What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-08 · 408 added, 654 removed, 473 unchanged (69% of the section changed)

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AFG Net Assets

AFG has the following net assets to support the development and growth of its existing subsidiaries, future acquisitions and capital management activities.

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

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

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

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

As of March 31, 2023, AFG's stand alone net assets, excluding its equity investments in subsidiaries, were $224.

Cash and short-term investments $ 179

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Other net assets 17

(1) Includes surplus notes (fair value of $69) issued by AAC that are eliminated in consolidation.

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

From April 1, 2022, through September 30, 2022, AFG repurchased 1,605,316 shares for $14 at an average purchase price of $8.86 per share.

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

(1) Includes strategic minority investments in insurance services businesses of $25.

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Specialty Property and Casualty Insurance Segment

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

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

31 2023 First Quarter FORM 10-Q |

AFG's subsidiaries/businesses are divided into three segments with results for the three months ended March 31, 2023 and 2022 as follows:

($ in millions) Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated

Three Months Ended March 31, 2023

Premiums placed $ 77 77

Gross premiums written $ 9 $ 52 $ 61

Net premiums written 9 9 18

Earnings before interest, taxes, depreciation and amortization (1) (5)

Total revenues 32 9 15 $ 2 58

Total expenses 64 10 11 2 86

Pretax income (loss) (32) (1) 4 — (29)

Stockholders Equity (1)

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

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

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

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

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

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

Insurance Distribution Segment

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

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

Ambac Stockholders’ Equity (1)

824 111 94 224 1,254

Non-redeemable noncontrolling interest 51 2 53

Total stockholders’ equity $ 875 $ 113 $ 94 $ 224 $ 1,307

Three Months Ended March 31, 2022

Premiums placed $ 45 45

Commission income $ 7 $ 22

Sub-producer commission expense (1)

Net commissions 3 9

Earnings before interest, taxes, depreciation and amortization 1 4

Pretax income (loss) $ 1 $ 3

Stockholders Equity (2)

(1) Included in Operating Expense within the Consolidated Statements of Comprehensive Income.

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

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

Refer to Note 1.

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

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

Legacy Financial Guarantee Insurance Segment

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

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

Net premiums earned $ 7 $ 31

Net investment income 9 (9)

Loss and loss expenses (benefit) (356) (347)

Operating expenses 20 64

Interest expense 49 138

Gross premiums written $ 6 $ 24 $ 30

Net premiums written 7 5 12

Total revenues 109 2 9 $ — 119

Total expenses 102 4 6 3 116

Pretax income (loss) 6 (2) 2 (3) 3

Stockholders Equity (1)

Adversely Classified Credit Net Par Outstanding $ 4,979

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

Ambac Stockholders’ Equity (1)

567 115 66 166 914

Non-redeemable noncontrolling interest 60 60

Total stockholders’ equity $ 627 $ 115 $ 66 $ 166 $ 974

(1) Represents Ambac's stockholders equity for each segment, including intercompany eliminations.

Legacy Financial Guarantee:

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

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

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

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

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

Refer to Note 1.

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

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Asset Management

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Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further details of fixed maturity investments by asset category and pooled investment funds by investment type.

At September 30, 2022, AAC owned $282 of distressed Ambac-insured bonds, including significant concentrations of insured RMBS bonds, and excluding Ambac's holdings of Sitka Senior Secured Notes.

As a result of the Puerto Rico restructurings discussed under "Liability and Insured Exposure Management" below, the amount of Ambac-insured Puerto Rico bonds held in the investment portfolio was significantly reduced during the nine months ended September 30, 2022.

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

As further discussed in Note 1.

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

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

At March 31, 2023, AAC owned $287 of distressed Ambac-insured bonds, including significant concentrations of insured RMBS bonds.

Subject to internal and regulatory guidelines, market conditions and other constraints, Ambac may continue to opportunistically purchase or sell Ambac-insured securities,

surplus notes and/or other Ambac issued securities, and may consider opportunities to exchange securities issued or insured by it from time to time for other securities issued by it.

Liability and Insured Exposure Management

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

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

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

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

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

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

Ambac completed risk reduction transactions of $136 of net par exposure related to Puerto Rico for the three months ended March 31, 2023

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at March 31, 2023 and December 31, 2022.

Net par exposure within the U.S.

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

September 30,

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2023 December 31,

3 unchanged sentences

Watch list 3,026 3,044 (18) (1) %

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

The decrease in total and ACC credit net par outstanding resulted from active de-risking, scheduled maturities, amortizations, refundings and calls, partially offset by a weakening of the USD versus the GBP and EURO.

Banking Sector Crisis of 2023

The recent collapse of several banks precipitated a sudden loss of confidence in the banking system, prompting bank runs and the U.S.

government to provide direct support to failed banks and, through an expansive emergency lending program, the system more broadly.

In the U.S., this crisis was in part a consequence of rising interest rates, resulting in large declines in the market value of U.S.

Treasury and government-backed debt held by banking institutions.

The risk of additional bank failures due to asset-liability mismatches or other risks, such as outsized exposure to commercial real estate, remains.

Despite recent actions by government agencies and regulators to mitigate the consequences of these bank failures by providing liquidity and guaranteeing uninsured deposits, there is no guarantee that they will provide similar support in the event of additional bank failures.

In Europe, regulators stepped in to facilitate mergers of stressed banks into more stable institutions.

The ability or willingness of healthy banks to merge with stressed banks in the future is also subject to significant uncertainty.

Ambac's cash balances held at banks was $43 as of March 31, 2023 and $44 as of December 31, 2022.

Substantially all of these cash balances were uninsured as of March 31, 2023 and December 31, 2022 because they either (i) exceeded the $250,000 FDIC insurance limit or (ii) were held in foreign banks.

These cash balances were held primarily with Ambac's main operating banks which are large money center and/or global banks.

Ambac actively manages its cash balances to reduce bank risk and to enhance yield by transferring most of its funds to government and prime money market funds.

Included in the cash balances above is $15 of cash of companies Ambac has acquired within its insurance distribution businesses that are held in regional banks.

The management of these balances and the associated bank exposure is under consideration as part of Ambac's ongoing integration of these acquired businesses.

Ambac also has exposure to banks through its fixed maturity investment portfolio totaling $157 and $119 as of March 31, 2022, and December 31, 2023.

All of these investments are managed by third-party asset management firms which follow single and sector risk limits established by Ambac.

The average rating of our fixed income investment in banks was A- as of March 31, 2023.

Russia and Ukraine Conflict

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

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

We do not have operations in Russia or Ukraine

or any insured exposures in those countries.

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

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Financial Statement Impact of Foreign Currency:

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

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the three months ended March 31, 2023, included the following:

Net income (1)

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Future changes to currency rates may adversely affect our financial results.

Refer to Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31,

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

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

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

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

Similar Federal legislation gained approval in March of 2022.

The Alternative Reference Rates Committee, the Federal Reserve Board and several industry associations and groups have expressed support for the new law.

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

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

See the Risk Factor entitled "Uncertainties regarding the expected discontinuance of the London Inter-Bank Offered Rate or any other interest rate benchmark could have adverse consequences" found in Part I, Item 1A of Ambac’s Annual Report on Form 10-K for the year ended December 31, 2021.

Also, for further background and information about management's evaluation of Ambac's potential exposures to LIBOR transition, see "Executive Summary — LIBOR Sunset" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2021.

SEC Proposed Rules on Climate Related Information

On March 21, 2022, the Securities and Exchange Commission (“SEC”) proposed rule amendments that would require public companies to include certain climate-related information in their periodic reports and registration statements, including oversight and governance, material impacts (operational and financial), risk identification and management, and Scope 1, 2 and 3 emissions (the “Proposed Rule”).

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

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

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

Refer to Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further information on the impact of future currency rate changes on Ambac's financial instruments.

CRITICAL ACCOUNTING ESTIMATES

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structured and international finance.

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

The following table provides a breakdown of guaranteed net par outstanding by market at March 31, 2023 and December 31, 2022.

Net par exposures within the U.S.

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

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

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

Background and Business Description in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021:

September 30,

Guaranteed net par outstanding includes the exposures of policies insuring variable

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interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC.

Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded.

2023 December 31,

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Total net par outstanding $ 22,440 $ 22,613

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

(2) Includes $467 and $1,054 of Puerto Rico net par outstanding at September 30, 2022 and December 31, 2021, respectively.

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The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at September 30, 2022:

Risk Name Country-Bond Type Ambac

(1) Includes $5,377 and $5,400 of Military Housing net par outstanding at March 31, 2023 and December 31, 2022, respectively.

(2) Includes $106 and $244 of Puerto Rico net par outstanding at March 31, 2023 and December 31, 2022, respectively.

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at March 31, 2023:

Bond Kind Country-Bond Type Ambac

Outstanding % of Total

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

IF AUK Capital Hospitals plc (2)

UK-Infrastructure A- 2046 810 3.4 %

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

IF AUK National Grid Gas UK-Utility BBB+ 2037 718 3.0 %

IF AUK Aspire Defence Finance plc UK-Infrastructure A- 2040 670 2.8 %

PF AAC New Jersey Transportation Trust Fund Authority US-Lease and Tax-backed Revenue BBB- 2036 623 2.6 %

IF AUK Posillipo Finance II S.r.l Italy-Sub-Sovereign BIG 2035 556 2.3 %

IF AUK National Grid Electricity Transmission UK-Utility BBB+ 2036 500 2.1 %

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

UK-Infrastructure BBB- 2040 470 2.0 %

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

IF AUK Investor Owned Utility Gas - unsecured UK-Utility BBB+ 2037 $ 838 2.8 %

IF AUK Other Asset Securitizations UK-Asset Securitizations BBB 2033 737 3.1 %

IF AUK PFI - Accommodation UK-Infrastructure A- 2040 727 3.3 %

IF AUK PFI - Hospitals UK-Infrastructure A- 2046 704 3.7 %

IF AUK Investor Owned Utility Other - unsecured UK-Utility A- 2035 628 3.2 %

IF AUK Sub-Sovereign Italy-Sub-Sovereign BIG 2035 599 2.2 %

IF AUK Investor Owned Utility Electric - unsecured UK-Utility BBB+ 2036 576 2.7 %

PF AAC US State Lease/Appropriation US-Lease and Tax-backed Revenue BBB- 2036 489 2.6 %

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

PF AAC Military Housing US-Housing Revenue BBB- 2052 449 2.0 %

Total $ 6,219 27.7 %

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BIG denotes credits deemed below investment grade.

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

AAC has issued policies for these transactions that will only pay in the event that Ambac UK does not pay under its insurance policies ("second to pay policies").

Net par related to the top ten exposures reduced $987 from December 31, 2021.

Exposures are impacted by changes in foreign exchange rates ($1,045 reduction during the nine months ended September 30, 2022), certain indexation rates, reinsurance transactions and scheduled and unscheduled paydowns.

Net par related to the top ten exposures increased $103 from December 31, 2022.

Exposures are impacted by changes in foreign exchange rates ($108 increase during the three months ended March 31, 2023), certain indexation rates, reinsurance transactions and scheduled and unscheduled paydowns.

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

The concentration of net par amongst the top ten (as a percentage of net par outstanding) was 27% at September 30, 2022, and 26% at December 31, 2021.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) was 28% at March 31, 2023, and 27% at December 31, 2022.

Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $30 per single risk, with insured exposures ranging up to $384 and a median net par outstanding of $5.

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

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

Each issuing entity has its own credit risk profile attributable to, as applicable, discreet revenue sources, direct general obligation pledges and general obligation guarantees.

Net Par Outstanding

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

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

PR Sales Tax Financing Corporation - Senior Sales Tax Revenue (COFINA) 69 73

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

PR Infrastructure Financing Authority (Special Tax Revenue) — 403

PR Convention Center District Authority (Hotel Occupancy Tax — 86

Commonwealth of Puerto Rico - General Obligation Bonds — 11

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

Total Net Exposure to The Commonwealth of Puerto Rico and Related Entities $ 467 $ 1,054

Commonwealth Plan of Adjustment (Title III Case)

On March 15, 2022, the Eighth Amended Title III Joint Plan of Adjustment of the Commonwealth of Puerto Rico, et al.

("Eighth Amended POA") together with the Qualifying Modifications for PRIFA and CCDA ("PRIFA QM" and "CCDA QM", respectively) became effective, restructuring approximately $33,000 of debt across various Commonwealth instrumentalities, including obligations insured by AAC, and approximately $50,000 in pension obligations.

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

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

AAC-Insured Bond Effective Date Transactions

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

1) their respective shares of GO/PBA plan consideration available under the Eighth Amended POA, and 2) cash from Ambac.

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

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

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

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

As of the effective date, all the remaining outstanding AAC-insured GO and PBA bonds totaling about $94 of insured par were satisfied and eliminated via commutation or acceleration.

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

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

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

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

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

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

Puerto Rico Highway and Transportation Authority (“PRHTA”)

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

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

PRHTA/CCDA PSA

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

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

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

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

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

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

The value of the Clawback CVI is highly uncertain, given the contingent, outperformance-driven structure.

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

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

PRHTA bondholders will also receive new PRHTA bonds or cash with a face amount of $1,245.

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

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

AAC and other PRHTA creditors will receive restriction fees and consummation costs payable at the effective date of the PRHTA POA.

Interim Distribution

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

The Interim Distribution to AAC totaled approximately $19 of cash and $295 maximum notional amount of Clawback CVI.

On the PRHTA POA effective date, a portion of the cash and Clawback CVI, or the proceeds thereof, will either be:

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

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below, together with the new PRHTA bonds or cash plan consideration in connection with the PRHTA POA.

Bondholder Elections

As outlined in the July 2022, Form of Election Notice for AAC-insured Bond Holders with Claims in Class 6 (the AAC Insured PRHTA 98 Senior Bonds), AAC-insured PRHTA 98 bondholders were each permitted to choose between two different treatment options for the satisfaction of their claims.

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

Under this option, bondholders will receive:

(i) their respective shares of certain consideration available under PRHTA/CCDA PSA, including the aforementioned Interim Distribution of cash and Clawback CVI from Ambac as well as the new PRHTA bonds or cash related to the PRHTA POA and (ii) a cash commutation payment from AAC equivalent to 48% of the outstanding insured bond balance as of July 1, 2022, less any subsequent insured policy payments prior to the PRHTA plan effective date.

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

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

Under the second option, the bondholders’ respective shares of consideration, or the proceeds thereof, related to the Interim Distribution from Ambac and the new PRHTA bonds or cash to be distributed under the PRHTA POA, will be deposited into a trust.

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

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

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

In addition, on the PRHTA plan effective date, all AAC-insured PRHTA 68 bonds will be accelerated, satisfying AAC’s obligations under the applicable AAC Insurance Policies.

Puerto Rico Considerations

The Eighth Amended POA and the qualifying modifications for PRIFA and CCDA became effective on March 15, 2022, and on that date and since, AAC-insured Puerto Rico exposures have been significantly reduced via commutation and acceleration.

However, uncertainty remains as to our remaining exposures as to (i) the value of the consideration provided by or on behalf of the debtors under the Eight Amended POA, as it relates to the PRHTA Interim Distribution, and under the PRHTA POA;

(ii) the extent to which exposure management strategies, such as commutation and acceleration, will be executed for PRHTA;

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

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

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

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

Ambac 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.

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

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

Exposure Currency

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

The table below shows the distribution by currency of AAC’s insured exposure as of March 31, 2023:

Currency Net Par Amount

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34 2023 First Quarter FORM 10-Q |

Ratings Distribution

The following charts provide a rating distribution of net par outstanding based upon internal Ambac credit ratings (1) and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at September 30, 2022 and December 31, 2021.

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

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Net Par Outstanding

Bond Type September 30,

Bond Type March 31,

2023 December 31,

Public Finance:

Puerto Rico $ 467 $ 1,054

Military Housing $ 365 $ 366

Puerto Rico 106 244

Other 212 213

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Total $ 3,778 $ 3,953

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

The net decline in below investment grade exposures is primarily due to the Puerto Rico de-risking of $136.

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

Accordingly, due to these and other factors, it is not unreasonable to expect the proportion of below investment grade exposure in the guarantee portfolio to increase in the future.

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Results of Operations ($ in millions)

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A summary of our financial results is shown below:

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

2022 2021 2022 2021

Three Months Ended March 31, 2023 2022

Gross premiums written $ 61 $ 30

Net premiums earned $ 14 $ 15

Commission income 14 9

Program fees 1 —

Net investment income 34 5

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Net gains (losses) on derivative contracts (4) 57

Net realized gains (losses) on extinguishment of debt — — 57 33

Commission income 7 7 22 20

Other income (expense) 1 1 5 —

Income (loss) on variable interest entities (1) 22

Losses and loss expenses (benefit) (353) (55) (341) (73)

Other income 3 2

Losses and loss adjustment expenses 18 24

Amortization of deferred acquisition costs, net 1 —

Commission expense 8 5

General and administrative expenses 36 29

Intangible amortization 7 14

Operating expenses 37 32 104 94

Interest expense 16 44

Provision (benefit) for income taxes 2 2 4 15

Provision for income taxes 4 —

Net income (loss) (33) 2

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

Net income (loss) attributable to common stockholders $ (33) $ 2

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

• AAC has successfully implemented the restructuring of a significant portion of its remaining Puerto Rico exposures, following the occurrence of the effective dates for the Plan of Adjustment related to AAC-insured Puerto Rico General Obligation bonds (“GO”) and Public Buildings Authority (“PBA”) bonds, and Qualifying Modifications for AAC-insured Puerto Rico Infrastructure Authority (“PRIFA”) and Convention Center District Authority (“CCDA”) bonds, all effective March 15, 2022.

As a result of these successful restructurings, Ambac recorded a gain in the amount of $198 as part of its first quarter 2022 consolidated financial results.

This gain included (i) a net benefit in losses and (ii) a gain on the consolidation of newly established variable interest entities;

partially offset by losses from sales and changes to the fair value of securities received in the restructuring and accelerated amortization of the insurance intangible asset.

In the second quarter 2022, the newly created VIEs combined with changes to the fair value of securities received by AAC resulted in losses totaling $17.

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

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

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

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

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

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35 2023 First Quarter FORM 10-Q |

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three months ended March 31, 2023 and 2022, respectively.

Gross Premiums Written.

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

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

2022 2021 2022 2021

Gross premiums written increased $30 for the three months ended March 31, 2023, compared to the same period in the prior year, as shown by segment below.

Three Months Ended March 31, 2023 2022

Legacy Financial Guaranty Insurance $ 9 $ 6

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Total $ 61 $ 30

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

Legacy Financial Guarantee Insurance gross written premiums relate to changes in expected and contractual premium cash flows for existing financial guarantees in force.

Net Premiums Earned.

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

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

2022 2021 2022 2021

Net premiums earned decreased $1 for the three months ended March 31, 2023, compared to the same period in the prior year as shown by segment below.

Three Months Ended March 31, 2023 2022

Legacy Financial Guaranty Insurance $ 7 $ 13

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Total $ 14 $ 15

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

The reduction in Legacy Financial Guarantee Insurance segment was primarily due to de-risking activities, including the Puerto Rico restructurings, and run-off of the insured portfolio.

Net Investment Income.

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

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

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

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

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and Other investments is summarized in the table below:

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

2022 2021 2022 2021

Securities available-for-sale:

Ambac-insured (including secured notes) $ 6 $ 8 $ 19 $ 37

Three Months Ended March 31, 2023 2022

Securities available-for-sale and short-term other than Ambac-insured $ 16 $ 7

Other investments (includes trading securities) 13 (9)

Securities available-for-sale:

Ambac-insured (including secured notes) 5 7

Net investment income (loss) $ 34 $ 5

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

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

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

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

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

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

Net investment income (loss) increased $29 for the three months ended March 31, 2023 compared to the prior year periods.

• Net investment income from available-for-sale and short-term securities, other than Ambac-insured increased for the three months ended March 31, 2023, compared to the same periods in the prior year due primarily to higher portfolio yields and, to a lesser extent, higher average holdings.

• Other investments income (loss) increased $22 for the three months ended March 31, 2023, compared to the same periods in the prior year.

Pooled fund investments results increased $12 for the three months ended March 31, 2023, compared to the prior year period, driven by improved performance on equities, high-yield and leveraged loans and private equity offset by lower returns on real estate.

Investments in pooled funds may be volatile, but are generally expected to produce higher returns than available-for-sale investments.

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

LSNI secured notes were held until redeemed in July 2021.

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

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

The three months ended March 31, 2023 also included gains of less than $1 on securities received in the Puerto Rico restructurings which are classified as trading.

These trading securities produced losses of $(9) for the three months ended March 31, 2022.

• Net investment income from Ambac-insured securities for the three months ended March 31, 2023, decreased $2 compared to the prior year periods, due to settlement of insured Puerto Rico bonds in 2022.

Net Investment Gains (Losses), including Impairments.

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

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

2022 2021 2022 2021

Three Months Ended March 31, 2023 2022

Net gains (losses) on securities sold or called $ (1) $ 8

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Net investment gains (losses), including impairments $ (4) $ 10

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

Net gains for the nine months ended September 30, 2022, also included a recovery of $9 from a class-action settlement relating to certain RMBS securities previously held in the investment portfolio.

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

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

Net gains (losses) on securities sold or called for the three months ended March 31, 2022, included a recovery of $9 from a class-action settlement relating to certain RMBS securities previously held in the investment portfolio.

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

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

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If management either:

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

Net Gains (Losses) on Derivative Contracts.

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

(i) has the intent to sell its investment in a debt security or (ii) determines that the Company is more likely than not will be required to sell the debt

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

36 2023 First Quarter FORM 10-Q |

security before its anticipated recovery, then the amortized cost of the security is written-down to fair value with a corresponding impairment charge recognized in earnings.

Net Gains (Losses) on Derivative Contracts.

Net gains (losses) on derivative contracts are driven primarily by results from the Company's interest rate derivatives portfolio.

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

This economic hedge positioning was substantially reduced for the three months ended March 31, 2023, compared to the prior year period.

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

Results from credit derivatives were not significant to the periods presented and as of June 30, 2022, all outstanding credit derivatives have matured.

Net gains (losses) on interest rate derivatives for the three and nine months ended September 30, 2022, were $37 and $122 compared to $5 and $18 for the three and nine months ended September 30, 2021.

The net gains in 2022 reflect changes in fair value from increases in forward interest rates and lower counterparty credit adjustments on certain derivative assets, partially offset by portfolio carrying costs.

The improved results for the three and nine months ended September 30, 2022, resulted from the significant rate increases in the periods combined with favorable portfolio positioning, and the impact of changing credit spreads in derivative assets as described further below.

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

Net gains (losses) on interest rate derivatives for the three months ended March 31, 2023, were $(4) compared to $57 for the three months ended March 31, 2022.

The net loss for the three months ended March 31, 2023, resulted primarily from interest rate decreases during the period and a higher counterparty credit adjustment on certain derivative assets.

The net gains in 2022 were driven by significant rate increases in the period combined with favorable portfolio positioning, and the impact of changing credit spreads in derivative assets as described further below.

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

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

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $2 and $6 for the three and nine months ended September 30, 2022, respectively, and $2 and $8 for the three and nine months ended September 30, 2021, respectively.

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

Commissions Income.

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

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $(1) and $2 for the three months ended March 31, 2023 and 2022, respectively.

The counterparty credit adjustments for both periods were driven primarily by changes to the underlying asset values.

Commissions Income and Commission Expense.

Commission income for the three months ended March 31, 2023 was $14 compared to $9, for the three months ended March 31, 2022.

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

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

Gross commission income has an accompanying expense, sub-producer commissions (included in Operating Expenses in the Consolidated Statements of Total Comprehensive Income (Loss), which will largely track changes in gross commission.

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

Net Realized Gains on Extinguishment of Debt.

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

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

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

Refer to Note 1.

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

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

The increase was driven by (i) commissions earned on All Trans and Capacity Marine, which were purchased in November 2022 and (ii) greater premiums placed by Xchange Benefits.

Gross commission income has an accompanying expense, commission expense, which will largely track changes in gross commission.

For the three months ended March 31, 2023, commission expense of $8 compared to $5 in three months ended March 31, 2022, driven primarily by the same factors as commission income.

Income (Loss) on Variable Interest Entities.

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

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

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

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

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

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

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

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Income (loss) on variable interest entities was $(1) for the three months ended March 31, 2023, compared to $22 for the three months ended March 31, 2022.

Results for the three months ended March 31, 2023 were impacted by accelerated interest costs from a VIE trust created in connection with the Puerto Rico restructurings, partially offset by gains on higher valuation of net assets on other FG VIEs.

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

The three months ended March 31, 2022 included the initial $28 gain upon consolidation on March 15, 2022, partially offset by subsequent declines in the fair value of the trusts' assets through March 31, 2022.

Refer to Note 9.

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Losses and Loss Expenses.

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

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

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

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

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

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

Loss and loss expenses decreased $6 for the three months ended March 31, 2023, compared to the same period in the prior year.

Legacy financial guarantee loss and loss expenses (benefit) were $13 for the three months ended March 31, 2023.

Specialty Property and Casualty Insurance loss and loss expenses were $5 for the three months ended March 31, 2023.

Intangible Amortization.

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

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

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

Operating Expenses.

Operating expenses consist of gross operating expenses plus reinsurance commissions.

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

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

2022 2021 2022 2021

Insurance intangible amortization for the three months ended March 31, 2023, was $6, a decrease of $8 as compared to the the three months ended March 31, 2022.

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The decrease was driven primarily by the timing of de-risking (including Puerto Rico in the three months ended March 31, 2022) and the reduced size of the financial guarantee insured portfolio.

Insurance intangible amortization will decline after policies mature or de-risked.

Other intangible amortization for the three months ended March 31, 2023, was $1 and $1 for the three months ended March 31, 2023 and 2022, respectively.

General and Administrative Expenses (G&A).

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

Three Months Ended March 31, 2023 2022

Compensation $ 16 $ 16

Non-compensation 20 13

Gross operating expenses 31 28 102 93

Sub-producer Commissions 4 4 13 11

Amortization of deferred acquisition costs 3 — 7 —

Reinsurance commissions, net (2) — (5) —

Total operating expenses $ 37 $ 32 $ 104 $ 94

The increase in gross operating expenses during the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, was due to the following:

• Higher compensation costs due to a net increase in staffing resulting from additions in the Specialty Property & Casualty Insurance and Insurance Distribution segments and higher incentive compensation expense including the impact of performance factor adjustments.

Total G&A expenses 36 29

The increase in G&A expenses during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was due to the following:

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

Specialty Property and Casualty Insurance segment auditing, licensing fees and equipment costs associated with growth of the business;

and Insurance Distribution segment sub-producer commissions.

These items were partially offset for the nine months comparative periods by first quarter 2021 advisory fees associated with Legacy Financial Guarantee Insurance debt restructuring.

• Higher compensation costs due to a net increase in staffing resulting from the development and growth, both organic and via acquisitions, of the Specialty Property & Casualty Insurance and Insurance Distribution segments, partially offset by lower incentive compensation expense including the impact of performance factor adjustments.

Interest Expense.

All interest expense relates to the Legacy Financial Guarantee Insurance segment and includes accrued interest on the LSNI Ambac Note, Sitka AAC Note, Tier 2 Notes, surplus notes and other debt obligations.

All interest expense relates to the Legacy Financial Guarantee Insurance segment and includes accrued interest on the Sitka AAC Note (fully redeemed during the fourth quarter of 2022), Tier 2 Notes (fully redeemed during the first quarter of 2023), surplus notes and other debt obligations.

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

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

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

2022 2021 2022 2021

Three Months Ended March 31, 2023 2022

Surplus notes $ 16 $ 20

$ 20 $ 20 $ 61 $ 57

LSNI Ambac Note — 1 — 50

Sitka AAC note — 17

Tier 2 Notes — 7

Other — — 1 1

Total interest expense $ 16 $ 44

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

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

The decrease in interest expense for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was mainly driven by the impact of the Secured Note Refinancing as further described in Note 1.

Background and Business Description, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, partially offset by discount accretion on surplus notes reissued in 2021.

The decrease in interest expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, reflects the impact of the 2022 redemption of secured notes as further described in Note 1.

These transactions resulted in lower debt outstanding.

Interest expense for 2023 also declined as a result of repurchases of surplus notes during 2022.

These benefits were partially offset by the effects of interest compounding on surplus notes.

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

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

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of June 7, 2022.

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

In May 2023, OCI declined the request of AAC to pay

the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the then next scheduled payment date of June 7, 2023.

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

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

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

Total accrued and unpaid interest for surplus notes outstanding to third parties were $575 at September 30, 2022.

Total accrued and unpaid interest for surplus notes outstanding to third parties was $438 at March 31, 2023.

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

Provision for Income Taxes.

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

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

The provision for income taxes for the three months ended March 31, 2023 and 2022, was $4, and $0 respectively, an increase of $3 and primarily relate to international operations.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

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

2022 2021 2022 2021

Three Months Ended March 31, 2023 2022

Net premiums earned $ 7 $ 13

2 unchanged sentences

Net gains on derivative contracts (3) 57

Net realized gains on extinguishment of debt — — 57 33

Other (1) 4 17 5

Total 67 44 250 204

Other income 2 24

Loss and loss expenses (benefit) 13 23

Operating expenses 20 18 64 56

Total (336) (37) (283) (17)

General and administrative expenses 28 21

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

403 81 533 221

Interest expense 16 44

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The Legacy Financial Guarantee Insurance segment is in active runoff.

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

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

Additionally, the segment results are impacted by changes in interest rates as they impact net gains on derivative contracts and interest expense on the floating rate AAC Sitka Note.

This will generally result in declining premiums earned, investment income, G&A expenses and intangible amortization.

The variability in the segment financial results are primarily driven by (i) changes in loss and loss expenses resulting from, amongst other items, credit developments, interest rates and de-

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risking transactions;

(ii) changes in interest rates as they impact net gains (losses) on derivative contracts and interest expense on the floating rate Sitka AAC Note prior to its redemption, and (iii) volatility from Other investments income (loss) resulting from changes in market conditions and other performance factors.

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

Net premiums earned.

Net premiums earned decreased $4 and $5 for the three and nine months ended September 30, 2022, compared to the same period in the prior year.

Net premiums earned decreased $7 for the three months ended March 31, 2023, compared to the same period in the prior year.

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

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

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

• Accelerated financial guarantee premiums earned as a result of calls and other accelerations on insured obligations, largely due to active de-risking of the insured portfolio, of ($2) and $5 for the for the three and nine months ended September 30, 2022, as compared to $1 and $1 for the three and nine months ended September 30, 2021.

The positive impact on net premiums earned related to credit losses amounted to $0 fo r the three months ended March 31, 2023, as compared to $1 for the three months ended March 31, 2022.

• Accelerated financial guarantee premiums earned as a result of calls and other accelerations on insured obligations, largely due to active de-risking of the insured portfolio, were deminimis for the three months ended March 31, 2023, as compared to $4 for the three months ended March 31, 2022.

Losses and Loss Expenses.

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

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

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

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

Refer to Note 2.

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

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62 2022 Third Quarter FORM 10-Q |

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

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

2022 2021 2022 2021

Three Months Ended March 31, 2023 2022

Structured Finance $ 20 $ 213

Domestic Public Finance 3 (190)

Other (4) (4) (3) 3

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

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

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

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

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

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

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

Operating Expenses.

The increases in operating expenses of $2 and $5 during the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021, is due to additional legal fees related to defensive litigation costs and additional compensation costs from the impact of incentive compensation performance factor adjustments, partially offset by a net reduction in headcount within the segment.

Other, including International Finance (10) 1

Totals $ 13 $ 23

Loss and loss expenses (benefit) for the three months ended March 31, 2023, were largely driven by unfavorable loss development in the RMBS portfolio resulting from a decline in discount rates, partially offset by assumption changes in the international portfolio.

Losses and loss expenses (benefit) for the three months ended March 31, 2022, were driven by a reduction to AAC’s estimated R&W subrogation recoveries in the amount of $224, partially offset by favorable loss development in domestic public finance, primarily due to the Puerto Rico restructuring.

G&A Expenses.

The increases in G&A expenses of $7 during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, is due to additional legal fees related to defensive litigation costs, increased severance costs and the timing of expense reimbursements to Corporate that are recognized when approved by the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”).

These increases were partially offset by lower compensation costs due to reduced headcount within the segment and lower incentive compensation including the impact of performance factor adjustments.

Specialty Property and Casualty Insurance

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

2022 2021 2022 2021

Three Months Ended March 31, 2023 2022

Gross premiums written $ 52 $ 24

Net premiums written 9 5

Premiums earned $ 4 $ — $ 8 $ —

Net premiums earned $ 7 $ 1

Investment income 1 —

Net investment gains (losses), including impairments — —

Other income (program fees) 1 — 2 —

Total 6 — 11 1

Program fees 1 —

Losses and loss expenses incurred 5 1

Operating expenses 4 2 11 5

Total 7 2 16 5

Amortization of deferred acquisition costs, net 1 —

General and administrative expenses 4 3

EBITDA (1) $ (2)

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

Loss and LAE Ratio 65.2 % NM 65.7 % NM

Combined Ratio 150.8 % NM 176.5 % NM

Loss and LAE Ratio 66.6 % 65.3 %

Combined Ratio 129.7 % 302.4 %

Ambac's stockholders equity (1)

1 unchanged sentence

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

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

Fifteen programs were authorized to issue policies as of March 31, 2023.

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

6 unchanged sentences

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

General and administrative costs increased for the three months ended March 31, 2023 relative to the three months ended March 31, 2022 primarily resulting from the ramp up in Everspan's staffing and operations.

Additionally, the three months ended March 31, 2022 included costs associated with the acquisition of additional shell insurance companies in January 2022.

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

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

Segment pre-tax net income was favorably impacted by the growth in earned premium and program fees relative to loss and loss expenses incurred and operating expenses for the three month period ended September 30, 2022, compared to the three month period ended September 30, 2021.

Costs associated with the acquisition of additional shell insurance companies, as we continue to ramp up Everspan's operations, impacted pre-tax income for the nine months ended September 30, 2022, relative to the nine months ended September 30, 2021.

39 2023 First Quarter FORM 10-Q |

Insurance Distribution

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

2022 2021 2022 2021

Three Months Ended March 31, 2023 2022

Premiums placed $ 77 $ 45

Commission income $ 14 $ 9

Sub-producer commission expense (1)

Commission expense 8 5

Net commissions 7 4

Other Operating expenses (1)

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

EBITDA 1 1 4 4

General and administrative expenses (1)

Depreciation (1)

2 unchanged sentences

Ambac's stockholders equity (2)

(1) The Consolidated Statements of Comprehensive Income presents the sum of these items as Operating Expenses.

(1) The Consolidated Statements of Comprehensive Income presents the sum of these items as General and Administrative Expenses.

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

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

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

Ambac's Insurance Distribution businesses are compensated for their services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices.

Commission revenues are usually based on a percentage of the premiums placed.

Xchange is also eligible to receive profit sharing contingent commissions on certain of its programs based on the underwriting results of the policies it places with the carrier, which may cause some variability in revenue and earnings.

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

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

Higher premiums placed and shifts in mix of business were the primary drivers to the increases in both gross and sub-producer commissions.

Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which result in revenue and earnings concentrations in the first and third quarters each calendar year.

In addition, we are eligible to receive profit sharing contingent commissions on certain programs based on the underwriting results of the policies placed with carriers, which may cause some variability in revenue and earnings.

The Insurance Distribution segment placed premiums for its carriers of approximately $77 for the three months ended March 31, 2023, up $32 or 72% as compared to the three months ended March 31, 2022.

Higher premiums placed were driven by organic growth at Xchange, the acquisition of All Trans and Capacity Marine and the April 29, 2022, ESL renewal rights acquisition.

The increase in premiums placed and changes to the mix of business written led to the growth in commission income and commission expense of 69% and 76%, respectively.

Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which results in revenue and earnings concentrations in the first and third quarters each calendar year.

ESL is Xchange's largest business.

Other Operating Expenses.

Other operating expenses for the three and nine months ended September 30, 2022 increased slightly as compared to the three and nine months ended September 30, 2021 as a result of employees hired to support the ESL renewal rights acquisition that occurred on April 29, 2022.

G&A Expenses.

G&A expenses for the three months ended March 31, 2023, increased compared to the three months ended March 31, 2022, as a result of the All Trans and Capacity Marine acquisitions as well as employees hired to support the ESL renewal rights acquisition.

LIQUIDITY AND CAPITAL RESOURCES

3 unchanged sentences

AFG is a holding company with no outstanding debt.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $223 as of September 30, 2022, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

AFG's investments include securities directly issued by AAC (i.e.

surplus notes), which are eliminated in consolidation.

Securities issued by AAC and certain other of AFG's investments are generally less liquid than investment grade and highly traded investments.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns,

totaling $224 as of March 31, 2023, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

• Under an inter-company cost allocation agreement, AFG is reimbursed by AAC for a portion of certain operating costs and expenses and, if approved by OCI, entitled to an additional payment of up to $4 per year to cover expenses not otherwise reimbursed.

The $4 reimbursement for 2021 expenses was approved by OCI and paid to AFG in April 2022.

AFG's principal uses of liquidity are:

(i) the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which may include illiquid investments and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses.

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

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

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

AFG received distributions from Xchange of

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64 2022 Third Quarter FORM 10-Q |

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

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

The $4 reimbursement for 2022 and 2021 expenses was approved by OCI and paid to AFG during March of 2023 and April of 2022, respectively.

• Substantial uncertainty remains as to AAC's ability to pay dividends to AFG and the timing of any such dividends.

• Everspan's ability to make future dividend payments will mostly depend on its future profitability relative to its capital needs to support growth.

Everspan is not expected to pay dividends in the near term.

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

AFG received distributions from Cirrata of $2 and $2 during the three months ended March 31, 2023 and 2022.

AFG's principal uses of liquidity are:

(i) the payment of G&A expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which are generally illiquid and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses.

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

In the opinion of the Company’s management the net assets of AFG are sufficient to meet AFG’s current liquidity requirements.

7 unchanged sentences

• See Note 6.

Insurance Contracts to the Consolidated Financial Statements included in Part II, Item 8, in this Form 10-Q for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK.

Insurance Contracts to the Consolidated Financial Statements included in Part I, Item 1., in this Form 10-Q for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK.

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

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

Cash provided from these sources is used primarily for claim payments and commutations, loss expenses and acquisition costs (Specialty Property & Casualty Insurance segment only), debt service on outstanding debt (Legacy Financial Guarantee segment only), G&A expenses, reinsurance payments and purchases of

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40 2023 First Quarter FORM 10-Q |

securities and other investments that may not be immediately converted into cash.

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

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

As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, OCI declined AAC's request to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on June 7, 2023.

Long-term Debt to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, for further discussion of the payment terms and conditions of the Tier 2 Notes as well as the aggregate annual maturities of all debt outstanding.

As further described in Note 1.

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

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

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

AAC's future interest obligations on long-term debt after giving effect to the redemptions on October 29, 2022 include $678 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2023 (including surplus notes held by AFG), and Tier 2 Note interest that may be paid-in-kind until maturity on February 12, 2055 at which time $2,030 would be due.

Current principal outstanding on AAC's long-term debt consisted of $519 of surplus notes.

AAC's future interest obligations on long-term debt include $496 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2024.

• Ambac Financial Services ("AFS") uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as a partial economic hedge against the effects of rising interest rates elsewhere in the Legacy Financial Guarantee segment.

AFS's derivatives also include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings.

AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and operating expenses.

AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and G&A expenses.

Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI.

2 unchanged sentences

Insurance Distribution:

The liquidity requirements of our MGA subsidiaries are met primarily by funds generated from commission receipts (both base and profit commissions).

The liquidity requirements of our Insurance Distribution subsidiaries are met primarily by funds generated from commission receipts (both base and profit commissions).

Base commissions are generally received monthly, whereas profit commissions are received only if the business underwritten is profitable.

Cash provided from these sources is used primarily for commissions paid to sub-producers, operating expenses and distributions to AFG and other members.

Cash provided from these sources is used primarily for commissions paid to sub-producers, G&A expenses and distributions to AFG and other members.

Consolidated Cash Flow Statement Discussion.

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

Nine Months Ended September 30, 2022 2021

Three Months Ended March 31, 2023 2022

Cash provided by (used in):

4 unchanged sentences

Net cash flow $ 243 $ 93

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(1) During the second quarter of 2022, AAC made $393 of payments in connection with the acceleration of the AAC-insured PRIFA and CCDA bonds that were not commuted during the first quarter of 2022 and were deposited into the respective trusts.

The receipt of $393 from AAC plus the existing cash assets of the consolidated trusts fully redeemed the trust certificates (AAC was the holder of $164 of the PRIFA trust certificates that were fully redeemed).

As a result of the AAC claim payments and associated full redemption of the trust certificates, the remaining non-cash assets of the trusts, valued at $111, were distributed to AAC.

Because these trusts are consolidated VIEs, this activity will be reflected as $274 payments of VIE liabilities in second quarter 2022 financing activities.

(1) During the first quarter of 2023, AAC made $108 of payments to accelerate AAC-insured bonds that were deposited into trusts established under the Puerto Rico restructurings.

Because the trusts are consolidated VIEs, these payments are reflected as payments of VIE liabilities within financing activities in the first quarter 2023.

Operating activities

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

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

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

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

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

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

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

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

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

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

Nine Months Ended September 30, 2022 2021

The following represents the significant cash operating activity during the three months ended March 31, 2023 and 2022:

• Cash provided by (i) gross premiums were $48 and $28 for the three months ended March 31, 2023 and 2022, respectively;

(ii) interest rate derivatives were $11 and $11 for the three months ended March 31, 2023 and 2022, respectively;

(iii) investment portfolio income were $20 and $14 for the three months ended March 31, 2023 and 2022, respectively;

and (iv) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts was $47 for the three months ended March 31, 2022.

• Interest payments, including accumulated paid-in-kind interest on the Tier 2 Notes, were $50 for the three months ended March 31, 2023 and $15 for the three months ended March 31, 2022.

• Payments related to (i) G&A expenses we re $37 and $34 for the three months ended March 31, 2023 and 2022, respectively;

and (ii) reinsurance premiums paid were $31 and $7 for the three months ended March 31, 2023 and 2022, respectively

• Net Legacy Financial Guarantee Insurance loss and loss expenses paid, including commutation payments, during the three months ended March 31, 2023 and 2022 are detailed below:

Three Months Ended March 31, 2023 2022

Net loss and loss expenses paid (recovered):

3 unchanged sentences

Net cash flow $ (140) $ 28

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

(1) 2023 includes Nomura R&W settlement proceeds of $140

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

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Financing Activities

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

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

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

Financing activities for the three months ended March 31, 2023, included redemption of the Tier 2 Notes of $97 and paydowns and maturities of VIE debt obligations of $174 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

Financing activities for the three months ended March 31, 2022, include paydowns and maturities of VIE debt obligations of $49.

AFS hedges a portion of the interest rate risk in the Legacy Financial Guarantee Insurance segment financial guarantee and investment portfolios, along with legacy customer interest rate swaps, with standardized derivative contracts, including financial futures contracts, which contain collateral or margin requirements.

7 unchanged sentences

All collateral and margin obligations are currently met.

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

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Collateral and margin posted by AFS totaled a net amount of $71 (cash and securities collateral of $9 and $61, respectively), including independent amounts, under these contracts at March 31, 2023.

BALANCE SHEET ($ in millions)

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

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

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

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

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

derivative liabilities caused by rising interest rates;

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

As of September 30, 2022, total stockholders’ equity was $1,071, compared with total stockholders’ equity of $1,098 at December 31, 2021.

This decrease was primarily due to the changes in unrealized losses on invested assets and losses on foreign currency translation partially offset by net income for the nine months ended September 30, 2022.

Total assets increased by approximately $246 from December 31, 2022, to $8,219 at March 31, 2023, primarily due to:

(i) the increase in asset values of VIEs of $422, (ii) higher values on non-VIE invested assets and (iii) increases in premium receivables and reinsurance recoverables as a result of growth in the specialty P&C businesses.

The increase in VIE assets was driven by collateral received by FG VIEs and increased asset values including due to impact of the strengthening of the British Pound Sterling against the US dollar.

These factors were partially offset by (i) debt payments of $146 for the full redemption of Tier 2 Notes, and (ii) $108 of payments from Ambac Assurance to support partial redemptions of HTA Trust Certificates.

Total liabilities increased by approximately $245 from December 31, 2022, to $6,892 as of March 31, 2023, primarily due to increases in the value of VIEs liabilities of $329 (consistent factors as noted above in assets, including redemptions of HTA Trust Certificates).

Additional liability increases driven by (i) higher loss and loss adjustment expense reserves and (ii) an increase in unearned premium from the specialty P&C businesses.

These increases to total liabilities were partially offset by the redemption of the Tier 2 Notes of $146.

As of March 31, 2023, total stockholders’ equity was $1,307, compared with total stockholders’ equity of $1,305 at December 31, 2022.

This increase was primarily due to a decrease in unrealized losses on invested assets and gains on foreign currency translation, partially offset by the net loss for the three months ended March 31, 2022.

Investment Portfolio

3 unchanged sentences

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

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

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

September 30, 2022

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

Fixed maturity securities - trading 105 — — — 105

Short-term 387 27 — 109 523

Other investments 543 — — 16 559

Fixed maturity securities pledged as collateral 69 — — — 69

Total investments (1)

$ 2,382 $ 121 $ — $ 137 $ 2,640

December 31, 2021

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42 2023 First Quarter FORM 10-Q |

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

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

Fixed maturity securities $ 1,371 $ 110 $ — $ 13 $ 1,494 $ 1,281 $ 102 $ — $ 12 $ 1,395

5 unchanged sentences

$ 2,171 $ 133 $ — $ 205 $ 2,509 $ 2,259 $ 131 $ — $ 203 $ 2,593

(1) Includes investments denominated in non-US dollar currencies with a fair value of £296 ($330) and €37 ($37) as of September 30, 2022 and £341 ($462) and €38 ($43) as of December 31, 2021.

(1) Includes investments denominated in non-US dollar currencies with a fair value of £263 ($324) and €40 ($43) as of March 31, 2023 and £296 ($357) and €39 ($42) as of December 31, 2022.

Ambac invests in various asset classes in its fixed maturity securities portfolio.

2 unchanged sentences

Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for information about fixed maturity securities and pooled funds by asset class.

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The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at September 30, 2022 and December 31, 2021:

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at March 31, 2023 and December 31, 2022:

(1) Ratings are based on the lower of Moody’s or S&P ratings.

1 unchanged sentence

If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

(2) Below investment grade and not rated bonds insured by Ambac represent 22% and 32% of the September 30, 2022, and December 31, 2021, combined fixed maturity portfolio, respectively.

The decrease is primarily due to the impact of the settlement of insured Puerto Rico bonds described above, under Financial Guarantees in Force - AAC-Insured Bond Effective Date Transactions.

(2) Below investment grade and not rated bonds insured by Ambac represent 19% and 19% of the March 31, 2023, and December 31, 2022, combined fixed maturity portfolio, respectively.

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Premium Receivables

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

Ambac's premium receivables increased to $272 at March 31, 2023, from $269 at December 31, 2022.

As further discussed in Note 6.

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

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

At September 30, 2022, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $259 and $9, respectively.

Insurance Contracts, the increase is primarily due to growth in the Specialty P&C Insurance Segment.

At March 31, 2023, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $256 and $17, respectively.

Premium receivables by payment currency were as follows:

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and (iii) has certain cancellation rights that can be exercised in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

For those reinsurance counterparties that do not currently post collateral, Ambac’s reinsurers are well capitalized, highly rated, authorized capacity providers.

Ambac benefited from letters of credit and collateral amounting to approximately $99 from its reinsurers at September 30, 2022.

Those reinsurance counterparties that do not currently post collateral are well capitalized, highly rated, authorized capacity providers.

Ambac benefited from letters of credit and collateral amounting to approximately $115 from its reinsurers at March 31, 2023.

Additionally, while legacy liabilities from the 21st Century Companies and PWIC acquisitions were fully ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from the respective sellers to mitigate any residual risk to these reinsurers.

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

As of March 31, 2023 and December 31, 2022, reinsurance recoverable on paid and unpaid losses were $130 and $115, respectively primarily due to growth in the Specialty P&C Insurance Segment.

Intangible Assets

Intangible assets primarily include (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy (Legacy Financial Guarantee Insurance Segment) in 2013, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities of $272 at September 30, 2022, (ii) intangible assets established as part of the acquisition of

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Xchange (Insurance Distribution Segment) on December 31, 2020 of $31 at September 30, 2022, and (iii) indefinite-lived intangible assets established as part of the acquisitions of PWIC on October 1, 2021 and the 21st Century Companies on January 3, 2022 (Specialty Property & Casualty Insurance segment) of $14 at September 30, 2022.

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

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

carrying value of the financial guarantee insurance and reinsurance assets and liabilities of $261 at March 31, 2023, (ii) intangible assets established as part of acquisitions in the Insurance Distribution business of $46 at March 31, 2023, (iii) indefinite-lived intangible assets in the Specialty P&C business as part of its acquisitions of $14 at March 31, 2023.

As of March 31, 2023 and December 31, 2022, intangible assets were $321 and $326, respectively.

The decline is driven by amortization and translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK).

Derivative Assets and Liabilities

The interest rate derivative portfolio is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the Legacy Financial Guarantee insurance and investment portfolios.

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

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

The net decreases resulted primarily from higher interest rates during the nine months ended September 30, 2022.

Derivative assets increased from $27 at December 31, 2022, to $31 as of March 31, 2023.

Derivative liabilities increased from $38 at December 31, 2022, to $44 as of March 31, 2023.

The increases resulted primarily from lower interest rates during the three months ended March 31, 2023.

Loss and Loss Expense Reserves and Subrogation Recoverable

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Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for further information on loss and loss expenses.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of September 30, 2022 and December 31, 2021, were $(940) and $(522), respectively.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of March 31, 2023 and December 31, 2022, were $705 and $534, respectively.

Loss and loss expense reserves are included in the Unaudited Consolidated Balance Sheets as follows:

Specialty Property and Casualty Legacy Financial Guarantee

March 31, 2023:

December 31, 2022:

Specialty Property and Casualty Legacy Financial Guarantee Specialty Property and Casualty Legacy Financial Guarantee

Present Value of Expected

Net Cash Flows Unearned

Revenue Gross Loss

Balance Sheet Line Item Gross Loss

Revenue Gross Loss and Loss Expense

Reserves Present Value of Expected

Net Cash Flows Unearned

Revenue Gross Loss and Loss Expense

Balance Sheet Line Item Gross Loss and Loss Expense

Reserves Claims and

Expenses Recoveries (1)

September 30, 2022:

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

Subrogation recoverable — 37 (1,986) — (1,949)

Totals $ 75 $ 1,211 $ (2,192) $ (34) $ (940)

December 31, 2021:

Loss Expenses Recoveries (1)

Gross Loss and Loss Expense

Reserves Claims and

Loss Expenses Recoveries (1)

Loss and loss expense reserves $ 107 $ 822 $ (48) $ (30) $ 851 $ 90 $ 787 $ (44) $ (28) $ 805

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Totals $ 107 $ 824 $ (196) $ (30) $ 705 $ 90 $ 791 $ (319) $ (28) $ 534

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

(1) Present value of future recoveries includes R&W subrogation recoveries of $0 and $140 at March 31, 2023 and December 31, 2022, respectively.

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44 2023 First Quarter FORM 10-Q |

Legacy Financial Guarantee Insurance:

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These bond types represent 91% of our ever-to-date insurance claims recorded, with RMBS comprising 61%.

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

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at March 31, 2023 and December 31, 2022:

March 31, 2023:

December 31, 2022:

Outstanding (1)

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Net Cash Flows Unearned

Revenue Gross Loss

Revenue Gross Loss and Loss Expense

Reserves (1)(2)

Expenses Recoveries

September 30, 2022:

Outstanding (1)

Present Value of Expected

Net Cash Flows Unearned

Revenue Gross Loss and Loss Expense

Reserves (1)(2)

Loss Expenses Recoveries Claims and

Loss Expenses Recoveries

Structured Finance $ 2,009 $ 704 $ (173) $ (10) $ 521 $ 2,050 $ 664 $ (296) $ (10) $ 358

Domestic Public Finance 1,069 96 (8) (9) 79 1,215 96 (11) (10) 75

1,657 481 (220) (19) 242

Other 1,083 22 (4) (7) 11

Other, including International finance 1,107 18 (15) (11) (8) 782 23 (12) (8) 3

Loss expenses — 6 — — 6 — 8 — — 8

Totals $ 4,185 $ 824 $ (196) $ (30) $ 598 $ 4,047 $ 791 $ (319) $ (28) $ 444

December 31, 2021:

Structured Finance $ 2,371 $ 852 $ (2,018) $ (12) $ (1,178)

Domestic Public Finance 2,742 905 (312) (31) 562

Other 1,189 35 (5) (13) 17

Loss expenses — 45 — — 45

Total $ 6,302 $ 1,837 $ (2,485) $ (56) $ (554)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $525 and $10 respectively, at September 30, 2022, and $784 and $24, respectively at December 31, 2021.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves were $450 and $34 respectively, at March 31, 2023, and $472 and $33, respectively at December 31, 2022.

Recoverable ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses on the balance sheet.

(2) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

(3) As a result of the Puerto Rico restructuring and the subsequent acceleration of the AAC insured PRIFA and CCDA bonds gross par outstanding was reduced by $593.

Variability of Expected Losses and Recoveries

Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there can be no assurance that the ultimate liability will not be higher than such estimates.

It is possible that our estimated future losses for insurance policies discussed above could be understated or that our estimated future recoveries could be overstated.

While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions.

Accordingly, it is possible that our estimated loss reserves, gross of reinsurance, for financial guarantee insurance policies could be understated.

We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at September 30, 2022, and, among other things, assumes an inability to execute any commutation transactions with issuers and/or investors.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at March 31, 2023, and assumes an inability to execute any commutation transactions with issuers and/or investors.

Such stress scenarios are developed based on management’s view about all possible outcomes relating to losses and recoveries.

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Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases.

See “Risk Factors” in Part I, Item 1A as well as the descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and

"Other Credits, including Ambac UK, Variability" in Part II, Item 7 of the Company's 2021 Annual Report on Form 10-K, and Part II, Item1A "Risk Factors" of this Quarterly Report, for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes, as well as the descriptions of "Structured Finance Variability," "Domestic Public Finance Variability," and "Other Variability" appearing below.

The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for the Company, including (without limitation) impairing the ability of AAC to honor its financial obligations;

See “Risk Factors” in Part I, Item 1A as well as the descriptions of "RMBS Variability," "Public Finance Variability," "Student Loan Variability," and "Other Credits, including Ambac UK, Variability" in Part II, Item 7 of the Company's 2022 Annual Report on Form 10-K, and Part II, Item1A "Risk Factors" of this Quarterly Report, for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes, as well as the descriptions of "Structured Finance Variability," "Domestic

Public Finance Variability," and "Other Variability" appearing below.

The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for Ambac, including (without limitation) impairing the ability of AAC to honor its financial obligations, particularly its outstanding surplus note and preferred stock obligations;

the initiation of rehabilitation proceedings against AAC;

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Structured Finance Variability

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the effect of a weakened economy characterized by growing unemployment and wage

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the general effect of a weakened economy characterized by growing unemployment and wage pressures.

During the first quarter of 2023, Ambac revised the model it uses to project RMBS collateral losses considering the seasoning of our RMBS exposure and management’s view that the most relevant determinant of prospective collateral performance is borrower payment status.

Individual home price appreciation/depreciation has become less critical a determinant of performance considering the general appreciation in home values over the past few years as well as the impact of loan modifications.

The average estimated loan-to-values of the collateral related to insured exposures have declined to under 50% from peaks above 110%.

Projected losses in our RMBS exposures and related loss reserves, may increase or decrease in the future.

Possible stress case losses assume higher default rates, loss severities and lower prepayments.

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

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

45 2023 First Quarter FORM 10-Q |

Student Loans:

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Structured Finance Variability:

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

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

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

For example, an increase in interest rates of 1% could increase our estimate of expected losses by approximately $25.

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at March 31, 2023, could be approximately $70.

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

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Domestic Public Finance Variability:

public finance portfolio predominantly consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities;

however, the portfolio also includes a wide array of non-municipal types of bonds, including financings for not-for-profit entities and transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests.

public finance portfolio consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities;

however, the portfolio also includes a wide array of non-municipal types of bonds, including transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests, the largest sector of which is U.S.

military housing.

It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends.

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

The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have significant exposure, such as

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

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

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In the case of the Puerto Rico COFINA sales tax bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings, AAC and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds.

In the COFINA case, the senior bonds still received a reduction or "haircut" despite the existence of junior COFINA bonds, which received a recovery rate equal to about 56% of pre-petition amounts owed.

In the COFINA case, the senior bonds still received a reduction or "haircut"

despite the existence of junior COFINA bonds, which received a recovery rate equal to about 56% of pre-petition amounts owed.

In addition, municipal entities may be more inclined to use bankruptcy to resolve their financial stresses if they believe preferred outcomes for various creditor groups can be achieved.

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These factors could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

Following the March 15, 2022, consummation of the Eighth Amended POA, the PRIFA QM and the CCDA QM, all of Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities with the exception of PRHTA have now been restructured.

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

However, uncertainty remains as to (i) the value of the consideration provided by or on behalf of the debtors under the Eighth Amended POA as it relates to the Interim Distribution of Clawback CVI to PRHTA creditors and to the new PRHTA bonds or cash under PRHTA POA;

(ii) the extent to which exposure management strategies, such as commutation and acceleration, will be executed for PRHTA;

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

Losses may exceed current reserves in a material

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

Insurance Contracts and Note 14.

Commitments and Contingencies to the Consolidated Financial Statements in Part I and "Financial Guarantees in Force" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II in this Form 10-Q for further updates relating to Puerto Rico.

Material additional losses on our public finance credits caused by the aforementioned factors would have a material adverse effect on our results of operations and financial condition.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at September 30, 2022, the possible increase in loss reserves could be approximately $145 and there can be no assurance that losses may not exceed our stress case estimates.

Other Variability:

Following the December 6, 2022, consummation of the PRHTA POA all of Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities have now been restructured and AAC's exposures to Puerto Rico has been reduced to $106 of net par outstanding at March 31, 2023.

However, some uncertainty remains as it relates to the extent and timing to which exposure management strategies, such as commutation and acceleration, will be executed to further reduce exposure to Puerto Rico, and, to a lesser extent, market conditions such as interest rate movements, credit spread changes on remaining plan consideration supporting AAC-insured Puerto Rico exposure in trusts, such as COFINA bonds and PRHTA '98 CVI instruments.

Material additional losses on our public finance credits caused by the aforementioned would have a material adverse effect on our results of operations and financial condition.

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at March 31, 2023, the possible increase in loss reserves could be approximately $120 and there can be no assurance that losses may not exceed our stress case estimates.

Other Credits, including International Finance Variability:

It is possible our loss reserves on other types of credits, including those insured by Ambac UK, may be under-estimated because of various risks that vary widely, including the risk that we may not be able to recover or mitigate losses through our remediation processes.

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $285 greater than the loss reserves at September 30, 2022.

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $310 greater than the

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46 2023 First Quarter FORM 10-Q |

loss reserves at March 31, 2023.

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

Long-term Debt

Long-term debt consists of surplus notes issued by AAC, the Sitka AAC Note, Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions, and Ambac UK debt issued in connection with the 2019 Ballantyne commutation.

Long-term debt includes AAC surplus notes and the Ambac UK debt issued in connection with the Ballantyne commutation.

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

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

September 30,

The carrying value of each of these as of March 31, 2023 and December 31, 2022 is below:

2023 December 31, 2022

Surplus notes $ 481 $ 477

Sitka AAC note 1,157 1,154

Tier 2 notes — 146

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Total Long-term Debt $ 497 $ 639

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

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

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

The decrease in long-term debt from December 31, 2022, resulted from redemption of the Tier 2 Notes during the quarter ended March 31, 2023, partially offset by accretion on the carrying value of surplus notes and Ambac UK debt.

VARIABLE INTEREST ENTITIES

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There are no new accounting standards applicable to Ambac that have been issued but not yet adopted.

Please refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and in Part I, Item 1 on this Form 10-Q for a discussion of the impact of other recent accounting pronouncements on Ambac’s financial condition and results of operations.

INSURANCE STATUTORY BASIS FINANCIAL RESULTS ($ in million)

5 unchanged sentences

Ambac Assurance Corporation

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

As of September 30, 2022, statutory policyholder surplus and qualified statutory capital included $788 principal balance of surplus notes outstanding and $138 liquidation preference of preferred stock outstanding.

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $595 and $1,193 at March 31, 2023, respectively, as compared to $598 and $1,191 at December 31, 2022, respectively.

As of March 31, 2023, statutory policyholder surplus and qualified statutory capital included $519 principal balance of surplus notes outstanding and $115 liquidation preference of preferred stock outstanding.

These surplus notes (in addition to related accrued interest of $438 that is not recorded under statutory basis accounting principles);

preferred stock;

and all other liabilities, including insurance claims, the Sitka AAC Note and the Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC.

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

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

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

and all other liabilities, including insurance claims are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC.

The driver to the net decrease in policyholder surplus was the statutory net loss of $9 for the three months ended March 31, 2023 and contingency reserve contribution of $4, partially offset by an increase in fair value with undistributed earnings (losses) of pooled funds of $4 and unrealized gain on unrated securities of $2.

AAC's statutory surplus and therefore AFG's ultimate ability to realize residual value and/or dividends from AAC is sensitive to multiple factors, including:

(i) loss reserve development, (ii) settlements or other resolutions of remaining representation and warranty breach claims at amounts that differ from amounts recorded, including failures to collect such amounts or receive recoveries sufficient to pay or redeem obligations of AAC, including the remaining balance of the Tier 2 Notes (after the partial repayment in October 2022), (iii) approval by OCI of payments on surplus notes, (iv) ongoing interest costs associated with surplus notes and Tier 2 Notes, (v) swap gains and losses at AFS, the financial position of which is supported by certain guarantees and financing arrangement from AAC, (vi) first time payment defaults of insured obligations, which increase statutory loss reserves, (vii) commutations of insurance policies or credit derivative contracts at amounts that differ from the amount of liabilities recorded, (viii) reinsurance contract terminations at amounts that differ from net assets recorded, (ix) changes to the fair value of pooled fund and other investments carried at fair value, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, (xi) the ultimate residual value of Ambac UK, which may be impacted by numerous factors including foreign exchange rates, and (xii) future changes to prescribed practices.

(i) loss reserve development, (ii) approval by OCI of payments on surplus notes, (iii) ongoing interest costs associated with surplus notes, (iv) swap gains and losses at AFS, the financial position of which is supported by certain guarantees and financing arrangements from AAC, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded, (viii) changes to the fair value of pooled fund and other investments carried at fair value, (ix) realized gains and losses, including losses arising from other than temporary impairments of investment securities, (x) the ultimate residual value of Ambac UK, which may be impacted by numerous factors including foreign exchange rates, and (xi) future changes to prescribed practices by the OCI.

Everspan Indemnity Insurance Company

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

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

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $106.3 at March 31, 2023, as compared to $107.5 at December 31, 2022.

The significant driver to the decrease was a net loss of $1.3 during the three months ended March 31, 2023.

AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES (£ in millions)

Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were £466 at September 30, 2022, as compared to £444 at December 31, 2021.

At September 30, 2022, the carrying value of cash and investments was £526, an increase from £500 at December 31, 2021.

The increase in shareholders’ funds and cash and investments was primarily due to the continued receipt of premiums and foreign exchange gains, partially offset by investment losses, operating expenses and tax payments.

Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were £473 at March 31, 2023, as compared to £468 at December 31, 2022.

At March 31, 2023, the carrying value of cash and investments was £511, a increase from £508 at December 31, 2022.

The increase in shareholders’ funds and cash and investments was primarily due to the continued receipt of premiums and investment gains, partially offset by foreign

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47 2023 First Quarter FORM 10-Q |

exchange losses, general and administrative expenses and tax payments.

Ambac UK is also required to prepare financial information in accordance with the Solvency II Directive.

The basis of preparation of this information is significantly different from both US GAAP and UK GAAP.

Available capital resources under Solvency II were a surplus of £287 at June 30, 2022, the most recently published position, of which £282 were eligible to meet solvency capital requirements.

Eligible capital resources at June 30, 2022, were in comparison to regulatory capital requirements of £228.

Therefore, Ambac UK had a surplus of capital resources as compared to regulatory capital requirements of £54 at June 30, 2022.

Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £338 at December 31, 2022, the most recently published position.

Eligible capital resources at December 31, 2022, were in comparison to regulatory capital requirements of £213.

Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £125 at December 31, 2022.

NON-GAAP FINANCIAL MEASURES

($ in millions)

In addition to reporting the Company’s quarterly financial results in accordance with GAAP, The Company currently reports three non-GAAP financial measures:

EBITDA, adjusted earnings and adjusted book value.

The most directly comparable GAAP measures are pre-tax net income for EBITDA, net income attributable to common stockholders for adjusted earnings and Total Ambac Financial Group, Inc.

stockholders’ equity for adjusted book value.

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

We present such non-GAAP supplemental financial information because we believe such information is of interest to the investment community that provides greater transparency and enhanced visibility into the underlying drivers of our businesses on a basis that may not be otherwise apparent on a GAAP basis.

We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis.

In addition to reporting the Company’s quarterly financial results in accordance with GAAP, the Company is reporting non-GAAP financial measures:

EBITDA, Adjusted Net Income and Adjusted Book Value.

These amounts are derived from our consolidated financial information, but are not presented in our consolidated financial statements prepared in accordance with GAAP.

We present non-GAAP supplemental financial information because we believe such information is of interest to the investment community, and that it provides greater transparency and enhanced visibility into the underlying drivers and performance of our businesses on a basis that may not be otherwise apparent on a GAAP basis.

We view these non-GAAP

financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis and they are presented to improve the comparability of our results between periods by eliminating the impact of the items that may not be representative of our core operating performance.

These non-GAAP financial measures are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.

Ambac has a significant U.S.

tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements.

As a result of this and other considerations, we utilized a 0% effective tax rate for non-GAAP adjustments for both Adjusted Earnings and Adjusted Book Value;

which is subject to change.

Beginning January 1, 2023, Ambac replaced the non-GAAP measure Adjusted Earnings with a new non-GAAP measure Adjusted Net Income to better align with other participants in the Property & Casualty insurance industry, including insurance carriers and other peers in the insurance distribution business.

We are presenting Adjusted Net Income for the current and prior periods contained within this Form 10-Q so this non-GAAP financial measure compares both periods on the same basis.

The following paragraphs define each non-GAAP financial measure.

A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.

EBITDA is defined as net income before interest expense, income taxes, depreciation and amortization of intangible assets.

EBITDA is also adjusted for noncontrolling interests in subsidiaries where Ambac does not own 100%.

The following table reconciles pre-tax net income (loss) to the non-GAAP measure, EBITDA on a consolidation and segment basis for all periods presented:

| Ambac Financial Group, Inc.

73 2022 Third Quarter FORM 10-Q |

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

Three Months Ended September 30, 2022

Pretax income (loss) (1)

$ 349 $ (1) $ 1 $ (6) $ 342

Interest expense 49 — — — 49

Depreciation — — — — —

Amortization of intangible assets 5 — 1 — 6

Net (gain) attributable to noncontrolling interest — — —

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

Three Months Ended September 30, 2021

Pretax income (loss) (1)

$ 27 $ (2) $ 1 $ (6) $ 19

Interest expense 44 — — — 44

Depreciation — — — — —

Amortization of intangible assets 10 — 1 — 11

Net (gain) attributable to noncontrolling interest — —

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

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

Nine Months Ended September 30, 2022

Pretax income (loss) (1)

$ 362 $ (5) $ 3 $ (8) $ 352

A tabular reconciliation of the non-GAAP financial measure and the most comparable GAAP financial measure is also presented below.

EBITDA — We define EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization of intangible assets.

The following table reconciles net income (loss) to the non-GAAP measure, EBITDA on a consolidation and segment basis for all periods presented:

Three Months Ended March 31, 2023 Three Months Ended March 31, 2022

Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consoli-dated Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consoli-dated

Net income (loss) $ (36) $ (1) $ 3 $ — $ (33) $ 6 $ (2) $ 2 $ (3) $ 2

Interest expense 16 — — — 16 44 — — — 44

Income taxes 4 — — — 4 — — — — —

Depreciation — — — — — — — — — —

Amortization of intangible assets 6 — 1 — 7 14 — 1 — 14

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

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

Nine Months Ended September 30, 2021

Pretax income (loss) (1)

$ (9) $ (1) $ 5 $ — $ (5) $ 65 $ (2) $ 3 $ (3) $ 62

Interest expense 144 — — — 144

Depreciation 1 — — — 1

Amortization of intangible assets 42 — 2 — 44

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

Earnings before interest, taxes, depreciation and amortization $ 221 $ (4) $ 4 $ (12) $ 209

(1) Pretax income (loss) is prior to the impact of noncontrolling interests.

Adjusted Earnings (Loss).

Adjusted earnings (loss) is defined as net income (loss) attributable to common stockholders, as reported under GAAP, adjusted on an after-tax basis for the following:

• Insurance intangible amortization:

Elimination of the amortization of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting.

This adjustment ensures that all financial guarantee contracts are accounted for consistent with the provisions of the Financial Services – Insurance Topic of the ASC.

• Foreign exchange (gains) losses:

Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies.

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

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $1 and $1 for the three months ended March 31, 2023 and 2022, respectively.

These noncontrolling interests are primarily in the Insurance Distribution segment.

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74 2022 Third Quarter FORM 10-Q |

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

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

2022 2021 2022 2021

($ in millions, except share data) $ Amount Per Diluted Share (1)

$ Amount Per Diluted Share (1)

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

Insurance intangible amortization 5 0.11 10 0.22 32 0.68 42 0.90

48 2023 First Quarter FORM 10-Q |

Adjusted Net Income (Loss) — We define Adjusted Net Income (Loss) as net income (loss) attributable to common stockholders adjusted to reflect the following items:

(i) net investment (gains) losses, including impairments;

(ii) amortization of intangible assets;

(iii) litigation costs, including attorneys fees and other expenses to defend litigation against the Company, excluding loss adjustment expenses;

(iv) foreign exchange (gains) losses;

(v) workforce change costs, which primarily include severance and other costs related to employee terminations;

and (vi) net (gain) loss on extinguishment of debt.

Adjusted Net Income is also adjusted for the effect of the above items on both income taxes and noncontrolling interests.

The income tax effects are determined by applying the statutory tax rate in each jurisdiction that generate these adjustments.

The noncontrolling interest adjustments relate to subsidiaries where Ambac does not own 100%

The following table reconciles net income (loss) attributable to common stockholders to the non-GAAP measure, Adjusted net income:

Three Months Ended March 31,

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

Net income (loss) attributable to common shareholders $ (33) $ (0.73) $ 2 0.04

Net investment (gains) losses, including impairments 4 0.10 (10) (0.21)

Intangible amortization 7 0.15 14 0.30

Litigation costs 9 0.19 4 0.08

Foreign exchange (gains) losses — (0.01) 1 0.02

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

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

Workforce change costs 1 0.02 — —

(13) $ (0.28) 11 $ 0.23

Income tax effects (1) (0.02) — —

Net (gains) attributable to noncontrolling interests — — — —

Adjusted net income (loss) $ (14) $ (0.30) $ 11 $ 0.23

Adjusted Book Value .

7 unchanged sentences

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

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

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

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

However, when expected losses are less than UPR for

a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity.

This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders’ equity for financial guarantee contracts where expected losses are less than UPR.

1 unchanged sentence

• Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income:

Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”).

The AOCI component of the fair value adjustment on the investment portfolio may differ from realized gains and losses ultimately recognized by the Company based on the Company’s investment strategy.

This adjustment only allows for such gains and losses in adjusted book value when realized.

Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”), net of income taxes.

Ambac has a significant U.S.

tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements.

As a result of this, tax planning strategies and other considerations, we utilized a 0% effective tax rate for non-GAAP operating adjustments to Adjusted Book.

The following table reconciles Total Ambac Financial Group, Inc.

stockholders’ equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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

1 unchanged sentence

stockholders’ equity $ 1,254 $ 27.66 $ 1,252 $ 27.85

Non-credit impairment fair value losses on credit derivatives — — — 0.01

Insurance intangible asset (261) (5.77) (266) (5.91)

2 unchanged sentences

Adjusted book value $ 1,264 $ 27.89 $ 1,272 $ 28.29

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

Factors that impact changes to Adjusted Book Value include many of the same factors that impact Adjusted Earnings, including the majority of revenues and expenses, but generally exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net unearned premiums and fees in excess of expected losses adjustment.

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

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75 2022 Third Quarter FORM 10-Q |

to future premium assumptions (e.g.

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

The decrease in Adjusted Book Value since December 31, 2022 was primarily attributable to Ambac's net loss (excluding earned premium previously included in Adjusted Book Value), partially offset by the positive effect foreign exchange rates.

Quantitative and Qualitative Disclosure About Market Risk

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

As of March 31, 2023, there were no material changes in the market risks that the Company is exposed to since December 31, 2022.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis