac UK the ability to exercise certain control rights, (ii) AAC or Ambac UK being involved in the design of the VIE and receiving control rights from its inception, such as may occur from loss remediation activities, or (iii) the transaction not experiencing deterioration, however due to the passive nature of the VIE, AAC or Ambac UK's contingent control rights upon a future breach of performance triggers is considered to be the power over the most significant activity.

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of which may reduce the degree of Ambac’s control over a VIE.

• A VIE is generally deconsolidated in the period that AAC or Ambac UK no longer has such control rights, which could occur in connection with the execution of remediation activities on the transaction or amortization of insured exposure, either of which may reduce the degree of control over a VIE.

• Assets and liabilities of FG VIEs that are consolidated are reported within Variable interest entity assets or Variable interest entity liabilities on the Consolidated Balance Sheets.

• The election to use the fair value option is made on an instrument by instrument basis.

Ambac has elected the fair value option for consolidated FG VIE financial assets and financial liabilities, except in cases where Ambac was involved in the design of the VIE and was granted control rights at its inception.

Generally, Ambac has elected the fair value option for consolidated FG VIE financial assets and financial liabilities, except in cases where AAC or Ambac UK was involved in the design of the VIE and was granted control rights at its inception.

◦ When the fair value option is elected, changes in the fair value of the FG VIE's financial assets and liabilities are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

◦ In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed maturity securities and are considered available-for-sale as defined by the Investments - Debt Securities Topic of the ASC.

These assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income (loss) in Stockholders' Equity.

◦ In cases where the fair value option has not been elected, the FG VIE's invested assets are fixed maturity securities and are classified as either available-for-sale or trading as defined by the Investments - Debt Securities Topic of the ASC.

Available-for-sale assets are reported in the financial statements at fair value with unrealized gains and losses reflected in Accumulated Other Comprehensive Income (Loss) in Stockholders' Equity.

Trading assets are reported at fair value with unrealized gains and losses reflected within net income.

The financial liabilities of these FG VIEs consist of long term debt obligations and are carried at par less unamortized discount.

Income from the FG VIE's available-for-sale securities (including investment income, realized gains and losses and credit impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

Income from the FG VIE's securities (including investment income, realized gains and losses and credit impairments as applicable) and interest expense on long term debt are reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

• Upon initial consolidation of a FG VIE, Ambac recognizes a gain or loss in earnings for the difference between:

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Upon deconsolidation of a FG VIE, Ambac recognizes a gain or loss for the difference between:

(i) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE

and (ii) the carrying amount of the VIE’s assets and liabilities.

fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE and (ii) the carrying amount of the VIE’s assets and liabilities.

Gains or losses from consolidation and deconsolidation that are reported in earnings are reported within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

• The impact of consolidating such FG VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated FG VIEs and Ambac’s operating subsidiaries and the inclusion of the FG VIE’s third party assets and liabilities.

• The impact of consolidating such FG VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated FG VIEs and AAC or Ambac UK and the inclusion of the FG VIE’s third party assets and liabilities.

For a financial guarantee insurance policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under the Financial Services — Insurance Topic of the ASC.

Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets.

Such insurance assets and liabilities may include premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable, unearned premiums, loss and loss expense reserves, ceded premiums payable and insurance intangible assets.

For investment securities owned by Ambac that are debt instruments issued by the VIE, the associated debt and investment balances are eliminated upon consolidation.

Such insurance assets and liabilities may include premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable, unearned premiums, loss and loss adjustment expense reserves, ceded premiums payable and insurance intangible assets.

For investment securities owned by AAC or Ambac UK that are debt instruments issued by the VIE, the associated debt and investment balances are eliminated upon consolidation.

FG VIEs which are consolidated may include recourse and non-recourse liabilities.

FG VIEs' liabilities that are insured by AAC or Ambac UK are with recourse, because the Company guarantees the payment of principal and interest in the event the issuer defaults.

FG VIEs' liabilities that are not insured by the AAC or Ambac UK are without recourse, because AAC or Ambac UK have not issued a financial guarantee and is under no obligation for the payment of principal and interest of these instruments.

FG VIEs' liabilities that are insured by AAC or Ambac UK are with recourse, because the AAC or Ambac UK guarantees the payment of principal and interest in the event the issuer defaults.

FG VIEs' liabilities that are not insured by the AAC or Ambac UK are without recourse, because AAC or Ambac UK has not issued a financial guarantee and is under no obligation for the payment of principal and interest of these instruments.

AAC or Ambac UK’s economic exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse liabilities and any additional variable interests held by them.

Additionally, AAC or Ambac UK’s general creditors, other than those specific policy holders which own the VIE debt obligations, do not have rights with regard to the assets of the VIEs.

Ambac evaluates the net income effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE.

Ambac has determined that the net income and earnings per share effect of consolidated FG VIEs are attributable to Ambac’s interests through financial guarantee premium and loss payments with the VIE.

Ambac evaluates the net income effects and earnings per share effects to determine attributions between AAC or Ambac UK and non-controlling interests as a result of consolidating a VIE.

Ambac has determined that the net income and earnings per share effect of consolidated FG VIEs are attributable to AAC or Ambac UK’s interests through financial guarantee premium and loss payments with the VIE.

| Ambac Financial Group, Inc.

9 unchanged sentences

Corporate obligations, fair value option $ 1,828 $ — $ 1,828 $ 3,320 $ — $ 3,320

Municipal obligations, trading — 43 43 — — —

Municipal obligations, available-for-sale (1) — 96 96 — 136 136

— 136 136 — 139 139

Total FG VIE fixed maturity securities, at fair value 1,828 139 1,967 3,320 136 3,455

11 unchanged sentences

Derivative liabilities 1,048 — 1,048 1,940 — 1,940

Other liabilities — 5 5 — — —

Total FG VIE liabilities $ 3,836 $ 324 $ 4,160 $ 5,996 $ 160 $ 6,156

Number of FG VIEs consolidated 5 4 9 5 1 6

(1) Available-for-sale FG VIE fixed-maturity securities consist of municipal obligations with an amortized cost basis of $ 106 and $ 113 , and aggregate gross unrealized gains of $ 29 and $ 27 at December 31, 2021 and 2020, respectively.

(1) Available-for-sale FG VIE fixed maturity securities consist of municipal obligations with an amortized cost basis of $ 99 and $ 106 at December 31, 2022 and December 31, 2021, respectively.

At December 31, 2022, there were $ 1 aggregate gross gains and $( 4 ) aggregated gross losses.

At December 31, 2021, there were aggregate gross unrealized gains of $ 29 .

All such securities had contractual maturities due after ten years as of December 31, 2022.

5 unchanged sentences

Credit risk changes of fair value option long-term debt reported through other comprehensive income (loss) ( 1 ) 1 ( 1 )

Net change in fair value of VIE assets and liabilities reported in earnings 5 ( 3 ) 14

Investment income on available-for-sale securities 6 7 10

Net change in fair value of VIE assets and liabilities reported in earnings under the fair value option ( 1 ) 5 ( 3 )

Investment income (loss) ( 4 ) 6 7

Net realized investment gains (losses) on available-for-sale securities 2 2 8

1 unchanged sentence

Other expenses ( 1 ) ( 1 ) —

Gain (loss) from consolidating FG VIEs — — 15

Gain (loss) from de-consolidating FG VIEs — — ( 2 )

Gain (loss) from consolidating VIEs 37 — —

Income (loss) on variable interest entities $ 21 $ 7 $ 5

As further discussed in Note 8.

Insurance Contracts , on February 12, 2019, in connection with the COFINA POA, the COFINA Class 2 Trust was established.

Ambac was required to consolidate the COFINA Class 2 Trust, which resulted in a gain of $ 15 .

Ambac deconsolidated zero , one and one VIEs for the years ended December 31, 2021, 2020 and 2019, respectively.

These VIEs were deconsolidated as a result of guaranteed bond retirements or loss mitigation activities that eliminated or reduced Ambac's control rights that previously required Ambac to consolidate these entities, and resulted in the gain (loss) on deconsolidation noted in the above table.

There was no impact to consolidated assets and liabilities for the 2020 deconsolidation.

Insurance Contracts , in connection with the Puerto Rico restructuring, three new trusts were established for the year ended December 31, 2022.

Ambac was required to consolidate these trusts which resulted in a combined gain of $ 37 .

Including these new trusts, Ambac consolidated three and zero FG VIEs for the years ended December 31, 2022 and 2021, respectively.

Ambac did not deconsolidate any FG VIEs for the years ended December 31, 2022 and 2021.

| Ambac Financial Group, Inc.

28 unchanged sentences

(2) Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(3) Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(3) Insurance liabilities represent the amount included in “Loss and loss adjustment expense reserves” and “Unearned premiums” for financial guarantee insurance contracts on Ambac’s Consolidated Balance Sheets.

(4) Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.

Ambac Sponsored Non-consolidated VIEs

On August 28, 2014, Ambac monetized its ownership of the junior surplus note issued to it by AAC by depositing the junior surplus note into the Corolla Trust, a VIE, in exchange for cash and the Corolla Certificate, which represented Ambac's right to residual cash flows from the junior surplus note.

Ambac did not consolidate the VIE since it did not have a variable interest in the trust.

Ambac reported the Corolla Certificate as an equity investment within Other investments on the Consolidated Balance Sheets with associated results from operations included within Net investment income (loss):

Other investments on the Consolidated Statements of Total Comprehensive Income (Loss).

The equity investment had a carrying value of $ 51 at December 31, 2020.

As further described in Note 1.

Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100 % of the outstanding Notes of the Corolla Trust and the Corolla Certificates for AAC surplus notes and subsequently dissolved the Corolla Trust.

On February 12, 2018, Ambac formed a VIE, Ambac LSNI, LLC ("Ambac LSNI").

Ambac LSNI issued LSNI Secured

Notes in connection with the Rehabilitation Exit Transactions.

Ambac does not consolidate Ambac LSNI since it does not have a variable interest in the VIE.

Ambac reported its holdings of LSNI Secured Notes within Fixed Maturity Securities in the Consolidated Balance Sheets.

The carrying value of LSNI Secured Notes held by Ambac was $ 465 at December 31, 2020.

Ambac's debt obligation to the VIE had a carrying value of $ 1,641 at December 31, 2020, and was reported within Long-term debt on the Consolidated Balance Sheets.

As further described in Note 1.

Background and Business Description, on July 6, 2021, Sitka, Ambac's newly formed VIE, issued the Sitka Senior Secured Notes that were used to fund a portion of the full redemption of the LSNI Secured Notes issued by LSNI, with the remaining balance redeemed utilizing other available sources of liquidity.

Ambac does not consolidate Sitka since it does not have a variable interest in the VIE.

Ambac's debt obligation to Sitka had a carrying value of $ 1,154 at December 31, 2021, and is reported within Long-term debt on the Consolidated Balance Sheets.

| Ambac Financial Group, Inc.

116 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

On July 6, 2021, Sitka Holdings, LLC ("Sitka"), Ambac's then newly formed non-consolidated VIE, issued the Sitka Senior Secured Notes.

Ambac's debt obligation to Sitka had a carrying value of $ 1,154 at December 31, 2021, reported within Long-

term debt on the Consolidated Balance Sheets.

The Sitka Senior Secured Notes were fully redeemed effective as of October 29, 2022.

Background and Business Description in this Annual Report on Form 10-K for further information.

LONG-TERM DEBT

7 unchanged sentences

$ 519 $ ( 42 ) $ 477 $ 785 $ ( 56 ) $ 729

5.1 % Junior Surplus Notes

— — — 365 ( 118 ) 247

LSNI Ambac Note — — — 1,641 — 1,641

Sitka AAC Note — — $ — 1,175 ( 21 ) 1,154

2 unchanged sentences

Long-term debt $ 706 $ ( 67 ) $ 639 $ 2,334 $ ( 104 ) $ 2,230

| Ambac Financial Group, Inc.

115 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Aggregated annual maturities of non-VIE long-term debt obligations (based on scheduled maturity dates as further discussed below) are as follows:

1 unchanged sentence

Thereafter 41

Total $ 2,334

(1) Surplus Notes issued had a scheduled maturity date of June 7, 2020.

OCI declined the request of Ambac Assurance to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on June 7, 2020, and June 7, 2021.

(1) Surplus Notes had a scheduled maturity date of June 7, 2020.

OCI declined the request of Ambac Assurance to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on June 7, 2020, June 7, 2021 and June 7, 2022.

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

1 unchanged sentence

Included in the table above is the potential principal payment at the next scheduled payment date of June 7, 2023.

(2) Includes $ 146 of Tier 2 Notes, as more fully described in Note 1.

Background and Business Description, which were fully redeemed on January 15, 2023.

Surplus Notes

Ambac Assurance's surplus notes, with a par amount of $ 519 and $ 785 at December 31, 2022 and 2021, respectively, had a scheduled maturity of June 7, 2020, which has been extended until OCI grants approval to make the payment.

During the year ended December 31, 2021, in connection with the 2021 Surplus Note Exchanges and other transactions, Surplus Notes with aggregate par amount of $ 255 were re-issued, and all Junior Surplus Notes were acquired and extinguished.

The discount on Surplus Notes issued prior to 2021 was accreted into income using the effective interest method based on projected cash flows at the date of issuance through June 7, 2020, using a weighted average imputed interest rate of 10.1 %.

The discount on Surplus Notes issued during the year ended December 31, 2021, is being accreted into income using the effective interest method at a weighted average imputed interest rate of 8.9 %.

Refer to Note 1.

Background and Business Description for further discussion of the 2021 Surplus Note Exchanges.

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.

Surplus notes are subordinated in right of payment to other claims, which could impair the right of holders of such notes to receive interest and principal in the event of AAC's insolvency or a similar occurrence.

During the year ended December 31, 2022, surplus notes with aggregate par amount of $ 266 were acquired and extinguished.

The discount on surplus notes outstanding as of December 31, 2022, is being accreted into income at a weighted average effective interest rate of 7.0 %.

Ambac can provide no assurance as to when surplus note principal and interest payments will be made.

If OCI does not approve payments on or the acquisition of surplus notes over time, the ongoing accretion of interest on the notes may impair AAC's ability to extinguish the notes in full.

Surplus notes are subordinated in right of payment to policyholder and other claims.

Sitka AAC Note

The Sitka AAC Note, issued in connection with the Secured Note Refinancing on July 6, 2021, as more fully described in Note 1.

Background and Business Description, has a par value of $ 1,175 at December 31, 2021, and a legal maturity of July 6, 2026.

Interest on the Sitka AAC Note is payable quarterly (on the last day of each quarter beginning with September 30, 2021) at an annual rate of 3-month U.S.

Dollar LIBOR + 4.50 %, subject to a 0.75 % LIBOR floor.

The discount on Sitka AAC Note is being accreted into income using the effective interest method based on an imputed interest rate of 5.7 %

The Sitka AAC Note is redeemable prior to July 6, 2022, at a price of 100 % of the principal amount plus a make-whole premium and accrued and unpaid interest.

The make-whole premium represents the excess of the present value of 103 % of the principal amount plus all required scheduled interest payments through July 6, 2022 (excluding accrued and unpaid interest to the redemption date ) , over the principal amount to be redeemed.

On and after July 6, 2022, and prior to July 6, 2023, the notes are redeemable at a price equal to 103 % of the principal amount plus accrued and unpaid interest.

On and after July 6, 2023, the notes are redeemable at 100 % of the principal amount plus accrued and unpaid interest.

The Sitka AAC Note is secured by a pledge of AAC’s right, title and interest in (i) up to $ 1,400 of proceeds from certain litigations involving AAC related to residential mortgage-backed securities (the "RMBS Litigations") and (ii) the capital stock of Ambac UK.

Such collateral may prove to be insufficient to pay any or all the amounts due on the Sitka AAC Note due to (a) inherent uncertainty with respect to the amount

| Ambac Financial Group, Inc.

117 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

and timing of recoveries on the RMBS Litigations, and (b) uncertainty with respect to the value of Ambac UK and the amount that could be obtained in a sale or other disposition of such collateral due to factors such as market and economic conditions, the availability of buyers, constraints associated with any extant rehabilitation, liquidation or similar proceeding, and regulatory requirements with respect to a change in ownership of Ambac UK.

In addition, AAC issued a financial guaranty insurance policy (the “Sitka Senior Secured Notes Policy”) to the trustee for the Sitka Senior Secured Notes for the benefit of the holders of the Sitka Senior Secured Notes irrevocably guaranteeing all regularly scheduled principal and interest payments in respect of the Sitka Senior Secured Notes as and when such payments become due and owing.

Upon receipt of any proceeds from the RMBS Litigations or proceeds from the sale or disposition of Ambac UK, AAC shall apply an amount equal to the lesser of (a) the amount of such proceeds from the RMBS Litigations up to $ 1,400 or proceeds of the sale or disposition of Ambac UK, as the case may be, and (b) all outstanding principal, premium, if any, and accrued and unpaid interest on the Sitka AAC Note to redeem the Sitka AAC Note, in whole or in part, as applicable;

provided, that any non-cash recoveries from the RMBS Litigations shall be deemed to be received upon the receipt of the applicable appraisal.

LSNI Ambac Note

The LSNI Ambac Note, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, had a par value of $ — and $ 1,641 at December 31, 2021 and 2020, respectively, and had a legal maturity of February 12, 2023.

Interest on the LSNI Ambac Note was payable quarterly (on the last day of each quarter beginning with June 30, 2018) at an annual rate of 3-month U.S.

The Sitka AAC Note, issued in connection with the Secured Note Refinancing on July 6, 2021, was wholly redeemed effective October 29, 2022, as a result of the BOA Settlement Payment as more fully described in Note 1.

Background and Business Description.

Interest on the Sitka AAC Note was payable quarterly (on the last day of each quarter beginning with September 30, 2021) at an annual rate of 3-month U.S.

Dollar LIBOR + 4.50 %, subject to a 0.75 % LIBOR floor.

During the years ended December 31, 2021, 2020 and 2019, $ 1,641 , $ 121 and $ 178 par value of the LSNI Ambac Note was redeemed, respectively.

The maturity date for the LSNI Ambac Note was the earlier of (x) February 12, 2023, and (y) if the LSNI Secured Notes were then outstanding, the date that is five business days prior to the date for which OCI approved the repayment of the outstanding principal amount of the surplus notes issued by AAC.

Promptly, and in any event within four business days after the receipt (whether directly or indirectly) of any representation and warranty subrogation recoveries, AAC was to apply an amount (the “Mandatory Redemption Amount”) equal to the lesser of (a) the amount of representation and warranty subrogation recoveries up to $ 1,400 and (b) all outstanding principal and accrued and unpaid interest on the LSNI Ambac Note to redeem the LSNI Ambac Note, in whole or in part, as applicable;

provided, that any non-cash representation and warranty subrogation recoveries shall be deemed to be received upon the receipt of the applicable appraisal.

As further described in Note 1.

Background and Business Description, on July 6, 2021, Sitka, Ambac's newly formed non-consolidated VIE, issued the Sitka Senior Secured Notes that were used to fund a portion of the full redemption of the LSNI Secured Notes issued by LSNI, with the remaining balance redeemed utilizing other available sources of liquidity.

The Tier 2 Notes, issued in connection with the Rehabilitation Exit Transactions on February 12, 2018, with a par value of $ 333 and $ 306 (including paid-in-kind interest of $ 93 and $ 66 ) at December 31, 2021 and 2020, respectively, have a legal maturity of February 12, 2055.

Interest on the Tier 2 Notes is at an annual rate of 8.50 %.

Other than upon payment of principal at redemption or maturity, interest payments will not be made in cash on interest payment dates and shall be paid-in-kind and compounded on the last day of each calendar quarter.

The Tier 2 Notes were recorded at a discount to par as any consideration paid that was directly related to the issuance of the Tier 2 Notes was capitalized and is part of the effective yield calculation.

Ambac accreted the discount on the Tier 2 Notes into earnings using the effective interest method, at an imputed interest rate of 9.9 % based on projected redemption at the date of issuance.

The discount on Sitka AAC Note was being accreted into income at an effective interest rate of 5.7 %

The Tier 2 Notes, issued on February 12, 2018, were partially redeemed on October 29, 2022, as a result of the BOA Settlement Payment as more fully described in Note 1.

Background and Business Description.

The Tier 2 Notes had a par value of $ 146 and $ 333 (including paid-in-kind interest of $ 49 and $ 93 ) at December 31, 2022 and 2021, respectively, and had a legal maturity of February 12, 2055.

Interest on the Tier 2 Notes was at an annual rate of 8.50 %.

Other than upon payment of principal at redemption or maturity, interest payments were not due in cash on interest payment dates and were paid-in-kind and compounded on the last day of each calendar quarter.

The Tier 2 Notes were recorded at a discount to par as any consideration paid that was directly related to the issuance of the Tier 2 Notes was capitalized and was part of the effective yield calculation.

Ambac accreted the discount on the Tier 2 Notes into earnings at an effective interest rate of 9.9 % based on the projected redemption at the date of issuance.

The discount had been fully accreted as of December 31, 2020.

The Tier 2 Notes are secured by recoveries from the RMBS Litigations in excess of $ 1,600 and are subject to mandatory redemption upon:

The Tier 2 Notes were secured by recoveries from the RMBS Litigations in excess of $ 1,600 and subject to mandatory redemption upon:

(i) receipt of recoveries from the RMBS Litigations in excess of $ 1,600 ("Tier 2 Net Proceeds") and (ii) payment of principal or interest on AAC surplus notes.

Promptly, and in any event within five business days after the receipt (whether directly or indirectly) of Tier 2 Net Proceeds, AAC shall deposit an amount equal to the Tier 2 Net Proceeds to a collateral account, provided, that any non-cash recoveries from the RMBS Litigations shall be deemed to be received upon the receipt of the applicable appraisal of the consideration received by AAC.

Similarly, within five business days after a surplus note payment (other than in connection with the Rehabilitation Exit Transactions), AAC shall deposit an amount based on the percentage of Surplus Notes paid applied to the outstanding balance of the Tier 2 Notes to a collateral account.

In both cases, the amount deposited shall not be in excess of the amount required to redeem all outstanding Tier 2 Notes.

Also, such amounts shall be used to initiate a redemption on the Initial Call Date (as defined below) for the Tier 2 Notes or, if the Initial Call Date has occurred, promptly following the receipt of the Tier 2 Net Proceeds or surplus note payment.

The Tier 2 Notes may also be redeemed, in whole or in part, at the option of AAC.

Both mandatory and optional redemptions may be made at a price equal to 100 % of the aggregate principal amount redeemed, plus accrued and unpaid interest, if any, plus a make-whole premium.

Make-whole premiums are calculated based on future interest payments through the contractual call date ("Initial Call Date").

The Initial Call Date at issuance of December 17, 2020 extends ratably beginning the first anniversary of issuance to (i) September 17, 2021 by the second anniversary, and (ii) March 17, 2022 by the third anniversary of issuance.

There are no extensions of the Initial Call Date beyond March 17, 2022.

The Initial Call Date for redemptions is determined based on the date the applicable amounts are deposited to the collateral account.

Promptly, and in any event within five business days after the receipt (whether directly or indirectly) of Tier 2 Net Proceeds, AAC was required to deposit an amount equal to the Tier 2 Net Proceeds to a collateral account.

As described in Note 1.

Background and Business Description, the Tier 2 Notes were fully redeemed effective January 15, 2023 as a result of the Nomura Settlement Payment.

Ambac UK Debt

The Ambac UK debt, issued in connection with the commutation of its exposure with respect to Ballantyne Re plc on June 18, 2019, has a par value of $ 41 and $ 41 at

| Ambac Financial Group, Inc.

118 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

December 31, 2021 and 2020, and a legal maturity of May 2, 2036.

The Ambac UK debt, issued in connection with the commutation of its exposure with respect to Ballantyne Re plc on June 18, 2019, has a par value of $ 41 and $ 41 at December 31, 2022 and 2021, and a legal maturity of May 2, 2036.

Interest on the Ambac UK debt is at an annual rate of 0.00 %.

The Ambac UK debt was recorded at its fair value at the date of issuance.

The discount on the debt is currently being accreted into income using the effective interest method at an imputed interest rate of 7.4 %.

The discount on the debt is currently being accreted into income at an effective interest rate of 7.4 %.

Variable Interest Entities, Long-term Debt

5 unchanged sentences

The total unpaid principal amount of outstanding long-term debt associated with VIEs consolidated as a result of the financial guarantee provided by Ambac was $ 3,388 and $ 3,739 as of December 31, 2022 and 2021, respectively.

As of December 31, 2021 and 2020, the ranges of final maturity dates of the outstanding long-term debt associated with these VIEs were December 2025 to August 2054 and December 2025 to August 2054, respectively.

As of December 31, 2022 and 2021, the ranges of final maturity dates of the outstanding long-term debt

| Ambac Financial Group, Inc.

116 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

associated with these VIEs were December 2025 to August 2054 and December 2025 to August 2054, respectively.

As of December 31, 2022 and 2021, the interest rates on these VIEs’ long-term debt ranged from 0.00 % to 7.93 % in both years.

2 unchanged sentences

REVENUES FROM CONTRACTS WITH CUSTOMERS

T he following table presents the MGA/U business operations revenues recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC disaggregated by policy type for the twelve months ended December 31, 2021:

Employer Stop Loss Affinity

Products Other Total

Gross commissions $ 8 $ 18 $ — $ 26

During the twelve months ended December 31, 2021, the amount of revenue recognized related to performance obligations satisfied in a previous period, inclusive of changes due to estimates was approximately $ 12 .

The following table presents the revenues recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC disaggregated by policy type for the year ended December 31, 2022 and 2021:

Year ended December 31, 2022 2021

Employer stop loss $ 9 $ 8

Affinity products 19 18

Commercial Auto, Marine and Other 3 —

Total 31 $ 26

During the year ended December 31, 2022, the amount of revenue recognized related to performance obligations satisfied in a previous period, inclusive of changes due to estimates was approximately $ 6 .

Contract Assets and Liabilities

1 unchanged sentence

December 31, 2022 2021

Commissions receivable $ 2 $ 2

Premiums and commissions receivable $ 7 $ 2

Contract assets 5 4

Contract liabilities 1 1

Contract assets represent estimated future consideration related to base commissions and profit-sharing commissions that were recognized as revenue upon the placement of the policy.

The Company does not have the right to bill or collect payment on i) base commissions until the insurer has collected the related premiums from policyholders nor ii) profit-sharing commissions until after the contract year is completed.

The change in contract assets during the year ended December 31, 2021, is primarily due to reclassification to receivables (unconditional right) and collections.

Contract assets represent estimated future consideration related to base commissions and profit-sharing commissions that were recognized as revenue upon the placement of the policy, but are not yet billable or collectable.

The Company does not have the right to bill or collect payment on i) base commissions until the related premiums from policyholders have been collected nor ii) profit-sharing commissions until after the contract year is completed.

The change in contract assets during the year ended December 31, 2022, was primarily due to the acquisition of All Trans and Capacity Marine, reclassification to receivables (unconditional right) and collections.

Contract liabilities represent advance consideration received from customers related to Employer stop loss base commissions that will be recognized over time as claims servicing is performed, which typically occurs between 17 and 20 months from contract inception.

42 unchanged sentences

Year Ended December 31,

Unrealized Gains (Losses) on Available-for-Sale Securities (1)

Unrealized Gains (Losses) on

Available-for-Sale Securities (1)

$ ( 17 ) $ ( 7 ) Net realized investment gains (losses)

22 unchanged sentences

As of December 31, 2022, 44,973,757 shares of AFG's common stock (par value $ 0.01 ) and warrants entitling holders to acquire up to 4,877,617 shares of new common stock at an exercise price of $ 16.67 per share were issued and outstanding.

Common shares outstanding increased by 495,000 , during the year ended December 31, 2021, primarily due to settlements of employee restricted and performance stock units.

Common shares outstanding decreased by 1,330,382 , during the year ended December 31, 2022, primarily due to share repurchases partially offset by settlements of employee restricted and performance stock units.

For the three years ended December 31, 2022, 2021 and 2020, — , 132 and 34 warrants were exercised, respectively, resulting in an issuance of — , 4 and 8 shares of common stock, respectively.

Share Repurchases

On March 29, 2022, AFG's Board of Directors approved a share repurchase program authorizing up to $ 20 in share repurchases, with an expiration date of March 31, 2024, which may be terminated at any time.

As of December 31, 2022, AFG repurchased 1,605,316 shares for $ 14.2 with an average purchase price of $ 8.86 per share.

On May 5, 2022, the Board of Directors authorized an additional $ 15 in share repurchase bringing the total unused authorized amount to $ 20.8 .

Warrant Repurchases

On June 30, 2015, the Board of Directors of AFG authorized the establishment of a warrant repurchase program that permits the repurchase of up to $ 10 of warrants.

2 unchanged sentences

For the years ended December 31, 2022 and 2021, AFG did not repurchase any warrants.

Earnings Per Share Calculation

The numerator of the basic and diluted earnings per share computation represents net income (loss) attributable to common stockholders adjusted by the retained earnings impact of the adjustment to redemption value of redeemable noncontrolling interests under ASC 480.

The redemption value adjustment is further described in the Redeemable Noncontrolling Interests section of Note 2.

Basis of Presentation and Significant Accounting Policies .

The following table provides a reconciliation of net income attributable to common stockholders to the numerator in the basic and diluted earnings per share calculation, together with the resulting earnings per share amounts:

9 unchanged sentences

The following table provides a reconciliation of the common shares used for basic net income per share to the diluted shares used for diluted net income per share:

December 31, 2021 2020 2019

Year Ended December 31,

2022 2021 2020

Basic weighted average shares outstanding 45,719,906 46,535,001 46,147,062

15 unchanged sentences

Although a portion of these performance metrics have been achieved as of the respective period end, it is possible that awards may no longer meet the metric at the end of the performance period.

AFG files a consolidated Federal income tax return with its subsidiaries.

AFG and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions.

The following are the major jurisdictions in which Ambac and its subsidiaries operate and the earliest tax years subject to examination:

4 unchanged sentences

United Kingdom 2019

Consolidated Pretax Income (Loss)

and foreign components of pre-tax income (loss) were as follows:

2021 2020 2019

$ ( 32 ) $ ( 441 ) $ ( 174 )

Foreign 34 1 ( 9 )

Total $ 2 $ ( 440 ) $ ( 183 )

| Ambac Financial Group, Inc.

4 unchanged sentences

(Dollar Amounts in Millions, Except Share Amounts)

Consolidated Pretax Income (Loss)

and foreign components of pre-tax income (loss) were as follows:

Year Ended December 31, 2022 2021 2020

$ 511 $ ( 32 ) $ ( 441 )

Foreign 13 34 1

Total $ 525 $ 2 $ ( 440 )

Provision (Benefit) for Income Taxes

The components of the provision (benefit) for income taxes were as follows:

2021 2020 2019

Year Ended December 31, 2022 2021 2020

Current taxes

state and local

$ 2 $ — $ ( 3 )

Total current taxes

5 unchanged sentences

The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2022, 2021 and 2020 is as follows:

2021 2020 2019

Year Ended December 31, 2022 2021 2020

Total income taxes charged to net income $ 2 $ 18 $ ( 3 )

Income taxes charged (credited) to stockholders’ equity:

Unrealized gains (losses) on investment securities ( 3 ) 3 14

Unrealized gains (losses) on foreign currency translations — — —

Unrealized gains (losses) on investment securities, including foreign exchange ( 47 ) ( 3 ) 3

Change in retirement benefits — — —

Credit Risk Changes to Fair Value Options — — —

Valuation allowance to equity 41 1 ( 3 )

13 unchanged sentences

Substantiation adjustment — — % — — % ( 29 ) 7 %

Variable Interest Entities 25 5 % — — % — — %

Valuation allowance ( 131 ) ( 25 ) % ( 4 ) ( 230 ) % 113 ( 26 ) %

3 unchanged sentences

The Company had no material unrecognized tax benefits at December 31, 2021 and 2020.

| Ambac Financial Group, Inc.

120 2022 FORM 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Deferred Income Taxes

9 unchanged sentences

Net operating loss carryforward 725 736

Interest expense carryforward 66 50

Investments 6 —

Loss reserves 38 180

6 unchanged sentences

Net deferred tax liability $ 15 $ 28

| Ambac Financial Group, Inc.

122 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

In accordance with the Income Tax Topic of the ASC, a valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some, or all, of the deferred tax asset will not be realized.

3 unchanged sentences

and is classified in other liabilities on the Consolidated Balance Sheet.

Pursuant to a 2013 Closing Agreement between Ambac and the United States Internal Revenue Service ("IRS"), AAC could have to pay amount to as much as $ 8 to the IRS should AAC utilize NOLs available to it as of December 31, 2019.

As of December 31, 2021, the Company has $ 3,744 of NOLs, which if not utilized will begin expiring in 2029, and will fully expire in 2041.

NOL Usage & Investment Interest Carryforward

Pursuant to a 2013 Closing Agreement between Ambac and the United States Internal Revenue Service ("IRS"), AAC could have to pay as much as $ 8 to the IRS in the year utilized should AAC utilize $ 2,142 of NOLs and Interest Expense Limitation available to it as of December 31, 2022.

As of December 31, 2022, the Company has (i) $ 3,454 of NOLs, which if not utilized will begin expiring in 2030, and will fully expire in 2043, and (ii) $ 314 of interest expense tax deduction carryover, which has an indefinite carryforward period but is limited in any particular year based on certain provisions.

Beginning in 2022, the Company is presenting these items separately in the deferred income tax table above with conforming display in 2021.

EMPLOYMENT BENEFIT PLANS

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The following table sets forth projected benefit payments from Ambac’s postretirement plan over the next ten years for current retirees:

The discount rate used in determining the projected benefit obligations for the postretirement plan is selected by reference to

a pension liability index with similar duration to that of the benefit plan.

The discount rate used in determining the projected benefit obligations for the postretirement plan is selected by reference to a pension liability index with similar duration to that of the benefit plan.

The rates used for the projected plan benefit obligations at the measurement date for December 31, 2022 and 2021, were 5.00 % and 2.75 %, respectively.

Savings Incentive Plans

As a result of the acquisition of Xchange on December 31, 2020, Ambac has two Savings Incentive Plans.

As a result of the acquisitions of All Trans and Capacity Marine effective November 1, 2022, Ambac has multiple savings incentive plans.

Substantially all US employees are covered by one of these plans.

The plan sponsored by AAC includes employer matching contributions equal to 100 % of the employees’ contributions, up to 3 % of such participants’ compensation, as defined in the plan, plus 50 % of contributions up to an additional 2 % of compensation, subject to limits set by the Internal Revenue Code.

The plan sponsored by Xchange includes employer matching contributions equal to 4 % of such participants' compensation, as defined in the plan.

The total cost of the savings incentive plans were $ 1 , $ 1 and $ 1 for the years December 31, 2021, 2020 and 2019, respectively.

The Plan sponsored by AFG includes employer matching contributions equal to 100 % of the employees’ contributions, up to 3 % of such participants’ compensation, as defined in the plan, plus 50 % of contributions up to an additional 2 % of compensation, subject to limits set by the Internal Revenue Code.

Xchange employees moved to this plan from a previous plan sponsored by Xchange during 2022.

The Xchange sponsored plan included employer matching contributions equal to 4 % of such participants' compensation, as defined in the plan.

Employees of All Trans and Capacity Marine are included in a multiple employer plan that has discretionary contributions for which none were made during Ambac's ownership of these entities.

The total cost of the

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

savings incentive plans were $ 1 , $ 1 and $ 1 for the years December 31, 2022, 2021 and 2020, respectively.

Incentive Compensation - Stock Units and Cash

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In addition, shares subject to outstanding awards granted under the 2013 Plan that subsequently terminate by expiration or forfeiture, cancellation, or otherwise without the issuance of such shares become available for awards under the 2020 Plan.

Of the total shares authorized for issuance pursuant to the 2020 Plan and 2013 Plan, 1,255,643 shares are available for future grant as of December 31, 2021.

Shares available for future grant are reduced by the maximum number of shares that could be issued pursuant to outstanding performance awards.

The number of shares available for future grant considering the target number of shares instead of the maximum number of shares related to performance awards is 2,691,618 .

Of the total shares authorized for issuance pursuant to the 2020 Plan and 2013 Plan, the following are the number of shares available for future grant at December 31, 2022:

• 74,907 shares when shares available for future grant are reduced by the maximum number of shares that could be issued pursuant to outstanding performance awards;

• 1,145,243 shares when shares available for future grant are reduced by the probable number of shares that could be issued pursuant to outstanding performance awards which are subject to change depending on actual performance.

On June 24, 2021, the compensation committee of Ambac's Board of Directors adopted the Ambac Financial Group, Inc.

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The Stock Deferral Plan is not funded, and deferred awards under the Stock Deferral Plan are not segregated from the Company’s general assets.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

The amount of stock-based compensation expense and corresponding after-tax expense are as follows:

Year Ended December 31,

2022 2021 2020

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Total stock-based compensation $ 17 $ 14 $ 11

$ 14 $ 11 $ 12

Total stock-based compensation (after-tax) $ 17 $ 14 $ 11

$ 14 $ 11 $ 12

Restricted Stock Units (“RSUs”)

RSUs have been awarded to certain employees for a portion of their STIP compensation, LTIP compensation, sign-on and special awards for exceptional performance.

RSUs have also been awarded to consultants for meeting certain contractual performance goals.

The previously issued STIP awards vested upon grant, but settlement was deferred (other than for employment tax withholdings) into two equal installments generally on the first and second anniversary date of the grant.

RSUs can be awarded to certain employees for a portion of their STIP compensation, LTIP compensation, sign-on and special awards for exceptional performance.

RSUs can also be awarded to consultants for meeting certain contractual performance goals.

The LTIP, sign-on, consultant and special awards generally vest in equal installments over a two to three year period.

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Shares Weighted Average

Fair Value Per Share

Outstanding at beginning of period 837,070 $ 17.82

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(1) When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to cover the employee’s withholding taxes.

For the year ended December 31, 2021, Ambac purchased 88,723 of shares from employees that settled restricted stock units to meet the required tax withholdings.

Ambac’s closing share price on the grant date was used to estimate the fair value of the service condition based RSU on the grant date.

The weighted average grant date fair value of RSUs granted during 2021, 2020 and 2019 was $ 17.39 , $ 17.36 and $ 19.75 , respectively.

As of December 31, 2021, there was $ 5 of total unrecognized compensation costs related to unvested RSUs granted.

These costs are expected to be recognized over a weighted average period of 1.7 years.

The fair value for RSUs vested and delivered during the year ended December 31, 2021, 2020 and 2019 was $ 4 , $ 4 and $ 4 , respectively.

Performance Stock Awards ("PSUs")

Performance awards granted vest in 3 years and awards have components relative to performance at AFG, Xchange and AAC.

Actual awards can payout 0 % to 220 % of the number of units granted.

Under currently outstanding award agreements, performance will be evaluated as follows:

• AFG performance, as it relates to the 2019 PSU awards, will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period (exclusive of AAC and its subsidiaries' earnings), which is intended to reward participants for generating pre-tax income.

• Xchange, as it relates to the 2021 PSU awards, will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period.

• AAC performance will be evaluated according to:

(i) changes in AAC's assets relative to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of AAC (2019 and 2020 PSU awards only) and (ii) reductions in watch list and adversely classified credits, which is intended to reward participants for de-risking the financial guarantee insured portfolio.

• In 2019, a relative Total Shareholder Return modifier was added as an additional metric with respect to the LTIP award payouts.

The modifier will cause the payout at the end of the performance period to be increased or decreased by 10 % if AFG's stock performance compared to a peer group is at or above the 75 th percentile or at or below the 25 th percentile, respectively .

For the year ended December 31, 2022, Ambac withheld 97,871 shares from

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(Dollar Amounts in Millions, Except Share Amounts)

and (ii) a termination occurred prior to the last day of the performance period by reason of death, the beneficiaries of the recipient would be entitled to receive the number of PSUs that the recipient would have been entitled to receive at a 100 % overall payout multiple regardless of the outcome of any of the performance conditions.

employees that settled restricted stock units to meet the required tax withholdings.

Ambac’s closing share price on the grant date was used to estimate the fair value of the service condition based RSU on the grant date.

The weighted average grant date fair value per share of RSUs granted during 2022, 2021 and 2020 was $ 12.48 , $ 17.39 and $ 17.36 , respectively.

As of December 31, 2022, there was $ 4 of total unrecognized compensation costs related to unvested RSUs granted.

These costs are expected to be recognized over a weighted average period of 1.6 years.

The fair value for RSUs vested and delivered during the year ended December 31, 2022, 2021 and 2020 was $ 4 , $ 4 and $ 4 , respectively.

Performance Stock Awards ("PSUs")

PSUs are awarded to certain employees for a portion of their LTIP compensation and vest after 3 years from grant date.

The actual number of shares payable at settlement is subject to performance metrics relative to AFG, Xchange, Everspan and AAC.

Actual payout can range from 0 % to 240 % of the number of units granted.

Under currently outstanding award agreements, performance will be evaluated as follows:

• In regards to Xchange, for the 2021 and 2022 PSU awards, cumulative earnings before interest, taxes, depreciation and amortization over the vesting period.

• In regards to Everspan, for the 2022 PSU awards, cumulative earnings before interest, taxes, depreciation and amortization over the vesting period.

• In regards to AAC:

(i) changes in AAC's assets relative to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of AAC (2020 PSU awards only) and (ii) reductions in watch list and adversely classified credits, which is intended to reward participants for de-risking the financial guarantee insured portfolio.

• Relative Total Shareholder Return;

the modifier will cause the payout at the end of the performance period to be increased or decreased 10 % for awards issued through 2021 and 20 % for 2022 awards, if AFG's stock performance compared to a peer group is at or above the 75 th percentile or at or below the 25 th percentile, respectively .

Pursuant to the LTIP award agreements if (i) a termination occurs by reason of disability, an involuntary termination by the Company other than for “cause,” or "retirement," the recipient would be entitled to receive the PSU award which would only be payable at the end of the relevant performance period and based on the satisfaction of the performance conditions related to such award at the time of termination and (ii) a termination occurred prior to the last day of the performance period by reason of death, the beneficiaries of the recipient would be entitled to receive the number of PSUs that the recipient would have been entitled to receive at a 100 % overall payout multiple regardless of the outcome of any of the performance conditions.

The current performance awards shall be settled within 75 days after the end of the performance period, including those with partial or accelerated vesting, subject to any deferrals made pursuant to the Stock Deferral Plan.

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Shares Weighted Average

Fair Value Per Share

Outstanding at beginning of period 722,056 $ 18.97

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Performance adjustment (3)

289,912 15.09

Outstanding at end of period 918,951 $ 15.67

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As of December 31, 2022, there was $ 8 of total unrecognized compensation costs related to the PSU portion of unvested performance awards, which are expected to be recognized over a weighted average period of 1.6 years.

Ambac is the lessee and lessor for certain lease agreements further described below.

The fair value for PSUs vested and delivered during the year ended December 31, 2022, 2021 and 2020 was $ 5 , $ 10 and $ 4 , respectively.

Ambac is the lessee and lessor under certain lease agreements further described below.

Lessee information

Ambac is the lessee in operating leases for corporate offices, a data center and equipment.

Leases in effect at December 31, 2021, have remaining lease terms ranging from slightly over 2 years to 8 years.

Ambac is the lessee in operating leases for corporate offices, a data center, auto and equipment.

Leases in effect at December 31, 2022, have remaining lease terms ranging from under 1 year to 7 years.

Certain of these leases include automatic renewal or early termination provisions.

Ambac does not include these provisions in the determination of its lease liabilities and

right-of-use assets unless exercise is considered reasonably certain.

Ambac does not include these provisions in the determination of its lease liabilities and right-of-use assets unless exercise is considered reasonably certain.

Lease costs are included in operating expenses on the Consolidated Statement of Total Comprehensive Income (Loss).

The components of lease costs, net of sub-lessor income, is as follows:

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Year Ended December 31, 2022 2021

Operating lease cost $ 4 $ 5

Short-term lease cost — —

Variable lease cost — —

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Operating lease right of use assets and operating lease liabilities are included in Other assets and Other liabilities, respectively, on the consolidated balance sheet.

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AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Future undiscounted lease payments, gross of sublease receipts, to be made are as follows:

As of December 31, 2022 Operating Leases

Thereafter 14

Total lease payments 32

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COMMITMENTS AND CONTINGENCIES

Litigation Against Ambac

Litigation Against Ambac - Pending Cases

Monterey Bay Military Housing, LLC, et al.

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The claims relate to bonds and debt certificates (insured by AAC) that were issued to finance the renovation and construction of housing at certain military bases.

Plaintiffs allege that defendants secretly conspired to overcharge plaintiffs for the financing of the projects and directed the excess profits

to themselves.

Plaintiffs allege that defendants secretly conspired to overcharge plaintiffs for the financing of the projects and directed the excess profits to themselves.

Plaintiffs allege defendants generated these excess profits by supposedly charging inflated interest rates, manipulating “shadow ratings,” charging unnecessary fees, and hiding evidence of their alleged wrongdoing.

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On September 26, 2019, the court issued a decision denying defendants’ motion to dismiss and sua sponte reconsidering its previous denial of defendants’ motion to transfer venue to the Southern District of New York (“SDNY”).

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

On October 10, 2019, after the case was transferred to the SDNY, the defendants filed motions to vacate or reconsider the decision by the Northern District of California on the defendants’ motion to dismiss.

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Cave, to whom plaintiffs’ motion to strike was referred for a Report and Recommendation, issued an opinion and order denying plaintiffs’ motion.

On April 6, 2022, certain co-defendants filed a motion to sever the plaintiffs’ claims and to dismiss all claims except for claims asserted by the Monterey Bay plaintiffs.

In re National Collegiate Student Loan Trusts Litigation (Delaware Court of Chancery, Consolidated C.A.

12111, filed November 1, 2019).

On November 1, 2019, AAC became aware of a new declaratory judgment action filed by certain residual equity interest holders (“NC Owners” or “Plaintiffs”) in fourteen National Collegiate Student Loan Trusts (the “Trusts”) against Wilmington Trust Company, the Owner Trustee for the Trusts;

Bank National Association, the Indenture Trustee;

GSS Data Services, Inc., the Administrator;

Through this action, Plaintiffs seek a number of judicial determinations.

On January 21, 2020, the presiding Vice Chancellor entered an order consolidating the action with previously filed litigation relating to the Trusts.

On February 13, 2020, AAC, the Owner Trustee, the Indenture Trustee, and other parties filed declaratory judgment counterclaims.

Several parties, including Plaintiffs and AAC, filed motions for judgment on the pleadings in support of their requested judicial determinations.

On August 27, 2020, the Vice Chancellor issued an opinion addressing all of the pending motions for judgment on the pleadings, which granted certain of the parties’ requested judicial determinations and denied others.

He deferred judgment on still other declarations pending further factual development.

The Vice Chancellor has entered a series of stays to facilitate good-faith settlement discussions, the most recent of which was entered on January 27, 2023, and stays the matter through February 28, 2023.

Financial Oversight and Management Board for Puerto Rico, et al.

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On May 2, 2019, the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), together with the Official Committee of Unsecured Creditors for the Commonwealth (the “Committee”), filed an adversary proceeding against certain parties that filed proofs of claim on account of general obligation bonds issued by the Commonwealth of Puerto Rico, including AAC.

The complaint seeks declarations that the general obligation bonds are unsecured obligations and, in the alternative, seeks to avoid any security interests that holders of such bonds may have.

The complaint seeks declarations that the general obligation bonds are

unsecured obligations and, in the alternative, seeks to avoid any security interests that holders of such bonds may have.

On June 12, 2019, a group of general obligation bondholders moved to dismiss the complaint.

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certain other defendants filed motions to dismiss on this same date.

On February 9, 2020, the Oversight Board announced that it intended to file, and to seek to confirm, an amended plan of

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

adjustment (the “Commonwealth Plan”).

On February 9, 2020, the Oversight Board announced that it intended to file, and to seek to confirm, an amended plan of adjustment (the “Commonwealth Plan”).

On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempted to confirm the Commonwealth Plan.

The January 18, 2022 confirmation of the Commonwealth Plan, which is currently being appealed (as described below), resolved this litigation.

On May 9, 2022, the District Court dismissed this case.

Financial Oversight and Management Board for Puerto Rico, et al.

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19-ap-00363, filed May 20, 2019).

On May 20, 2019, the Oversight Board, together with the Committee, as Plaintiffs, filed an adversary proceeding against certain parties that filed proofs of claim on account of bonds issued by the Puerto Rico Highways and Transportation Authority ("PRHTA"), including AAC.

The complaint seeks declarations that the PRHTA bonds are only secured by revenues on deposit with the PRHTA fiscal agent and that PRHTA bondholders have no security interest in any other property of PRHTA or the Commonwealth, and in the alternative, to the extent such other security interests exist, the complaint seeks to avoid other security interests that holders of PRHTA bonds may have.

On June 14, 2019, at the request of the Plaintiffs, the District Court stayed the case until September 1, 2019 as to all defendants;

On June 14, 2019, at the request of the Plaintiffs, the District Court stayed the case until September 1, 2019;

on July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation.

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20-ap-00005, discussed below).

The October 12, 2022 confirmation of the PRHTA POA (as defined below), which is currently being appealed (as described below), resolved this litigation.

AAC expects this case will be dismissed pursuant to PRHTA POA.

Financial Oversight and Management Board for Puerto Rico v.

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20-ap-00003, filed Jan.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the Puerto Rico Infrastructure Financing Authority (“PRIFA”) and the PRIFA bond trustee, all of which defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring PRIFA (as defined below) bonds and the PRIFA bond trustee, all of which defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds.

The complaint seeks to disallow defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

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On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

On May 5, 2021, monoline defendants Assured Guaranty Corporation, Assured Guaranty Municipal Corporation (“Assured”), and National Public Finance Guarantee Corporation (“National”) announced an agreement with the Oversight Board with respect to the treatment of bonds issued by PRHTA and the Puerto Rico Convention Center District Authority (“PRCCDA”) (the “PRHTA/PRCCDA Settlement”).

On July 14, 2021, AAC and Financial Guaranty Insurance Company (“FGIC”) reached an agreement in principle with the Oversight Board with respect to the treatment of bonds issued by the Puerto Rico Infrastructure Financing Authority ("PRIFA") (the “PRIFA Settlement”), and as a result of that settlement, also joined the PRHTA/PRCCDA Settlement.

On August 2, 2021, the Oversight Board, AAC, FGIC, and the PRIFA bond trustee jointly moved to stay this case as a result of the PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA Settlement and the settlement related to general obligation and PBA bonds (“GO/PBA Settlement”).

On May 5, 2021, Assured

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(Dollar Amounts in Millions, Except Share Amounts)

Guaranty Corp.

and Assured Guaranty Municipal Corp.

(“Assured”) and National Public Finance Guarantee Corporation (“National”) announced an agreement with the Oversight Board with respect to the PRHTA/PRCCDA Settlement (as defined below).

On July 14, 2021, AAC and Financial Guaranty Insurance Company (“FGIC”) reached an agreement in principle with the Oversight Board with respect to the PRIFA Settlement (as defined below).

On August 3, 2021, the District Court ordered that this case be stayed.

Following the

filing of several revised versions of the Commonwealth Plan, the Court held a confirmation hearing in November 2021.

On January 18, 2022, the Court entered an order confirming the Commonwealth Plan, as amended, and entered its findings of fact and conclusions of law related thereto.

The Commonwealth Plan resolves the issues raised in this adversary proceeding.

Following confirmation of the Commonwealth Plan, several parties filed notices of appeal of the District Court’s confirmation order to the First Circuit Court of Appeals.

On February 1, 2022, Federación de Maestros de Puerto Rico, Inc., Grupo Magisterial Educadores(as) por la Democracia, Unidad, Cambio, Militancia y Organización Sindical, Inc., and Unión Nacional de Educadores y Trabajadores de la Educación, Inc.

(collectively, the “Teachers’ Unions”) moved for a stay of the confirmation order while the appeal is pending, and on February 4, 2022, Asociación Puertorriqueña de la Judicatura, Inc.

(“APJ”) and a number of credit unions (the “Credit Unions”) also filed motions for a stay pending appeal.

On February 9 and February 11, 2022, a number of parties—including AAC—filed oppositions to the stay motions, requesting, in the alternative, that the appealing parties seeking a stay be required to post supersedeas bonds pending appeal.

On February 11, 2022, the District Court entered an order granting APJ’s motion for voluntary dismissal of its appeal.

The District Court has taken the remaining stay motions on submission.

On February 17, 2022, the Oversight Board filed a notice of appeal of the District Court’s confirmation order, seeking review of the District Court’s finding regarding the nondischargeability of certain claims arising under the Takings Clause of the U.S.

Constitution.

The January 18, 2022 confirmation of the Commonwealth Plan, which is currently being appealed (as described below), resolved this litigation.

On September 30, 2022, the District Court entered an order closing this adversary proceeding.

Financial Oversight and Management Board for Puerto Rico v.

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20-ap-00004, filed Jan.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by the PRCCDA and the PRCCDA bond trustee, all of which defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring PRCCDA (as defined below) bonds and the PRCCDA bond trustee, all of which defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds.

The complaint seeks to disallow defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

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On August 3, 2021, the District Court ordered that this case be stayed.

Following the filing of several revised versions of the Commonwealth Plan, the Court held a confirmation hearing in November 2021.

On January 18, 2022, the Court entered an order confirming the Commonwealth Plan, as amended, and entered its findings of fact and conclusions of law related thereto.

The Commonwealth Plan resolves the issues raised in this adversary proceeding.

Following confirmation of the

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Commonwealth Plan, several parties filed notices of appeal of the District Court’s confirmation order to the First Circuit Court of Appeals.

On February 1 and 4, 2022, the Teachers’ Unions, APJ, and the Credit Unions moved for a stay of the confirmation order while this appeal is pending.

On February 11, 2022, the District Court entered an order granting APJ’s motion for voluntary dismissal of its appeal.

The District Court has taken the remaining stay motions on submission.

Constitution.

The January 18, 2022 confirmation of the Commonwealth Plan, which is currently being appealed (as described below), resolved this litigation.

On September 30, 2022, the Court entered an order closing this adversary proceeding.

Financial Oversight and Management Board for Puerto Rico v.

2 unchanged sentences

20-ap-00005, filed Jan.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by PRHTA, certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds.

On January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring PRHTA bonds, certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds.

The complaint seeks to disallow defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status.

1 unchanged sentence

On March 10, 2020, the District Court stayed the motions to dismiss and authorized the Oversight Board to move for summary judgment, which motion defendants opposed.

On May 5, 2021, Assured and National announced an agreement with the Oversight Board with respect to the PRHTA/PRCCDA Settlement.

May 5, 2021, Assured and National announced an agreement with the Oversight Board with respect to the PRHTA/PRCCDA Settlement.

On July 14, 2021, AAC and FGIC reached an agreement in principle with the Oversight Board with respect to the PRIFA Settlement.