What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-07 · 324 added, 269 removed, 688 unchanged (46% of the section changed)

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Business and Note 1.

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

Background and Business Description for

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

Organization of Information

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

As of September 30, 2023, AFG's stand alone net assets, excluding its equity investments in subsidiaries, were $209.

Cash and short-term investments $ 159

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(1) Includes strategic minority investments in insurance services businesses of $26.

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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

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

Three Months Ended September 30, 2023 Three Months Ended September 30, 2022

($ in millions) Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance

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Total stockholders’ equity $ 887 $ 118 $ 103 $ 210 $ 1,318 $ 741 $ 112 $ 64 $ 154 $ 1,071

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

Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022

Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance

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

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Legacy Financial Guarantee:

Overall Strategy:

As further discussed in Note 1.

Background and Business Description 1 to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q, Ambac has key strategic priorities for the Legacy financial Guarantee segment, including AAC.

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

OCI’s Runoff Capital Framework, which is substantially complete, applies risk-based and other adjustments to AAC’s assets and insured liabilities, as determined by OCI in its sole discretion.

OCI’s Runoff Capital Framework allows AAC to understand the likely impact of various developments and actions now or in the future on AAC’s capital position thereunder.

No changes in AAC’s current management of the business are required by OCI’s Runoff Capital Framework.

Furthermore, AAC’s ability to use capital for potential future deleveraging transactions or distributions will continue to require AAC to improve its capital position and obtain OCI’s approval, and there can be no assurance that OCI will approve any such use of capital.

The results of OCI’s Runoff Capital Framework are expected to vary over time based on changes in AAC’s financial position, insured portfolio developments, the impact of strategic actions taken by AAC and, possibly, changes to the inputs and assumptions utilized by OCI.

With OCI’s Runoff Capital Framework substantially completed, Ambac has finalized its internal evaluation of a range of strategic options for AAC, and as a result, has appointed an investment bank along with other advisors to actively discuss such strategic options with interested parties.

There can be no assurance that we will ultimately complete any strategic initiative.

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

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

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

engaging in mergers and similar transactions;

disposing of assets;

making restricted payments;

creating or permitting liens;

engaging in transactions with affiliates;

modifying or creating tax sharing agreements;

and taking certain actions with respect to surplus notes (among other restrictions and limitations).

The Settlement Agreement includes

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

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

The Stipulation and Order has no fixed term and may be terminated or modified only with the approval of OCI.

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

It is expected that the existing Stipulation and Order will be modified in connection with the final adoption of OCI's Runoff Capital Framework.

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

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

Asset and Liability Management

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

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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 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.

At September 30, 2023, AAC and Ambac UK owned $318 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

Ambac's Risk Management Group focuses on the implementation and execution of risk reduction, defeasance and loss recovery strategies.

Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of loss mitigation or remediation strategies in order to target and prioritize policies, or portions thereof, for commutation, reinsurance, refinancing, restructuring or other risk reduction strategies.

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 $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

Analysts evaluate the estimated timing and severity of projected policy claims as well as the potential impact of loss mitigation or remediation strategies in order to target and

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insured portfolio at June 30, 2023 and December 31, 2022.

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prioritize policies, or portions thereof, for commutation, reinsurance, refinancing, restructuring or other risk reduction strategies.

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 equating to $130 and $350 of net par exposure for the three and nine months ended September 30, 2023, respectively.

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

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at September 30, 2023 and December 31, 2022.

Net par exposure within the U.S.

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

September 30,

2023 December 31,

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Watch list 1,564 3,044 (1,480) (49) %

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

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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 $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.

Ambac's cash balances held at banks was $41 as of September 30, 2023 and $42 as of December 31, 2022.

Substantially all of these cash balances were uninsured as of September 30, 2023 and December 31, 2022 because they either (i) exceeded the two hundred and fifty thousand FDIC insurance limit or (ii) were held in foreign banks.

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

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

Ambac actively manages its cash balances to

reduce bank risk and to enhance yield by transferring most of its funds to government and prime money market funds.

Included in the cash balances above is $17 of cash of companies Ambac has acquired within its insurance distribution businesses that are held in regional banks.

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

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

Ambac also has exposure to banks through its fixed maturity investment portfolio totaling $151 and $119 as of September 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.

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.

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

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

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

The average rating of our fixed income investment in banks was A- as of September 30, 2023.

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 six months ended June 30, 2023, included the following:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the nine months ended September 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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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 June 30, 2023 and December 31, 2022.

The following table provides a breakdown of guaranteed net par outstanding by market at September 30, 2023 and December 31,

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Net par exposures within the U.S.

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

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

Consolidation Topic of the ASC.

Guaranteed net par outstanding 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.

September 30,

2023 December 31,

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Total net par outstanding $ 19,541 $ 22,613

(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:

(1) Includes $3,387 and $5,400 of Military Housing net par outstanding at September 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 September 30, 2023:

Bond Kind Country-Bond Type Ambac

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IF AUK Investor Owned Utility Gas - unsecured UK-Utility BBB+ 2037 $ 856 4.4 %

IF AUK PFI - Hospitals UK-Infrastructure BBB+ 2046 708 3.6 %

IF AUK PFI - Accommodation UK-Infrastructure A- 2040 708 3.6 %

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

IF AUK Other Asset Securitizations UK-Asset Securitizations BBB 2033 693 3.5 %

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IF AUK Sub-Sovereign Italy-Sub-Sovereign BIG 2035 568 2.9 %

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

IF AUK PFI - Accommodation UK-Infrastructure A- 2038 458 2.3 %

PF AAC US State Lease/Appropriation US-Lease and Tax-backed Revenue BBB- 2036 428 2.2 %

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BIG denotes credits deemed below investment grade.

Net par related to the top ten exposures increased $92 from December 31, 2022.

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 31% at June 30, 2023, and 27% at December 31, 2022.

Net par related to the top ten exposures decreased $153 from December 31, 2022.

Exposures are impacted by changes in foreign exchange rates ($42 increase during the nine months ended September 30, 2023), certain indexation rates, reinsurance transactions and scheduled and unscheduled paydowns.

As a result of high current 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 30% at September 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 $28 per single risk, with insured exposures ranging up to $298 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 June 30, 2023:

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

Currency Net Par Amount

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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 June 30, 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 June 30,

Bond Type September 30,

2023 December 31,

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Results of Operations ($ in millions)

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A summary of our financial results is shown below:

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

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

2023 2022 2023 2022

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Provision for income taxes 1 2 7 4

Net income (loss) (13) 5 (46) 8

Net income 66 340 21 348

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

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

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

Net income attributable to common stockholders $ 66 $ 340 $ 19 $ 347

Significant items impacting Ambac's results for the nine months ended September 30, 2023 and 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.

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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.

In the second quarter 2022, the newly created VIEs combined

with changes to the fair value of securities received by AAC resulted in losses totaling $17.

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

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

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

Gross Premiums Written.

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,

Gross premiums written increased $63 and $112 for the three and nine months ended September 30, 2023, compared to the same period in the prior year, as shown by segment below.

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

2023 2022 2023 2022

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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.

Specialty Property & Casualty Insurance growth in gross premiums written was driven by new programs, including assumed premium written with Everspan as a reinsurer, and growth in existing programs.

Net Premiums Earned.

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,

Net premiums earned increased $8 and $8 for the three and nine months ended September 30, 2023, compared to the same period in the prior year as shown by segment below.

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

2023 2022 2023 2022

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Total $ 18 $ 11 $ 47 $ 39

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.

The reduction in Legacy Financial Guarantee Insurance segment was primarily due to de-risking activities, including the 2023 reinsurance transaction and 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, which includes assumed reinsurance of a workers compensation program, and growth in existing programs.

Net Investment Income.

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

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

Investments in pooled investment

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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.

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gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets.

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

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.

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 June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

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Net investment income (loss) $ 30 $ 11 $ 100 $ (6)

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.

Net investment income (loss) increased $20 and $105 and for the three and nine months ended September 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 nine months ended September 30, 2023, compared to the same periods in the prior year due primarily to higher portfolio yields.

• Other investments income (loss) increased $13 and $83 for the three and nine months ended September 30, 2023, compared to the same periods in the prior year.

Pooled fund investments results increased $11 and $56 for the three and nine months ended September 30, 2023, compared to the prior year periods.

The increase for the three months ended September 30, 2023, was driven primarily by improved performance on hedge funds, high-yield and leveraged loans, floating rate income, equities and real estate.

For the nine month period of 2023, the majority of the increase resulted from equities, hedge funds, and high yield and leverage loans.

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.

Changes in fair value of securities received in the Puerto Rico restructurings and classified as trading, resulted in increased investment income of $2 and $27 for the three and nine months ended

September 30, 2023, compared to the same periods in the prior year.

• Net investment income from Ambac-insured securities for the three and nine months ended September 30, 2023, decreased less than $1 and $1, respectively, compared to prior year periods, as additional purchases of AAC-insured RMBS and student loan securities offset the impact of the 2022 settlements of insured Puerto Rico bonds and the redemption of Sitka Senior Secured Notes held in the portfolio in 2022.

Net Investment Gains (Losses), including Impairments.

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

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

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

2023 2022 2023 2022

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Net investment gains (losses), including impairments $ 1 $ 14 $ (7) $ 31

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.

Net gains (losses) on securities sold or called for the three and nine months ended September 30, 2022, included $4 from the distribution of residual assets of a legacy financial guarantee student loan restructuring vehicle.

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

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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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.

This economic hedge was substantially reduced since September 30, 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

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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 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.

Net gains (losses) on interest rate derivatives for the three and nine months ended September 30, 2023, were $4 and $1 compared to $37 and $123 for the three and nine months ended September 30, 2022.

Results for the three and nine months ended September 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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Counterparty credit adjustments are generally applicable for uncollateralized derivative assets that may not be offset by derivative liabilities under a master netting agreement.

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

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $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.

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $4 and $4 for the three and nine months ended September 30, 2023, respectively, and $2 and $6 for the three and nine months ended September 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.

Net realized gains on extinguishment of debt was $— and $57 for three and nine months ended September 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.

Commission income for the three and nine months ended September 30, 2023, was $15 and $39 compared to $7 and $22, for the three and nine months ended September 30, 2022.

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

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

The increase was driven by (i) commissions earned on All Trans and Capacity Marine, which were purchased in November 2022 (ii) commissions earned on Riverton which was purchased in August 2023 and (iii) greater premiums placed by Xchange Benefits.

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

For the three 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.

For the three and nine months ended September 30, 2023, commission expense of $8 and $22 compared to $4 and $13 in three and nine months ended September 30, 2022, driven primarily by the same factors as commission income.

Income (Loss) on Variable Interest Entities.

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

subsidiaries, including gains or losses attributable to consolidating or deconsolidating FG VIEs during the periods reported.

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

2 unchanged sentences

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 $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.

Income (loss) on variable interest entities was $1 and $0 for the three and nine months ended September 30, 2023, compared to $(1) and $14 for the three and nine months ended September 30, 2022.

Results for the three months ended September 30, 2023, reflect gains from higher valuation of certain FG VIE net assets, partially offset by net interest and other expenses of the Puerto Rico restructuring VIEs.

The loss for the nine months ended September 30, 2023, include accelerated discount accretion within interest expense resulting from partial redemption of certain Puerto Rico VIE trust units, partially offset by gains on higher valuation of net assets on other FG VIEs.

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

Results for the nine months ended September 30, 2022, related primarily to two VIE trusts created in connection with the Puerto Rico restructurings in March 2022, including the initial $28 gain upon consolidation of these VIEs, offset by subsequent interest expense and declines in fair value of these VIEs' assets.

Refer to Note 9.

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Losses and Loss Expenses.

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.

Loss and loss expense benefit decreased $277 and $290 for the three and nine months ended September 30, 2023, compared to the same period in the prior year.

The below provides the breakout of loss and loss expenses by segment:

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40 2023 Third Quarter FORM 10-Q |

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

2023 2022 2023 2022

Legacy financial guarantee $ (86) (356) $ (71) (347)

Specialty property and casualty insurance 10 3 20 5

(76) (353) (51) (341)

The large variance within legacy financial guarantee was driven by activities in the RMBS portfolio in both years, including the impact of the Settlement Agreement with Bank of America Corporation in the three months ended September 30, 2022.

Refer to discussion of each segment's results below for further details.

Intangible Amortization.

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 for the three and nine months ended September 30, 2023, was $6 and $18, an increase of $1 and a decrease of $14 as compared to the the three and nine months ended September 30, 2022.

The decrease for the nine months ended September 30, 2023, was driven primarily by the timing of de-risking (including Puerto Rico in the nine months ended September 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.

Other intangible amortization for the three and nine months ended September 30, 2023, was $1 and $3, and $1 and $2 for the three and nine months ended September 30, 2022, respectively.

General and Administrative Expenses (G&A).

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

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

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

2023 2022 2023 2022

2 unchanged sentences

Total G&A expenses 49 31 122 90

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40 2023 Second Quarter FORM 10-Q |

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.

The increase in Compensation G&A expenses during the three and nine months ended September 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 nine months ended September 30, 2023, these factors were further affected by lower incentive compensation expense including the impact of performance factor adjustments.

The increase in Non-Compensation G&A expenses during the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022, was due to higher Legacy Financial Guarantee Insurance segment's legal defense costs of $17 and $26, respectively.

Interest Expense.

2 unchanged sentences

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

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

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

2023 2022 2023 2022

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Total interest expense $ 16 $ 49 $ 48 $ 138

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.

The decrease in interest expense for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 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.

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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.

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

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

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

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

amounts following each scheduled payment date.

Total accrued and unpaid interest for surplus notes outstanding to third parties was $450 at June 30, 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 $462 at September 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 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.

The provision for income taxes primarily relates to international operations and was $1 and $7 for the three and nine months ended September 30, 2023, compared to $2 and $4 for the three and nine months ended September 30, 2022, a decrease of $1 for the quarter and an increase of $3 for the year-to-date period.

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41 2023 Third Quarter FORM 10-Q |

Results of Operations by Segment

Legacy Financial Guarantee Insurance

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

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

2023 2022 2023 2022

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

91 403 96 533

Interest expense 16 49 48 138

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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-risking transactions;

The variability in the segment financial results are primarily driven by (i) change 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 $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 decreased $1 and $11 for the three and nine months ended September 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 $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.

The positive impact on net premiums earned related to credit losses amounted to $0 and $1 fo r the three and nine months ended September 30, 2023 , as compared to $1 and $3 f or the three and nine months ended September 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 nine months ended September 30, 2023, as compared to ($2) and $5 for the three and nine months ended September 30, 2022.

Investment and Derivative Results.

Net investment income increased $18 and $99 for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, driven by higher yields in fixed income and improved performance from pooled fund investments.

Net investment gains (losses), including impairments declined $13 and $38 for the three and nine months ended September 30, 2023, respectively, compared to the prior year periods, primarily as a result of foreign exchange gains and certain recoveries in 2022.

Derivative gains declined $33 in the third quarter 2023 and $121 year-to-date, compared the prior year periods which experienced significant gains from rising interest rates.

Ambac has exited the derivative positions that led to the gains in 2022.

See Consolidated Results above for further information about investment and derivative results.

Losses and Loss Expenses.

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

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

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

2023 2022 2023 2022

3 unchanged sentences

Totals $ (86) $ (356) $ (71) $ (347)

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.

Loss and loss expenses (benefit) for the three and nine months ended September 30, 2023, was largely driven by RMBS recoveries, the positive impact of discount rates on the RMBS portfolio and assumption changes in the international portfolio (nine months only).

Changes in RMBS recoveries impacting loss and loss expenses can be volatile and therefore each period's results are not indicative of potential future results.

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

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

G&A Expenses.

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.

Segment G&A expenses increased during the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022, primarily due to higher

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42 2023 Third Quarter FORM 10-Q |

legal defense costs in the 2023 periods, partially offset by lower compensation costs due to reduced headcount and the timing of incentive compensation performance factor adjustments.

Specialty Property and Casualty Insurance

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

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

2023 2022 2023 2022

12 unchanged sentences

Pretax income (loss) $ — $ (1) $ (1) $ (5)

Loss and LAE Ratio 73.7 % 66.5 % 70.4 % NM

Combined Ratio 125.5 % 161.7 % 127.4 % NM

Retention Ratio (1)

32.0% 18.9% 23.6% 19.6%

Loss and LAE Ratio (2)

78.0% 65.2% 73.8% 65.7%

Combined Ratio (3)

106.5% 147.8% 112.3% 178.8%

Ambac's stockholders

(1) Retention ratio is defined as net premiums written divided by gross premiums written

(2) Loss and LAE ratio is defined as losses and loss expenses incurred divided by net premiums earned

(3) Combined ratio is defined as Loss and LAE ratio plus Expense Ratio.

Expense Ratio is defined as acquisition costs and general and administrative expenses, reduced by program fees divided by net premiums earned.

(4) 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.

Sixteen programs were authorized to issue policies as of June 30, 2023.

Twenty programs were authorized to issue policies as of September 30, 2023.

This includes Everspan participating on one primary workers compensation program as a reinsurer.

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.

Consistent with its strategy to generate sustainable and profitable, long-term specialty property and casualty program insurance business with a focus on diverse classes of risks, Everspan may source programs as a reinsurer.

Accessing programs as a reinsurer provides Everspan the ability to diversify its risk profile, efficiently manage its exposure limits and underwrite programs in

a cost efficient manner, amongst other benefits.

Everspan may participate as a reinsurer on up to 30% of a program, which is in line with its strategy to generally retain up to 30% per program.

Participation as a reinsurer will affect the retention ratio as Everspan's portion of assumed premiums is reflected fully in both Gross and Net Premiums Written.

Loss and loss expenses incurred increased for the three and nine months ended September 30, 2023, relative to the three and nine months ended September 30, 2022, as a result of a number of factors, including growth of the business and the impact of prior period development from reserve strengthening on certain programs (mostly due to an increase in frequency of claim in commercial auto).

Everspan's selected loss ratio (including ULAE) was 70.9% at September 30, 2023 versus 64.0% at September 30, 2022.

Everspan's loss ratio may shift as the inforce book of business grows and diversifies.

The increase in the Loss and LAE ratio for the three months ended September 30, 2023, compared to September 30, 2022, was partially 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 within a loss ratio range.

These sliding scale arrangements mitigate net income volatility.

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

1 unchanged sentence

In addition, on a going forward basis, we may not be able to offset the impact of inflation on our loss costs with sufficient price increases.

The estimation of loss reserves may also be more difficult during extreme events, such as a pandemic, or during the persistence of volatile or uncertain economic conditions, due to, amongst other reasons, unexpected changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses.

The estimation of loss reserves may also be more difficult during extreme events, such as a pandemic, or during the persistence of volatile or uncertain economic conditions, due to, amongst other reasons, unexpected changes in behavior of judicial decisions, claimants and policyholders, including fraudulent reporting of exposures and/or losses.

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

1 unchanged sentence

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 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.

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

The impact of growing operations was partially offset for the nine month comparison by costs associated with the acquisition of additional shell insurance companies in January 2022.

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43 2023 Third Quarter FORM 10-Q |

Insurance Distribution

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

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

2023 2022 2023 2022

14 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 $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.

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

("Riverton") which is expected to 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 managers and real estate professionals.

The Insurance Distribution segment placed premiums for its carriers of approximately $62 and $180 for the three and nine months ended September 30, 2023, up $34 and $83 or 119% and 85.8%, respectively, as compared to the three and nine months ended September 30, 2022.

Higher premiums placed were driven by organic growth at Xchange, the acquisition of All Trans, Capacity Marine and Riverton, 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 107% and 101%, respectively.

1 unchanged sentence

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.

Other lines of business placed by our Insurance Distribution business may also experience seasonality that may cause some volatility of results from period to period.

G&A Expenses.

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.

G&A expenses for the three and nine months ended September 30, 2023, increased compared to the three and nine months ended September 30, 2022, primarily as a result of the All Trans, Capacity Marine and Riverton acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

3 unchanged sentences

AFG is a holding company with no outstanding debt.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $223 as of June 30, 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 $209 as of September 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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43 2023 Second Quarter FORM 10-Q |

• 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 $3.6 and $2.5 during the six months ended June 30, 2023 and 2022.

AFG received distributions from Cirrata of $5.3 and $4.2 during the nine months ended September 30, 2023 and 2022.

AFG's principal uses of liquidity are:

9 unchanged sentences

investment income and maturities and sales of investments.

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44 2023 Third Quarter FORM 10-Q |

• See Note 6.

5 unchanged sentences

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.

AAC's future interest obligations on long-term debt include $496 of accrued and unpaid interest all or a portion of which 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.

9 unchanged sentences

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

Six Months Ended June 30, 2023 2022

Nine Months Ended September 30, 2023 2022

Cash provided by (used in):

5 unchanged sentences

(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.

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

Operating activities

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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44 2023 Second Quarter FORM 10-Q |

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

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

• Cash provided by (i) gross premiums were $146 and $100 for the nine months ended September 30, 2023 and 2022, respectively;

(ii) interest rate derivatives were $22 and $61 for the nine months ended September 30, 2023 and 2022, respectively;

(iii) investment portfolio income was $69 and $59 for the nine months ended September 30, 2023 and 2022, respectively;

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

• Interest payments, including accumulated paid-in-kind interest on the Tier 2 Notes, were $50 for the nine months ended September 30, 2023, and $51 for the nine months ended September 30, 2022.

• Payments related to (i) G&A expenses we re $94 and $75 for the nine months ended September 30, 2023 and 2022, respectively;

and (ii) reinsurance premiums paid were $99 and $43 for the nine months ended September 30, 2023 and 2022, respectively

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

Nine Months Ended September 30, 2023 2022

Net loss and loss expenses paid (recovered):

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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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45 2023 Third Quarter FORM 10-Q |

Financing Activities

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.

Financing activities for the nine months ended September 30, 2023, included redemption of the Tier 2 Notes of $97, share repurchases of $5, and paydowns and maturities of VIE debt obligations of $285 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

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

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.

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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.

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.

Collateral posted by AFS totaled a net amount of $36 (cash and securities collateral of $9 and $27, respectively), including independent amounts, under these contracts at September 30, 2023.

BALANCE SHEET ($ in millions)

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 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 $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.

Total assets decreased by approximately $125 from December 31, 2022, to $7,847 at September 30, 2023, primarily due to:

(i) the decrease in asset values of VIEs of $77 and (ii) lower non-VIE invested assets of $101, partially offset by increases in premium receivables, reinsurance recoverables and deferred premiums as a result of growth in the specialty P&C businesses.

• During 2023, VIE assets were reduced by maturities / paydowns, the deconsolidation of one VIE and sales of Puerto Rico restructuring VIE assets to fund debt redemptions.

Offsetting these decreases was cash collateral received by FG VIEs.

• Reduction in non-VIE investments from December 31, 2022 included the impact of $113 of payments from Ambac Assurance to support partial redemptions of HTA Trust Certificates.

Total liabilities decreased by approximately $141 from December 31, 2022, to $6,507 as of September 30, 2023, primarily due to decreases in the value of VIE liabilities of $168 (consistent factors as noted above in assets, including redemptions of HTA Trust Certificates, and increase in cash collateral payable).

Additional liability increases were driven by higher loss and loss adjustment expense reserves, unearned premiums and ceded premium payables 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 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.

As of September 30, 2023, total stockholders’ equity was $1,318, compared with total stockholders’ equity of $1,305 at December 31, 2022.

This increase was primarily due to total comprehensive income for the nine months ended September 30, 2023.

Investment Portfolio

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

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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

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

September 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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$ 2,156 $ 148 $ 4 $ 184 $ 2,492 $ 2,259 $ 131 $ — $ 203 $ 2,593

(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.

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(1) Includes investments denominated in non-US dollar currencies with a fair value of £329 ($401) and €28 ($29) as of September 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 June 30, 2023 and December 31, 2022:

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at September 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 21% and 19% of the June 30, 2023, and December 31, 2022, combined fixed maturity portfolio, respectively.

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(2) Below investment grade and not rated bonds insured by Ambac represent 20% and 19% of the September 30, 2023, and December 31, 2022, combined fixed maturity portfolio, respectively.

Premium Receivables

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

Ambac's premium receivables increased to $278 at September 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 June 30, 2023, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $253 and $23, respectively.

Insurance Contracts, the increase is primarily due to growth in the Specialty P&C Insurance Segment, including receivables related to the workers compensation program where Everspan participates as a reinsurer.

At September 30, 2023, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $245 and $33, respectively.

Premium receivables by payment currency were as follows:

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To minimize its exposure to losses from reinsurers, Ambac (i) monitors the financial condition of its reinsurers;

(ii) is entitled to receive collateral from its reinsurance counterparties under certain reinsurance contracts;

(ii) is entitled to receive collateral from its reinsurance

counterparties under certain reinsurance contracts;

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

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 $113 from its reinsurers at June 30, 2023.

Ambac benefited from letters of credit and collateral amounting to approximately $119 from its reinsurers at September 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 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.

As of September 30, 2023 and December 31, 2022, reinsurance recoverable on paid and unpaid losses were $172 and $115, respectively primarily due to growth in the Specialty P&C Insurance Segment.

Intangible Assets

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.

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 $249 at September 30, 2023, (ii) intangible assets established as part of acquisitions in the Insurance Distribution business of $48 at September 30, 2023,

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(iii) indefinite-lived intangible assets in the Specialty P&C business as part of its acquisitions of $14 at September 30, 2023.

As of September 30, 2023 and December 31, 2022, intangible assets were $312 and $326, respectively.

The decline is driven by amortization;

partially offset by translation gains from the consolidation of Ambac's foreign subsidiary (Ambac UK).

partially offset by translation gains from the consolidation of Ambac's foreign subsidiary (Ambac UK) and established intangibles from the acquisition of Riverton.

Derivative Assets and Liabilities

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.

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

As of September 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 $15 as of September 30, 2023.

Derivative liabilities decreased from $38 at December 31, 2022, to $22 as of September 30, 2023.

Decreases in derivative asset and liability values since December 31, 2022 resulted from declines in fair value driven by rising interest rates.

Loss and Loss Expense Reserves and Subrogation Recoverable

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

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

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of September 30, 2023 and December 31, 2022, were $670 and $534, respectively.

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

June 30, 2023:

September 30, 2023:

December 31, 2022:

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Totals $ 160 $ 773 $ (234) $ (29) $ 670 $ 90 $ 791 $ (319) $ (28) $ 534

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

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 June 30, 2023 and December 31, 2022:

June 30, 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 September 30, 2023 and December 31, 2022:

September 30, 2023:

December 31, 2022:

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Totals $ 4,076 $ 773 $ (234) $ (29) $ 510 $ 4,047 $ 791 $ (319) $ (28) $ 444

(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.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves were $399 and $32 respectively, at September 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.

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

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Variability of Expected Losses and Recoveries

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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 June 30, 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 September 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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Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases.

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

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

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

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

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

During the first quarter of 2023, Ambac revised the model it uses to project RMBS collateral losses considering the seasoning of our RMBS exposure and management’s view

that the most relevant determinant of prospective collateral performance is borrower payment status.

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

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

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Student Loans:

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Structured Finance Variability:

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at June 30, 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 September 30, 2023, could be approximately $60.

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

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

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49 2023 Third Quarter FORM 10-Q |

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.

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

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 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.

For the public finance credits for which we have an estimate of expected loss at September 30, 2023, the sum of all the highest stress case loss scenarios is $125 and there can be no assurance that losses may not exceed such amounts.

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

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

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 $320 greater than the

loss reserves at September 30, 2023.

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

Long-term Debt

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

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

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

September 30,

2023 December 31, 2022

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Insurance Regulatory Restrictions 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.

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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 $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);

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $575 and $1,176 at September 30, 2023, respectively, as compared to $598 and $1,191 at December 31, 2022, respectively.

As of September 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 $462 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 $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.

The drivers to the net decrease in policyholder surplus were the statutory net loss of $14 for the nine months ended September 30, 2023, a contingency reserve contribution of $8, and the investment valuation changes that are direct charges to surplus of $4.

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 $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.

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $109 at September 30, 2023, as compared to $108 at December 31, 2022.

The significant drivers to the increase were capital contributions of $6.5 partially offset by a net loss at Everspan Indemnity Insurance Company, including its subsidiaries, of $5.4 during the nine months ended September 30, 2023, primarily driven by loss reserve strengthening and by net acquisition costs.

Acquisition costs, primarily commissions, are generally expensed immediately whereas the related premium is recognized over the life of the policy.

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 £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.

£468 at December 31, 2022.

At September 30, 2023, the carrying value of cash and investments was £531, 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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Ambac UK is also required to prepare financial information in accordance with the Solvency II Directive.

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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.

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

NON-GAAP FINANCIAL MEASURES

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EBITDA, Adjusted Net Income and Adjusted Book Value.

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

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

otherwise apparent on a GAAP basis.

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.

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

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The following paragraphs define each non-GAAP financial measure.

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

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

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

intangible assets.

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

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

Three Months Ended September 30, 2023 Three Months Ended September 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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$ 91 $ — $ 4 $ (4) $ 91 $ 403 $ (1) $ 2 $ (6) $ 397

(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.

(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 $0 for the three months ended September 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

Nine Months Ended September 30, 2023 Nine Months Ended September 30, 2022

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$ 96 $ (1) $ 10 $ (8) $ 98 $ 533 $ (5) $ 5 $ (8) $ 524

(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.

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $2 and $1 for the nine months ended September 30, 2023 and 2022, respectively.

These noncontrolling interests are primarily in the Insurance Distribution segment.

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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 June 30,

Three Months Ended September 30,

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

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Workforce change costs — — — 0.01

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

Pretax adjusted net income (loss) 94 $ 1.99 338 $ 7.37

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Adjusted Net Income (Loss) $ 94 $ 2.00 $ 339 $ 7.40

Six Months Ended June 30,

| Ambac Financial Group, Inc.

52 2023 Third Quarter FORM 10-Q |

Nine Months Ended September 30,

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

30 unchanged sentences

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

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

5 unchanged sentences

Adjusted book value $ 1,261 $ 27.90 $ 1,272 $ 28.29

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

| Ambac Financial Group, Inc.

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.

The decrease in Adjusted Book Value since December 31, 2022 was primarily attributable to Ambac's net income (excluding earned 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 June 30, 2023, there were no material changes in the market risks that the Company is exposed to since December 31, 2022.

As of September 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