What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-09 · 333 added, 257 removed, 624 unchanged (49% of the section changed)

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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.

As of June 30, 2023, AFG's stand alone net assets, excluding its equity investments in subsidiaries, were $223.

Cash and short-term investments $ 177

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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

33 2023 Second Quarter FORM 10-Q |

AFG's subsidiaries/businesses are divided into three segments with results for the three and six months ended June 30, 2023 and 2022 as follows:

Three Months Ended June 30, 2023 Three Months Ended June 30, 2022

($ in millions) 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

Premiums placed $ 41 41 $ 24 24

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Total stockholders’ equity $ 874 $ 114 $ 92 $ 223 $ 1,303 $ 510 $ 114 $ 65 $ 157 $ 846

Three Months Ended March 31, 2022

Six Months Ended June 30, 2023 Six Months Ended June 30, 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

Premiums placed $ 118 $ 118 $ 69 $ 69

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Pretax income (loss) $ (40) $ (1) $ 4 $ (3) $ (40) $ 13 $ (4) $ 2 $ (3) $ 9

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.

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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 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.

At June 30, 2023, AAC and Ambac UK owned $332 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 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.

Ambac completed risk reduction transactions of $22 and $159 of net par exposure related to Puerto Rico for the three and six months ended June 30, 2023, respectively.

Ambac also reinsured, through an existing quota share reinsurance agreement, $2,069 of insured par, consisting of primarily of military housing risk of $1,958, during the three months ended June 30, 2023.

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the

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34 2023 Second Quarter FORM 10-Q |

insured portfolio at June 30, 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.

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32 2023 First Quarter FORM 10-Q |

2023 December 31,

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Watch list 1,701 3,044 (1,343) (44) %

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.

The decrease in total, ACC and watch list credit net par outstanding resulted from active de-risking (primarily from the reinsurance cession noted above), 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.

The collapse of several banks in early 2023 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.

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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.

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

Despite 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.

Ambac's cash balances held at banks was $40 as of June 30, 2023 and $42 as of December 31, 2022.

Substantially all of these cash balances were uninsured as of June 30, 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.

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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.

Ambac also has exposure to banks through its fixed maturity investment portfolio totaling $152 and $119 as of June 30, 2023 and December 31, 2022, respectively.

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.

rating of our fixed income investment in banks was BBB+ as of June 30, 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 three months ended March 31, 2023, included the following:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the six months ended June 30, 2023, included the following:

Net income (1)

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For a discussion of Ambac’s critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” 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, 2022.

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35 2023 Second Quarter FORM 10-Q |

FINANCIAL GUARANTEES IN FORCE

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structured and international finance.

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

The following table provides a breakdown of guaranteed net par outstanding by market at June 30, 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

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33 2023 First Quarter FORM 10-Q |

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

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.

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Total net par outstanding $ 20,364 $ 22,613

(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:

(1) Includes $3,403 and $5,400 of Military Housing net par outstanding at June 30, 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 June 30, 2023:

Bond Kind Country-Bond Type Ambac

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IF AUK Investor Owned Utility Gas - unsecured UK-Utility BBB+ 2037 $ 887 4.4 %

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

IF AUK PFI - Accommodation UK-Infrastructure A- 2040 748 3.7 %

IF AUK PFI - Hospitals UK-Infrastructure A- 2046 746 3.7 %

IF AUK Other Asset Securitizations UK-Asset Securitizations BBB 2033 734 3.6 %

IF AUK Investor Owned Utility Other - unsecured UK-Utility A- 2035 675 3.3 %

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

IF AUK Investor Owned Utility Electric - unsecured UK-Utility BBB+ 2036 607 3.0 %

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

IF AUK Sub-Sovereign Italy-Sub-Sovereign BIG 2035 586 2.9 %

IF AUK PFI - Accommodation UK-Infrastructure BBB+ 2038 486 2.4 %

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

PF AAC US State Lease/Appropriation US-Lease and Tax-backed Revenue BBB- 2036 428 2.1 %

IF AUK PFI - Roads UK-Infrastructure BIG 2039 311 1.5 %

Total $ 6,208 30.6 %

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Net par related to the top ten exposures increased $92 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.

Exposures are impacted by changes in foreign exchange rates ($251 increase during the six months ended June 30, 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 28% at March 31, 2023, and 27% at December 31, 2022.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) was 31% at June 30, 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 $27 per single risk, with insured exposures ranging up to $305 and a median net par outstanding of $5.

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Exposure Currency

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

The table below shows the distribution by currency of AAC’s insured exposure as of June 30, 2023:

Currency Net Par Amount

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34 2023 First Quarter FORM 10-Q |

36 2023 Second 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 March 31, 2023 and December 31, 2022.

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

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Net Par Outstanding

Bond Type March 31,

Bond Type June 30,

2023 December 31,

1 unchanged sentence

Military Housing $ 363 $ 366

Puerto Rico 106 244

Other 212 213

General Obligations 96 151

Lease and Tax-Backed Revenue 87 252

Total Public Finance 599 823

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Total $ 3,619 $ 3,953

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

The net decline in below investment grade exposures is primarily due de-risking activities, including Puerto Rico of $159 and the above mentioned reinsurance transaction of $50.

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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37 2023 Second Quarter FORM 10-Q |

Results of Operations ($ in millions)

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A summary of our financial results is shown below:

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Gross premiums written $ 55 $ 37 $ 115 $ 67

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Program fees 2 1 4 1

Net investment income 34 5

Net investment income (loss) 35 (21) 69 (16)

Net investment gains (losses), including impairments (3) 7 (8) 17

Net gains (losses) on derivative contracts — 29 (3) 86

Net realized gains on extinguishment of debt — 57 — 57

Income (loss) on variable interest entities — (6) (1) 15

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Net income (loss) attributable to common stockholders $ (13) $ 5 $ (47) $ 7

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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.

Significant items impacting Ambac's results for the six months ended June 30, 2023 and June 30, 2022 include the following:

• AAC successfully implemented the restructuring of a significant portion of its 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 six months ended June 30, 2022 management recorded a reduction to AAC’s estimated R&W subrogation recoveries in the amount of $242, primarily from the evaluation of the potential effect on certain of AAC's R&W litigations of the New York Court of Appeals’ decision in the case entitled U.S.

Bank National Association v.

DLJ Mortgage Capital, Inc.

relating to Home Equity Asset Trust 2007-1, a residential mortgage-backed securities trust.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three and six months ended June 30, 2023 and 2022, respectively.

Gross Premiums Written.

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

Gross premiums written increased $18 and $49 for the three and six months ended June 30, 2023, compared to the same period in the prior year, as shown by segment below.

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Legacy Financial Guaranty Insurance $ 1 $ (4) $ 10 $ 2

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

Specialty Property & Casualty Insurance growth in gross premiums written is a driven by new programs and growth in existing programs.

Net Premiums Earned.

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

Net premiums earned increased $2 and $1 for the three and six months ended June 30, 2023, compared to the same period in the prior year as shown by segment below.

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Legacy Financial Guaranty Insurance $ 8 $ 11 $ 14 $ 24

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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.

Growth of Specialty Property & Casualty Insurance net premiums earned was due to both new programs and growth in existing programs.

Net Investment Income.

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

Investments in pooled investment funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method.

Investments in pooled investment

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38 2023 Second Quarter FORM 10-Q |

funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method.

These funds and other investments are reported in Other investments on the Unaudited Consolidated Balance Sheets, which consists primarily of pooled fund investments in diversified asset classes.

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and Other investments is summarized in the table below:

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Securities available-for-sale and short-term other than Ambac-insured $ 16 $ 8 32 15

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Net investment income (loss) $ 35 $ (21) $ 69 $ (16)

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.

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 income (loss) increased $56 and $86 and for the three and six months ended June 30, 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 and six months ended June 30, 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 $48 and $70 for the three and six months ended June 30, 2023, compared to the same periods in the prior year.

Pooled fund investments results increased $32 and $45 for the three and six months ended June 30, 2023, compared to the prior year period, driven by improved performance on equities, high-yield and leveraged loans and hedge funds, partially offset by negative performance on real estate.

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

Changes in fair value of securities received in the Puerto Rico restructurings and classified as trading, resulted in increased investment income of $16 and $25 for the three and six months ended June 30, 2023, compared to the same periods in the prior year.

• Net investment income from Ambac-insured securities for the three and six months ended June 30, 2023, increased $1 and decreased $1, respectively, compared to prior year periods, as additional purchases of AAC-insured student loan securities in 2023 offset the impact of the 2022 settlements of insured Puerto Rico bonds.

Net Investment Gains (Losses), including Impairments.

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

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net gains (losses) on securities sold or called $ (1) $ (2) $ (3) $ 7

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Net investment gains (losses), including impairments $ (3) $ 7 $ (8) $ 17

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.

Net gains (losses) on securities sold or called for the six months ended June 30, 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.

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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

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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.

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

Net Gains (Losses) on Derivative Contracts.

Net gains (losses) on derivative contracts are 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.

Through the first quarter of 2023, the interest rate derivatives portfolio was 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 was substantially reduced since the first half of 2022 and was fully removed during the three months ended June 30, 2023.

Net gains (losses) on interest rate derivatives 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.

The removal of the economic hedge will not change the exposure of future results to counterparty credit adjustments.

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.

Net gains (losses) on interest rate derivatives for the three and six months ended June 30, 2023, were $0 and $(3) compared to $29 and $86 for the three and six months ended June 30, 2022.

Results for the three and six months ended June 30, 2023, reflect the net impact of interest rate shifts and counterparty credit adjustments described below.

The net gains in 2022 were driven primarily by the significant rate increases in the periods.

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39 2023 Second Quarter FORM 10-Q |

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

2 unchanged sentences

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 $(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.

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 $0 for the three and six months ended June 30, 2023, respectively, and $2 and $4 for the three and six months ended June 30, 2022, respectively.

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

Net Realized Gains on Extinguishment of Debt.

Net realized gains on extinguishment of debt was $57 for three and six months ended June 30, 2022, resulting from repurchases of surplus notes below their carrying values.

Commission Income and Commission Expense.

Commission income for the three and six months ended June 30, 2023 was $10 and $25 compared to $6 and $15, for the three and six months ended June 30, 2022.

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

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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.

For the three and six months ended June 30, 2023, commission expense of $6 and $14 compared to $4 and $8 in three and six months ended June 30, 2022, driven primarily by the same factors as commission income.

Income (Loss) on Variable Interest Entities.

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

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

Differences between the net carrying value of the insurance accounts under

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

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

Income (loss) on variable interest entities was $(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.

Income (loss) on variable interest entities was $0 and $(1) for the three and six months ended June 30, 2023, compared to $(6) and $15 for the three months ended June 30, 2022.

Results for the three months ended June 30, 2023 reflect the offsetting effects of fair value gains on a Puerto Rico restructuring VIE's assets and accelerated interest cost upon redemption of its debt.

The loss for the six months ended June 30, 2023 include accelerated interest costs from the Puerto Rico VIE trust, partially offset by gains on higher valuation of net assets on other FG VIEs.

Results for three and six months ended June 30, 2022, related primarily to two VIE trusts created in connection with the Puerto Rico restructurings in March 2022.

The three months ended June 30, 2022 included losses of $7 from these VIEs driven by interest costs and changes in fair value of assets received in the restructuring.

The six months ended June 30, 2022 also included first quarter losses of $6 from changes to fair value of these VIEs' assets and the initial $28 gain upon consolidation on March 15, 2022.

Refer to Note 9.

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Losses and Loss Expenses.

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.

Loss and loss expenses increased $19 and $13 for the three and six months ended June 30, 2023, compared to the same period in the prior year.

Legacy financial guarantee loss and loss expenses (benefit) were $2 and $15 for the three and six months ended June 30, 2023.

Specialty Property and Casualty Insurance loss and loss expenses were $6 and $10 for the three and six months ended June 30, 2023.

Intangible Amortization.

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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37 2023 First Quarter FORM 10-Q |

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.

Insurance intangible amortization for the three and six months ended June 30, 2023, was $6 and $11, a decrease of $7 and $15 as compared to the the three and six months ended June 30, 2022.

The decrease was driven primarily by the timing of de-risking (including Puerto Rico in the six months ended June 30, 2022) and the reduced size of the financial guarantee insured portfolio.

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

Other intangible amortization for the three and six months ended June 30, 2023, was $1 and $2, 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

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Compensation $ 18 $ 16 $ 34 $ 32

1 unchanged sentence

Total G&A expenses 36 30 72 59

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.

• 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.

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The increase in Compensation G&A expenses during the three and six months ended June 30, 2023 was due to higher compensation costs from a net increase in staffing from the development and growth, both organic and via acquisitions, of the Specialty Property & Casualty Insurance and Insurance Distribution segments.

For the six months ended June 30, 2023, these factors were partially offset by lower incentive compensation expense including the impact of performance factor adjustments.

The increase in Non-Compensation G&A expenses during the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, was due to higher Legacy Financial Guarantee Insurance segment's legal defense costs of $5 and $10, respectively.

Interest Expense.

2 unchanged sentences

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

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Surplus notes $ 16 $ 20 $ 31 $ 41

1 unchanged sentence

Tier 2 Notes — 7 1 14

Other — — 1 1

Total interest expense $ 16 $ 45 $ 32 $ 89

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.

The decrease in interest expense for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, reflects the impact of the 2022 redemption of secured notes 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, 2022.

These transactions resulted in lower debt outstanding.

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

1 unchanged sentence

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

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.

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.

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

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

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

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

amounts following each scheduled payment date.

Total accrued and unpaid interest for surplus notes outstanding to third parties was $450 at June 30, 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 March 31, 2023 and 2022, was $4, and $0 respectively, an increase of $3 and primarily relate to international operations.

The provision for income taxes primarily relate to international operations and was $2 and $6 for the three and six months ended June 30, 2023, compared to $1 and $1 for the three and six months ended June 30, 2022, an increase of $1 for the quarter and an increase of $4 for the year-to-date period.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net premiums earned $ 8 $ 11 $ 14 $ 24

2 unchanged sentences

Net gains on derivative contracts 1 28 (3) 85

Net realized gains on extinguishment of debt — 57 — 57

Other income 2 (6) 4 18

Total 39 75 71 184

Loss and loss expenses (benefit) 2 (14) 15 9

General and administrative expenses 23 23 52 44

Total 25 10 66 54

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

8 unchanged sentences

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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38 2023 First Quarter FORM 10-Q |

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.

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-risking transactions;

and (ii) 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:

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41 2023 Second Quarter FORM 10-Q |

Net premiums earned.

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 decreased $3 and $10 for the three and six months ended June 30, 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 $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.

The positive impact on net premiums earned related to credit losses amounted to $1 and $1 fo r the three and six months ended June 30, 2023, as compared to $1 and $3 for the three and six months ended June 30, 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 and six months ended June 30, 2023, as compared to $2 and $6 for the three and six months ended June 30, 2022.

Losses and Loss Expenses.

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

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Structured Finance $ 1 $ (11) $ 21 $ 202

2 unchanged sentences

Totals $ 2 $ (14) $ 15 $ 9

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.

Loss and loss expenses (benefit) for the the six months ended June 30, 2023, were largely driven by unfavorable loss development in the RMBS portfolio resulting from a first quarter 2023 decline in discount rates, partially offset by assumption changes in the international portfolio.

Loss and loss expenses (benefit) for the three months ended June 30, 2022, were largely driven by the positive impact of higher discount rates and stronger recoveries, partially offset by a reduction to R&W subrogation recoveries (driven by higher discount rates and lower credit losses) and loss expenses incurred.

Losses and loss expenses (benefit) for the six months ended June 30, 2022, were driven by a reduction to AAC’s estimated R&W subrogation recoveries in the amount of $242, partially offset by favorable loss development in domestic public finance (primarily due to the Puerto Rico restructuring) and the positive impact of discount rates during 2022.

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.

The comparability of expenses for the three months ended June 30, 2023 to the prior year period is impacted by 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”).

This inter-segment charge was recognized in the first quarter of 2023 and in the second quarter of 2022.

Adjusting for this timing, Legacy Financial Guarantee Insurance G&A expenses for the three months ended June 30, 2023 increased $4 million from the prior year period.

Segment G&A expenses increased during the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022, primarily due to higher legal defense costs in the 2023 periods, partially offset by lower compensation costs due to reduced headcount in the three and six months ended June 30, 2022.

The timing of incentive compensation performance factor adjustments resulted in an increase to second quarter 2023 expenses, but a decrease for the six months ended June 30, 2023 compared to the prior year periods.

Specialty Property and Casualty Insurance

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Gross premiums written $ 53 $ 41 $ 105 $ 65

1 unchanged sentence

Net premiums earned $ 8 $ 3 $ 15 $ 4

Program fees 2 1 4 1

Investment income 1 — 2 1

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

Program fees 1 —

Total 11 4 20 5

Losses and loss expenses incurred 6 2 10 3

1 unchanged sentence

General and administrative expenses 4 3 8 6

Total 11 5 21 9

EBITDA — $ (1) (1) $ (4)

Pretax income (loss) $ — $ (1) $ (1) $ (4)

Loss and LAE Ratio 66.6 % 65.3 %

Combined Ratio 129.7 % 302.4 %

Ambac's stockholders equity (1)

Loss and LAE Ratio 73.7 % 66.5 % 70.4 % NM

Combined Ratio 125.5 % 161.7 % 127.4 % NM

Ambac's stockholders

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

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

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

Sixteen programs were authorized to issue policies as of June 30, 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.

Loss and loss expenses incurred increased for the three and six months ended June 30, 2023, relative to the three and six months ended June 30, 2022, as a result of a number of factors, including growth of the business.

While the Loss and LAE ratio increased on a relative basis, Everspan's selected loss ratio (including ULAE) was approximately 69% at June 30, 2023 and 66% at June 30, 2022, which is in line with expectations.

Everspan's loss ratio is expected to experience some volatility as the inforce book of business grows and diversifies.

The increase in the Loss and LAE ratio for the three months ended June 30, 2023, compared to

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42 2023 Second Quarter FORM 10-Q |

June 30, 2022, was substantially offset by a benefit to acquisition costs as a result of sliding scale commission arrangements.

Certain Everspan programs were structured to include sliding scale commission arrangements in order to reduce volatility and improve underwriting results.

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

5 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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General and administrative costs increased for the three and six months ended June 30, 2023 relative to the three and six months ended June 30, 2022 primarily resulting from the ramp up in Everspan's staffing and operations.

Additionally, the three and six months ended June 30, 2022 included costs associated with the acquisition of additional shell insurance companies in January 2022.

Insurance Distribution

Three Months Ended March 31, 2023 2022

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Premiums placed $ 41 $ 24 $ 118 $ 69

3 unchanged sentences

General and administrative expenses (1)

EBITDA 2 1 6 4

Depreciation (1)

1 unchanged sentence

Pretax income (loss) $ 1 $ — $ 4 $ 2

Ambac's stockholders equity (2)

Ambac's stockholders

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

3 unchanged sentences

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 Insurance Distribution segment placed premiums for its carriers of approximately $41 for the three and six months ended June 30, 2023, up $17 or 72% as compared to the three and six months ended June 30, 2022.

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

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.

Employer Stop Loss is Xchange's largest business.

On August 7, 2023, Ambac acquired a controlling interest (80%) in Riverton Insurance Agency, Corp.

("Riverton") which will add approximately $40 of annual premiums placed to the Insurance Distribution segment.

Riverton is an MGA and retail agency specializing in professional liability insurance programs to licensed architects, engineers, construction mangers and real estate professional.

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.

G&A expenses for the three and six months ended June 30, 2023, increased compared to the three and six months ended June 30, 2022, as a result of the All Trans and Capacity Marine acquisitions as well as employees hired to support the Employer Stop Loss 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 $224 as of March 31, 2023, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $223 as of June 30, 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.

1 unchanged sentence

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

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

1 unchanged sentence

• 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 received distributions from Cirrata of $3.6 and $2.5 during the six months ended June 30, 2023 and 2022.

AFG's principal uses of liquidity are:

6 unchanged sentences

Sources of liquidity for the Company’s insurance subsidiaries are through funds generated from premiums;

recoveries on claim payments, including RMBS representation and warranty subrogation recoveries (AAC only);

recoveries on claim payments;

reinsurance recoveries;

3 unchanged sentences

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), G&A expenses, reinsurance payments and purchases of

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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.

1 unchanged sentence

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'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.

• AFS's remaining derivatives 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 G&A expenses.

8 unchanged sentences

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

Three Months Ended March 31, 2023 2022

Six Months Ended June 30, 2023 2022

Cash provided by (used in):

4 unchanged sentences

Net cash flow $ 248 $ 16

(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.

(1) Because the trusts established under the Puerto Rico restructurings are consolidated VIEs, certain payments made by AAC to accelerate AAC-insured bonds that were deposited into trusts are reflected as payments of VIE liabilities within financing activities.

Cash used in financing activities includes $113 and $274 from such AAC payments, for the six months ended June 30, 2023 and 2022, respectively.

Operating activities

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

The following represents the significant cash operating activity during the six months ended June 30, 2023 and 2022:

• Cash provided by (i) gross premiums were $90 and $55 for the six months ended June 30, 2023 and 2022, respectively;

(ii) interest rate derivatives were $22 and $32 for the six months ended June 30, 2023 and 2022, respectively;

(iii) investment portfolio income were $51 and $29 for the six months ended June 30, 2023 and 2022, respectively;

and (iv) cash settlements from the Puerto Rico restructuring

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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 six months ended June 30, 2023 and $32 for the six months ended June 30, 2022.

• Payments related to (i) G&A expenses we re $65 and $54 for the six months ended June 30, 2023 and 2022, respectively;

and (ii) reinsurance premiums paid were $56 and $22 for the six months ended June 30, 2023 and 2022, respectively

• Net Legacy Financial Guarantee Insurance loss and loss expenses paid, including commutation payments, during the six months ended June 30, 2023 and 2022 are detailed below:

Six Months Ended June 30, 2023 2022

Net loss and loss expenses paid (recovered):

5 unchanged sentences

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 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.

Under these hedge agreements, AFS is required to post collateral or margin to its counterparties and futures commission merchants to cover unrealized losses.

In addition, AFS is required to post collateral or margin in excess of the amounts needed to cover unrealized losses.

All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral or margin posting or a termination have been triggered.

If terminations were to occur, AFS would be required to make termination payments but would also receive a return of collateral or margin in the form of cash or U.S.

Treasury obligations with market values equal to or in excess of market values of the swaps and futures contracts.

AFS may look to re-establish hedge positions that are terminated early, resulting in additional collateral or margin obligations.

The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced.

All collateral and margin obligations are currently met.

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

Financing activities for the six months ended June 30, 2023, included redemption of the Tier 2 Notes of $97, share repurchases of $3, and paydowns and maturities of VIE debt obligations of $235 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

Financing activities for the six months ended June 30, 2022, include paydowns and maturities of VIE debt obligations of $359.

AFS hedged 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, which contain collateral or margin requirements.

As of June 30, 2023, AFS's only remaining derivative positions include a limited number of legacy customer swaps and their associated hedges.

Under these hedge agreements, AFS is required to post collateral in excess of the derivative unrealized loss amount.

All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral posting or a termination have been triggered.

AFS may look to re-establish hedge positions resulting in additional collateral obligations.

The amount of additional collateral posted on derivatives contracts will depend on several

variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced.

All collateral obligations are currently met.

Collateral posted by AFS totaled a net amount of $54 (cash and securities collateral of $17 and $36, respectively), including independent amounts, under these contracts at June 30, 2023.

BALANCE SHEET ($ in millions)

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

Total assets increased by approximately $159 from December 31, 2022, to $8,132 at June 30, 2023, primarily due to:

(i) the increase in asset values of VIEs of $267, (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.

The increase in VIE assets was driven by collateral received by FG VIEs and increased asset values including due to the 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) $113 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.

Total liabilities increased by approximately $162 from December 31, 2022, to $6,809 as of June 30, 2023, primarily due to increases in the value of VIE liabilities of $166 (consistent factors as noted above in assets, including redemptions of HTA Trust Certificates).

Additional liability increases were 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.

As of June 30, 2023, total stockholders’ equity was $1,303, compared with total stockholders’ equity of $1,305 at December 31, 2022.

This decrease was primarily due to the net loss for the three and six months ended June 30, 2022, partially offset by unrealized gains on invested assets and gains on foreign currency translation.

Investment Portfolio

4 unchanged sentences

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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

45 2023 Second Quarter FORM 10-Q |

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at June 30, 2023 and December 31, 2022:

June 30, 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

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$ 2,168 $ 141 $ — $ 201 $ 2,510 $ 2,259 $ 131 $ — $ 203 $ 2,593

(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.

(1) Includes investments denominated in non-US dollar currencies with a fair value of £322 ($408) and €29 ($31) as of June 30, 2023 and £296 ($357) and €39 ($42) as of December 31, 2022.

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

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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.

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:

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at June 30, 2023 and December 31, 2022:

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

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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 19% and 19% of the March 31, 2023, and December 31, 2022, combined fixed maturity portfolio, respectively.

(2) Below investment grade and not rated bonds insured by Ambac represent 21% and 19% of the June 30, 2023, and December 31, 2022, combined fixed maturity portfolio, respectively.

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43 2023 First Quarter FORM 10-Q |

46 2023 Second Quarter FORM 10-Q |

Premium Receivables

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

Ambac's premium receivables increased to $276 at June 30, 2023, from $269 at December 31, 2022.

As further discussed in Note 6.

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.

At June 30, 2023, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $253 and $23, respectively.

Premium receivables by payment currency were as follows:

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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.

Ambac benefited from letters of credit and collateral amounting to approximately $113 from its reinsurers at June 30, 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 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.

As of June 30, 2023 and December 31, 2022, reinsurance recoverable on paid and unpaid losses were $149 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 $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).

reinsurance assets and liabilities of $258 at June 30, 2023, (ii) intangible assets established as part of acquisitions in the Insurance Distribution business of $45 at June 30, 2023, (iii) indefinite-lived intangible assets in the Specialty P&C business as part of its acquisitions of $14 at June 30, 2023.

As of June 30, 2023 and December 31, 2022, intangible assets were $317 and $326, respectively.

The decline is driven by amortization;

partially offset by translation gains 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 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.

The interest rate derivative portfolio was positioned to benefit from rising rates, until the early part of the second quarter ended June 30, 2023, as a partial economic hedge against interest rate exposure in the Legacy Financial Guarantee insurance and investment portfolios.

As of June 30, 2023, AFS' only remaining derivative positions include a limited number of legacy customer swaps and their associated hedges.

Derivative assets decreased from $27 at December 31, 2022, to $26 as of June 30, 2023.

Derivative liabilities decreased from $38 at December 31, 2022, to $37 as of June 30, 2023.

Loss and Loss Expense Reserves and Subrogation Recoverable

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

Loss and loss expense reserves are based upon estimates of the ultimate aggregate losses inherent in insurance policies issued to beneficiaries, excluding consolidated VIEs.

The evaluation process for determining the level of reserves is subject to certain estimates and judgments.

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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 March 31, 2023 and December 31, 2022, were $705 and $534, respectively.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of June 30, 2023 and December 31, 2022, were $724 and $534, respectively.

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

March 31, 2023:

June 30, 2023:

December 31, 2022:

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Totals $ 130 $ 815 $ (190) $ (31) $ 724 $ 90 $ 791 $ (319) $ (28) $ 534

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

(1) Present value of future recoveries includes R&W subrogation recoveries of $0 and $140 at June 30, 2023 and December 31, 2022, respectively.

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47 2023 Second 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 March 31, 2023 and December 31, 2022:

March 31, 2023:

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 June 30, 2023 and December 31, 2022:

June 30, 2023:

December 31, 2022:

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Totals $ 4,258 $ 815 $ (190) $ (31) $ 594 $ 4,047 $ 791 $ (319) $ (28) $ 444

(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.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves were $472 and $33 respectively, at June 30, 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.

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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 March 31, 2023, and 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 June 30, 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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Student Loans:

Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other factors, including the economic impact from public health crises and/or natural or other catastrophic events.

Such factors may include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by the Consumer Finance Protection Bureau.

Such factors may also include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by the Consumer Finance Protection Bureau.

During the second quarter of 2023, we revised our approach to projecting future defaults to reflect the student loan collateral's seasoning.

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 March 31, 2023, could be approximately $70.

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 June 30, 2023, could be approximately $70.

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

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Additionally, our loss reserves may be under-estimated because of the local, regional or national economic impact from public health crises and/or natural or other catastrophic events.

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

The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have significant exposure, such as Chicago's school district, the State of New Jersey and others.

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 exposure, such as Chicago's school district, the State of New Jersey and others.

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

Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer.

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

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

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

on the Ambac insured senior COFINA bonds.

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

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

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

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.

For the public finance credits for which we have an estimate of expected loss at June 30, 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 $310 greater than the

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46 2023 First Quarter FORM 10-Q |

loss reserves at March 31, 2023.

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 $335 greater than the loss reserves at June 30, 2023.

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

Long-term Debt

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

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

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

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

The carrying value of each of these as of June 30, 2023 and December 31, 2022 is below:

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49 2023 Second Quarter FORM 10-Q |

2023 December 31, 2022

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Ambac Assurance Corporation

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);

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $575 and $1,174 at June 30, 2023, respectively, as compared to $598 and $1,191 at December 31, 2022, respectively.

As of June 30, 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 $450 that

is not recorded under statutory basis accounting principles);

preferred stock;

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.

The driver to the net decrease in policyholder surplus was the statutory net loss of $19 for the six months ended June 30, 2023 and a contingency reserve contribution of $6, partially offset by investment valuation changes that are direct charges to surplus 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:

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Everspan Indemnity Insurance Company

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.

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $107.1 at June 30, 2023, as compared to $107.5 at December 31, 2022.

The significant driver to the decrease was a net loss of $1.7 during the six months ended June 30, 2023, partially offset by capital contributions of $1.3 million.

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 £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

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 £477 at June 30, 2023, as compared to £468 at December 31, 2022.

At June 30, 2023, the carrying value of cash and investments was £518, 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 exchange losses, general and administrative expenses and tax payments.

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47 2023 First Quarter FORM 10-Q |

exchange losses, general and administrative expenses and tax payments.

50 2023 Second Quarter FORM 10-Q |

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

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

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

Available capital resources under Solvency II were £361 at June 30, 2023, the most recently published position, of which £355 were eligible to meet solvency capital requirements.

Eligible capital resources at June 30, 2023, were in comparison to regulatory capital requirements of £217.

Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £138 at June 30, 2023.

Despite, Ambac UK being in an surplus capital position as of June 30, 2023, there can be no guarantee that it will be able to pay any dividends or other capital distributions to AAC in the near term.

All dividends and capital distribution from Ambac UK are subject to the judgement and approval of the Prudential Regulatory Authority.

NON-GAAP FINANCIAL MEASURES

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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.

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.

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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

Three Months Ended June 30, 2023 Three Months Ended June 30, 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

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$ 14 $ — $ 2 $ (4) $ 12 $ 65 $ (1) $ 1 $ 1 $ 65

(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.

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $0 and $0 for the three months ended June 30, 2023 and 2022, respectively.

These noncontrolling interests are primarily in the Insurance Distribution segment.

Six Months Ended June 30, 2023 Six Months Ended June 30, 2022

Net income (loss)

$ (45) $ (1) $ 4 $ (4) $ (46) $ 12 $ (4) $ 2 $ (3) $ 8

Interest expense 32 — — — 32 89 — — — 89

Income taxes 5 — — — 6 1 — — — 1

Depreciation 1 — — — 1 1 — — — 1

Amortization of intangible assets 11 — 2 — 13 26 — 1 — 28

$ 5 $ (1) $ 6 $ (3) $ 7 $ 130 $ (4) $ 3 $ (3) $ 127

(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 six months ended June 30, 2023 and 2022, respectively.

These noncontrolling interests are primarily in the Insurance Distribution segment.

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51 2023 Second 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:

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

Three Months Ended March 31,

Three Months Ended June 30,

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

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Workforce change costs — — 1 0.01

(13) $ (0.28) 11 $ 0.23

Net (gain) loss on extinguishment of debt — — (57) (1.25)

Pretax adjusted net income (loss) 4 $ 0.09 (39) $ (0.86)

Income tax effects (1) (0.02) 1 0.02

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Adjusted Net Income (Loss) $ 3 $ 0.07 $ (38) $ (0.84)

Six Months Ended June 30,

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

Net income (loss) attributable to common shareholders $ (47) $ (1.02) $ 7 $ 0.15

Net investment (gains) losses, including impairments 8 0.17 (17) (0.36)

Intangible amortization 13 0.29 28 0.60

Litigation costs 16 0.36 7 0.15

Foreign exchange (gains) losses — (0.01) 4 0.08

Workforce change costs 1 0.02 — 0.01

Net (gain) loss on extinguishment of debt — — (57) (1.23)

Pretax adjusted net income (loss) (9) $ (0.19) (28) $ (0.60)

Income tax effects (2) (0.03) 1 0.02

Net (gains) attributable to noncontrolling interests — (0.01) — (0.01)

Adjusted Net Income (Loss) $ (10) $ (0.23) $ (27) $ (0.59)

Adjusted Book Value .

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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.

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.

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stockholders’ equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

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Adjusted book value $ 1,222 $ 26.97 $ 1,272 $ 28.29

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.

The decrease in Adjusted Book Value since December 31, 2022 was primarily attributable to Ambac's net loss (excluding earned

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52 2023 Second Quarter FORM 10-Q |

premium previously included in Adjusted Book Value) and the impact of the reinsurance de-risking transaction executed during the quarter ended June 30, 2023, at AAC, partially offset by the positive effect foreign exchange rates.

Quantitative and Qualitative Disclosure About Market Risk

As of March 31, 2023, there were no material changes in the market risks that the Company is exposed to since December 31, 2022.

As of June 30, 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