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Item 7. Management’s Discussion and Analysis

2024-02-27 compared with 2023-03-01 · 495 added, 624 removed, 797 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations ($ and £ in millions)

The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our consolidated financial statements with the following:

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Non-GAAP Financial Measures

EXECUTIVE SUMMARY ($ in millions)

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EXECUTIVE SUMMARY

AFG Net Assets:

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

($ in millions)

As of December 31, 2023 and 2022, AFG's stand alone net assets, excluding its equity investments in subsidiaries, were $211 and $223, respectively.

Cash and short-term investments $ 156 $ 178

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Other net assets 23 17

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

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

Total $ 211 $ 223

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

The decrease in AFG net assets, excluding its equity investments in subsidiaries, during 2023 was driven by operating expenses, capital contributions to subsidiaries, the acquisition of Riverton Insurance Agency and share repurchases, partially offset by interest income and distributions from subsidiaries.

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

Specialty Property and Casualty Insurance Segment

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

Year ended December 31, 2022 2021

Year Ended December 31, 2023 Year Ended December 31, 2022

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

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

Distribution Corporate & Other Consoli-dated

Premiums placed $ 231 $ 231 $ 135 $ 135

Gross premiums written $ 15 $ 273 288 $ (20) $ 146 127

Net premiums written (35) 80 44 (6) 29 23

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

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

Loss ratio 65.4 % 71.4 %

Stockholders Equity (1)

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

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

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

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

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

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

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Insurance Distribution Segment

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

Year ended December 31, 2022 2021

Premiums placed $ 135 $ 117

Commission income 31 26

Sub-producer commission expense 18 15

Net commissions 13 12

Pretax income (loss) $ 5 $ 4

Earnings before interest, taxes, depreciation and amortization 6 5

Stockholders Equity (1)

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

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

Refer to Note 4.

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

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

Legacy Financial Guarantee Insurance Segment

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

Year ended December 31, 2022 2021

Net premiums earned $ 42 $ 46

Net investment income 12 138

Net gains on derivative contracts 128 22

Net realized gains on extinguishment of debt 81 33

Litigation recoveries 126 —

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

General and administrative expenses 102 77

Interest expense 168 187

Total revenues 144 64 52 $ 9 269 451 18 31 $ 4 505

Total expenses 127 64 44 22 257 (89) 25 27 17 (20)

Pretax income (loss) 17 — 7 (13) 12 540 (6) 5 (14) 525

Stockholders Equity (1)

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

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

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

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

operational and strategic cash needs.

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

Settlement of RMBS Litigations and Redemption of Secured Notes:

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

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

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

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

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

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

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

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

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

Refer to Note 1.

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

Asset Management

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

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

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

Refer to Note 5.

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

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

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

EBITDA 107 — 11 (12) 107 754 (6) 7 (14) 742

Ambac Stockholders’ Equity (1)

923 122 105 211 1,362 826 110 93 223 1,252

Non-redeemable noncontrolling interest 51 2 53 51 2 53

Total stockholders’ equity 974 124 105 211 1,415 877 112 93 223 1,305

Redeemable noncontrolling interest 17 17 20 20

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

Banking Sector Crisis of 2023

The collapse of several banks in early 2023 precipitated a sudden loss of confidence in the banking system, prompting bank runs and the U.S.

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

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

Treasury and government-backed debt held by banking institutions.

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

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

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

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

Ambac's cash balances held at banks was $27 as of December 31, 2023 and $42 as of December 31, 2022.

Substantially all of these cash balances were uninsured as of December 31, 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 limit 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 $16 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.

In addition, cash balances held by variable interest entities ("VIEs") that are consolidated in Ambac's financial statements as a result of Ambac's financial guarantees totaled $246 and $17 as of December 31, 2023 and 2022, respectively.

These amounts relate primarily to cash collateral posted against derivative assets and reserve balances

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

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

Liability and Insured Exposure Management

AAC'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.

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

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

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

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

Net par exposure within the U.S.

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.

($ in billions)

December 31, 2022 2021 Variance

Total $ 22,613 $ 28,020 $ (5,407) (19) %

ACC $ 4,735 $ 6,361 $ (1,626) (26) %

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

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

Russia and Ukraine Conflict

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

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

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

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

However, as the conflict continues and if it were

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

maintained under the VIEs' governing documents and are not directly managed by Ambac.

Ambac also has exposure to banks through its fixed maturity investment portfolio totaling $169 and $119 as of December 31, 2023 and December 31, 2022, respectively.

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

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

Financial Statement Impact of Foreign Currency:

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Refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report in Form 10-K for further details on transaction gains and losses.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further details on transaction gains and losses.

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

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

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

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

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

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

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

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

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

SEC Proposed Rules on Climate Related Information

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

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

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

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

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

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

Final climate disclosure rules have not yet been issued, however the rulemaking agendas for U.S.

agencies released in December 2023 indicate the SEC is targeting April 2024 for finalization.

Ambac has reviewed the Proposed Rule and will reassess our related compliance obligations and other effects on our operations when the final rule is issued.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

The loss and loss adjustment expense reserves and subrogation recoverable assets (collectively defined as "loss reserves") discussed in this section relate solely to Ambac’s financial guarantee insurance policies issued to beneficiaries.

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

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

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

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

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

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

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

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

Political, economic, environmental, credit or other unforeseen events

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could have an adverse impact on default probabilities and loss severities.

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

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

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

Reinsurance contracts may mitigate future loss reserve volatility.

While Ambac currently has minimal exposure ceded to reinsurers on financial guarantee credits with loss reserves, the existing reinsurance contracts would reduce future volatility to the extent loss reserves are established on those risks ceded to reinsurers.

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

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The table below indicates the gross par outstanding and gross loss reserves (including loss expenses) related to policies in Ambac’s Financial Guarantee loss and loss adjustment expense reserves at December 31, 2023 and 2022:

Gross Loss and Loss Adjustment Expense

December 31, 2023

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

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

(2) Gross Par Outstanding includes capital appreciation bonds, which are reported at the par amount at the time of issuance of the

insurance policy as opposed to the current accreted value of the bond.

(3) Loss and Loss Adjustment Expense reserves at December 31, 2023, of $559 are included in the balance sheet in the following line items:

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

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

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

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

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

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

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 a critical determinant of performance considering the general appreciation in home values over the past few years as well as the impact of loan modifications.

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

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

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

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

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

We then develop multiple scenarios where issuer debt service is

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paid, missed and/or haircut with claims paid then factor in any projected recovery amount (and potential variability of the recovery amount) and the timing thereof.

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

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

Level 3 financial instruments which are material include certain

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

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

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

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

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

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

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

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

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

the legacy financial guarantee business remains in run-off;

and material amounts of debt remain at AAC.

Negative evidence includes Specialty Property and Casualty Insurance and Insurance Distribution businesses not yet at scale, the Legacy Financial Guarantee Insurance business remaining in run-off, and material amounts of debt at AAC.

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

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

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FINANCIAL GUARANTEES IN FORCE

($ in millions)

Financial guarantee products were sold in three principal markets:

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structured finance and international finance.

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

Net par exposures within the U.S.

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

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

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

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

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

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

During 2023, Ambac completed risk reduction transactions equating to $2,419, including a quota share reinsurance cession of $2,069 insured par, consisting primarily of military housing risk of $1,958.

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

($ in billions)

December 31, 2023 2022 Variance

Total $ 19,541 $ 22,613 $ (3,072) (11) %

ACC $ 3,504 $ 4,735 $ (1,231) (26) %

Watch List $ 2,181 $ 3,044 $ (863) (28) %

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.

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

Public Finance (1)

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(1) Includes $3,371 and $5,400 of Military Housing net par outstanding at December 31, 2023 and 2022, respectively.

(2) Includes $244 and $1,054 of Puerto Rico net par outstanding at December 31, 2022 and 2021, respectively.

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

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

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

Financial Guarantees in Force to the Consolidated Financial

Statements, included in Part II, Item 8 in this Annual Report on Form 10-K for exposures by bond type.

Public Finance Insured Portfolio

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public finance exposures totaled $7,562 in net par outstanding, representing 39% of Ambac’s net par outstanding as of December 31, 2023, and a 28% reduction from the amount outstanding at December 31, 2022.

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

This reduction resulted from active de-risking (primarily from the above-mentioned reinsurance cession of $2,069 of insured par), scheduled paydowns, and early terminations (calls, refundings and pre-refundings).

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

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Collateral for these transactions includes the BAH payments as well as an interest in the ground lease.

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

Risk factors affecting these

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transactions include ongoing base essentiality, military deployments, the U.S.

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

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

other parts of Ambac's insured portfolio.

As of December 31, 2023, privatized military housing represented approximately 17% of net par outstanding as compared to 24% as of December 31, 2022.

Ambac's privatized military housing exposure decreased from 2022 as a result of the above-mentioned reinsurance cession.

Structured Finance Portfolio

Ambac’s portfolio of U.S.

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

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

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

structured finance exposures is $3,315 in net par outstanding, representing 17% of Ambac’s net par outstanding as of December 31, 2023, and an 8% reduction from the amount outstanding at December 31, 2022.

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

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

At December 31, 2023, RMBS represented approximately 9% of net par outstanding.

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International Finance Insured Portfolio

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

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

Ambac’s portfolio of international finance insured exposures is $8,664 in net par outstanding, representing 44% of Ambac’s net

par outstanding as of December 31, 2023, and a 2% increase from the amount outstanding at December 31, 2022.

This increase in exposure was primarily the result of a weakening of the US dollar versus the British pound and the Euro, partially offset by de-risking activity.

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

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

Ambac has no insured exposure related to emerging markets.

When underwriting transactions in the international markets, Ambac considered the specific risks related to the particular country and region that could impact the credit of the issuer.

These risks include the legal and political environment, capital markets dynamics, foreign exchange issues and the degree of governmental support.

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

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

Ambac continues to assess these risks, as well as emerging risks, through its ongoing risk management.

Ambac's international net par exposures are principally in the United Kingdom ($7,502);

however, we also have exposures with credit risk based in various EU member states, including Austria, France, Germany and Italy ($895).

At December 31, 2023, sub-sovereign and investor-owned and public utilities represented approximately 22% and 15% (Electric 5%, Gas 5% and Water 5%) of total net par outstanding, respectively.

Ambac has no insured exposure related to emerging markets.

Ambac UK, which is regulated in the United Kingdom (“UK”), was AAC’s primary vehicle for directly issuing financial guarantee policies in the UK and the European Union with $8,397 net par outstanding at December 31, 2023 (represents approximately 97% of Ambac's international net par outstanding).

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

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

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

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

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

Largest Insured Exposures:

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IF AUK Investor Owned Utility Gas - unsecured UK-Utility BBB+ 2037 $ 896 4.6 %

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

IF AUK PFI - Hospitals UK-Infrastructure BBB+ 2046 741 3.8 %

IF AUK PFI - Accommodation UK-Infrastructure A- 2040 739 3.8 %

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

IF AUK Other Asset Securitizations UK-Asset Securitizations BBB+ 2033 696 3.6 %

IF AUK Investor Owned Utility Other - unsecured UK-Utility A- 2035 683 3.5 %

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

IF AUK Investor Owned Utility Electric - unsecured UK-Utility BBB+ 2036 618 3.2 %

IF AUK Sub-Sovereign Italy-Sub-Sovereign BIG 2035 576 2.9 %

IF AUK PFI - Accommodation UK-Infrastructure A- 2038 478 2.4 %

PF AAC US State Lease/Appropriation US-Lease and Tax-backed Revenue BBB 2036 357 1.8 %

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

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

IF AUK PFI - Hospitals UK-Infrastructure BBB- 2040 307 1.6 %

Total $ 6,091 31.2 %

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Net par related to the top ten exposures reduced $25 from December 31, 2022.

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

Exposures are impacted by commutations, changes in foreign exchange rates ($283 increase during 2023), certain indexation rates linked to inflation measures in the United Kingdom (RPI) and scheduled and unscheduled paydowns.

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

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

The concentration of net par amongst the top ten (as a percentage of net par outstanding) increased to 31% at December 31, 2023, from 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 $307 and a median net par outstanding of $5.

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

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

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

roughly follows U.S.

Bankruptcy laws.

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

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

Net Par Outstanding

($ in millions) December 31,

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

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

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

PR Infrastructure Financing Authority (Special Tax Revenue) — 403

PR Convention Center District Authority (Hotel Occupancy Tax — 86

Commonwealth of Puerto Rico - General Obligation Bonds — 11

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

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

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

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

Commonwealth Plan of Adjustment (Title III Case)

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

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

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

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

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

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

AAC-Insured Bond Effective Date Transactions

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

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

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

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

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

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

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

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

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

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

The AAC-insured PRIFA and

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

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

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

PRHTA Plan of Adjustment (Title III Case)

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

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

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

PRHTA / CCDA PSA

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

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

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

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

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

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

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

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

PRHTA Interim Distribution

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

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

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

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

PRHTA Effective Date Transactions

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

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

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

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

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

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

Additional Insured Portfolio Information

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The following table depicts amortization of existing guaranteed net par outstanding:

Net Par Outstanding Amortization (1)

($ in millions)

Net Par Outstanding Amortization (1)

Estimated Net

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The table below shows the distribution by currency of Ambac's existing guaranteed net par outstanding as of December 31, 2023:

($ in millions) Net Par

(in millions)

Currency Net Par

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Total $ 19,541 100 %

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Financial Guarantees in Force to the Consolidated Financial Statements, included in Part II, Item 8 included in this Annual Report on Form 10-K, for geographic detail by location of risk as of December 31, 2023.

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

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AAA is less than 1% in both periods.

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Net Par Outstanding

December 31, 2022 2021

Public Finance:

Military Housing

Other 213 317

General Obligations 85 151

Lease and tax-backed revenue 80 252

Total Public Finance 563 823

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Total $ 3,470 $ 3,953

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

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

The net decline in below investment grade exposures is significantly due to de-risking activities, including Puerto Rico of $165 and from the above mentioned reinsurance transaction of $50.

Below investment grade exposures could increase as a relative proportion of the guarantee portfolio given that Ambac hasn't written any new financial guarantee business since 2008 and stressed borrowers generally have less ability to prepay or refinance their debt.

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

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

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

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

As of December 31, 2023, the aggregate amount of insured par ceded by AAC to reinsurers under reinsurance agreements was $6,464, with the largest reinsurer accounting for $2,766 or 10.6% of gross par outstanding at December 31, 2023.

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The following table shows the distribution, by bond type, of AAC’s ceded guaranteed portfolio at December 31, 2023:

Bond Type Ceded Par Amount

December 31, 2022 2021

December 31, Ceded Par Amount

Public Finance:

General obligation $ 1,265 $ 1,458

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

Housing revenue $ 2,829 $ 910

Lease and tax-backed revenue 1,125 1,169

General obligation 1,112 1,265

Transportation revenue 599 699

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Investor-owned utilities 174 174

Structured insurance — 313

Other 100 136

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Percentage of Gross Par Ceded 25 % 18 %

RESULTS OF OPERATIONS ($ in millions)

RESULTS OF OPERATIONS

The following discussion should be read along with the financial statements included in this Annual Report on Form 10-K, as well as Part II, "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K for the year ended December 31, 2022, which provides additional information on comparisons of years 2022 and 2021.

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

Net income attributable to common stockholders for the year ended December 31, 2023, was $4 compared to a net income attributable to common stockholders of $522 for the year ended December 31, 2022.

The net income variance was primarily driven by:

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

(i) a lower loss and loss adjustment expenses benefit, (ii) a litigation recovery in 2022, (iii) 2022 gains on derivative contracts, and (iv) 2022 net gains on extinguishment of debt, partially offset by higher returns from the investment portfolio and lower interest expense.

A summary of our financial results is shown below:

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Litigation recoveries — 126 —

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

Losses and loss adjustment expenses (33) (396) (88)

Amortization of deferred acquisition costs, net 11 3 1

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Net income (loss) attributable to common stockholders $ 4 $ 522 $ (17)

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

Ambac's results for the year ended December 31, 2023 compared to the year ended December 31, 2022 were impacted by the following:

• During 2023, Ambac completed LFG risk reduction transactions primarily through a quota share reinsurance cession, consisting primarily of military housing risk.

This reinsurance cession had an adverse impact on net premiums earned of approximately $2.

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

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

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

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

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

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

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

("Nomura") whereby the parties settled all RMBS litigation brought by AAC

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

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

against Nomura and AAC received $140 on January 3, 2023.

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

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

Interest expense was significantly reduced in 2023 as a result of these settlements.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for 2023 and 2022.

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Total $ 288 $ 127 $ 2

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

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

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

Specialty P&C growth is primarily driven by the number of active programs and their size as of December 31, 2023, we have twenty-three programs with nineteen MGA/Us.

Net Premiums Written.

Net premiums written increased $22 for the year ended December 31, 2023 compared to the year ended December 31, 2022, as shown by segment below:

Year Ended December 31, 2023 2022 2021

Legacy Financial Guaranty Insurance $ (35) $ (6) $ (35)

Specialty Property & Casualty Insurance 80 29 3

Total $ 44 $ 23 $ (33)

Legacy Financial Guarantee Insurance net premiums written relate to changes in expected and contractual premium cash flows for existing financial guarantees in force, and reinsurance cessions in 2023 and 2021.

Specialty P&C growth is primarily driven by the number of active programs and their size as of December 31, 2023, in addition to the impact of two assumed reinsurance transactions executed during 2023.

Net Premiums Earned.

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Total 78 $ 56 $ 47

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

The increase in Specialty Property & Casualty

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

Commission Income.

The reduction in the Legacy Financial Guarantee Insurance segment was primarily due to de-risking activities, including the 2023 reinsurance transaction, the 2022 Puerto Rico restructurings, and run-off of the insured portfolio.

The increase in Specialty Property and Casualty Insurance net premiums earned was driven by the growth in net premiums written.

Commission Income and Commission Expense.

Commission income was $51 compared to $31, for the years ended December 31, 2023 and 2022.

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

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

Commissions include both base and profit sharing commissions from Cirrata Group companies in the Insurance Distribution segment.

The increase was driven by organic growth in premiums placed as well as the acquisition of All Trans and Capacity Marine in November of 2022 and Riverton in August of 2023.

Commission expense will largely track changes in gross commission.

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

For the year ended December 31, 2023 commission expense was $29 compared to $18 for the year ended December 31, 2022, representing approximately 57% of commission income in both periods.

Program Fees.

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

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

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

Program fee revenues were $8 compared $3 for the years December 31, 2023 and 2022, respectively.

Program fee revenues represent the recognition of ceding commissions in excess of direct acquisition costs received from reinsurers and minimum fees received from MGA/Us until related programs reach certain levels of premium ceded.

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

Net Investment Income.

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

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

Net investment income for the periods presented were driven by the Legacy Financial Guarantee Insurance segment;

other segments' results were not significant.

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

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Net investment income $ 140 $ 17 $ 139

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

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

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

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

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

Net investment income increased $123 for the year ended December 31, 2023, compared to 2022.

• Income from Other investments and trading securities increased $97 in 2023, compared to the prior year.

Pooled fund investments produced a gain of $40, an increase of $66 from 2022, driven by improved performance in all fund categories even with a lower allocation to funds overall.

The largest increases were in hedge funds, equities and high-yield and leverage loan funds.

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

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

Gains on securities received in the Puerto Rico restructurings, which are classified as trading, were $7 in 2023, compared to a loss of $23 in 2022.

• Net investment income from available-for-sales securities other than Ambac-insured securities increased $27 in 2023, compared to the prior year, due to higher portfolio yields.

• Investment income from Ambac-insured securities was flat compared to 2022.

Higher average holdings of Ambac-insured RMBS and student loans in 2023 offset the impact of the 2022 settlements of Puerto Rico bonds and the redemption of Sitka Senior Secured Notes (as defined in Note 12.

Long-Term Debt to the Consolidated Financial Statements included in Part II, Item 8 in the Annual Report on Form 10-K) held in the portfolio in 2022.

Net Investment Gains (Losses), including Impairments.

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$ (22) $ 31 $ 7

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

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

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

Net investment gains (losses) during the year ended December 31, 2023, included impairments of Ambac-insured student loan securities that management intends to sell.

Net investment gains during the year ended December 31, 2022, included a recovery of $9 from a class-action settlement relating to certain RMBS securities previously held in the investment portfolio, $4 from the distribution of residual assets of a legacy financial guarantee student loan restructuring vehicle and $5

from the mandatory redemption of Sitka Senior Secured Notes over their amortized cost value.

Other net realized gains on securities sold or called in 2023 and 2022 are primarily from sales in connection with routine portfolio management.

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

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

If management either:

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

Refer to Note 2.

Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements located in Part II, Item 8 in this Annual Report on Form 10-K for a description of the Company's policies related to investment impairments.

Net Gains (Losses) on Derivative Contracts.

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

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

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

Into the second 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 September 30, 2022, and was fully removed during the second quarter of 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.

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

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

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

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

Net losses on interest rate derivatives for the year ended December 31, 2023, were $1, compared to a net gains of $128 for the year ended December 31, 2022.

Results for the year ended December 31, 2023, reflect the impacts of interest rate shifts in the early part of 2023 and counterparty credit adjustments as noted below.

The net gains in 2022 were driven primarily by the significant rate increase during the year.

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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Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $2 and $8 for the years ended December 31, 2023 and 2022, respectively.

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

The lower counterparty credit adjustments for both periods reflected lower underlying asset values with the further impact of credit spread narrowing in 2023 and widening in 2022.

Net Realized Gains on Extinguishment of Debt.

Net realized gains on extinguishment of debt was $0 for year ended December 31, 2023.

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

Gains were recognized due to repurchases of surplus notes below their carrying values, partially offset with losses recognized on the redemption of the Sitka AAC Note (as defined in Note 12.

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

Long-term Debt to the Consolidated Financial Statements

Ambac Financial Group, Inc 39

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

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

Refer to Note 1.

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

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

included in Part II, Item 8 in this Annual Report on Form 10-K) above its carrying value.

AAC repurchased $266 million current par of surplus notes from third party holders in 2022.

Subject to prevailing market conditions, our liquidity, internal and regulatory guidelines and approvals, contractual restrictions and OCI’s Run-off Capital Framework, Ambac may continue to opportunistically reduce, redeem, repurchase or otherwise retire its outstanding surplus notes, including through open market repurchases, tender offers, repayments, redemptions or otherwise, and may consider opportunities to exchange securities issued by it from time to time for other securities issued by AFG or AAC.

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.

Included within Income (loss) on variable interest entities are income statement amounts relating to LFG-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 LFG-VIEs during the periods reported.

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

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

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

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

Differences between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated 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.

In consolidation, most assets and liabilities of the LFG-VIEs are initially reported at fair value, except for customer contract assets and liabilities which are accounted for under the Revenue from Contracts with Customers Topic of the ASC.

The related insurance assets and liabilities are eliminated in consolidation.

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

Generally, LFG-VIEs in a net liability position are expected to have some portion of their obligations 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 LFG-VIEs' 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 LFG-VIE and Ambac could result in gains or losses, even if such policy changes do not result in deconsolidation of the LFG-VIE.

Income (loss) on variable interest entities was $3 and $21 for the years ended December 31, 2023 and 2022, respectively.

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

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

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

Results for the year ended December 31, 2023, were driven primarily by the $4 gain upon consolidation of a VIE for which Ambac UK guarantees the senior debt.

Results for the year ended December 31, 2022.

related primarily to three VIE trusts created in connection with the Puerto Rico restructurings in 2022.

The 2022 gain included the initial $37 million gain upon consolidation, losses of $9 from changes to fair value of these VIEs' assets, and losses of $7 from these VIEs' interest and other costs.

Refer to Note 11.

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Litigation Recoveries.

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

and fraud by the BOA Parties.

For the year ended December 31, 2022, in connection with the settlement agreement with Bank of America Corporation and certain affiliates, the BOA Settlement Payment included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties.

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

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Losses and Loss Adjustment Expenses (Benefit).

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

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

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

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

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

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

Losses and loss adjustment expenses increased $364 for the year ended December 31, 2023, compared to the prior year.

Below provides the breakout of loss and loss expenses by segment:

Year Ended December 31, 2023 2022 2021

Legacy financial guarantee $ (69) $ (406) $ (89)

Specialty property and casualty insurance 37 9 $ —

Total $ (33) $ (396) $ (88)

The large variance within legacy financial guarantee was driven by activities in the RMBS portfolio in 2023 and 2022, including the impact of the Settlement Agreements with Bank of America Corporation and certain affiliates thereof and the settlement agreement with Nomura during 2022.

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

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

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

($ in millions)

Year Ended December 31,

2023 2022 2021

Compensation $ 73 $ 66 $ 62

Non-compensation 84 75 49

$ 156 $ 141 $ 111

G&A expenses for the year ended December 31, 2023 are $156, an increase of $15 from G&A expenses for the year ended December 31, 2022.

The increase was primarily due to the following:

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

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

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

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

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

Intangible Amortization.

Insurance intangible amortization was $25 and $44 for the years ended December 31, 2023 and 2022, respectively.

The decrease was driven primarily by the timing of de-risking transactions (including Puerto Rico in 2022) and the reduced size of the financial guarantee insured portfolio.

Insurance intangible amortization will decline after policies

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Guarantee Insurance stemming from the 2021 secured note refinancing.

Intangible Amortization.

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

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

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

mature or they are de-risked Other intangible amortization was $3 and $3 for the years ended December 31, 2023 and 2022 relating to acquisitions within the Insurance Distribution segment.

Interest Expense.

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

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

All interest expense relates to the Legacy Financial Guarantee Insurance segment and includes accrued interest on the LSNI Ambac Note (fully redeemed in 2021), Sitka AAC Note (fully redeemed during the fourth quarter of 2022), Tier 2 Notes (fully redeemed during the first quarter of 2023), surplus notes and other debt obligations.

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

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

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

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

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

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

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

The decrease in interest expense for the year ended December 31, 2023, compared to the year ended December 31, 2022, reflects the impact of the 2022 redemption of secured notes and purchases of surplus notes as described further under "Debt Redemptions and Extinguishments" in Note 12.

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

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

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

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

scheduled payment date.

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 $475 at December 31, 2023.

As required by the terms of surplus notes, AAC will continue to seek OCI’s approval to make payments of principal and interest on its surplus notes.

OCI’s approval may be granted or denied in OCI’s sole discretion.

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

Ambac can provide no assurance as to when or if surplus note principal and interest payments will be made.

Provision for Income Taxes.

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Total 144 451

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

Losses and loss adjustment expenses (69) (406)

General and administrative expenses 106 102

Total 37 (303)

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

EBITDA 107 754

Interest expense 64 168

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Pretax income (loss) $ 17 $ 540

Stockholders equity (2)

(1) Abbreviated as "EBITDA" in future references

Ambac's stockholders equity (1)

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

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

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

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

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

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The positive impact on net premiums earned related to credit losses amounted to $1 and $4 for the years ended December 31, 2023 and 2022, respectively.

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• 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 $0 and $8 for the years ended December 31, 2023 and 2022, respectively.

Losses and Loss Adjustment Expenses (Benefit).

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

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

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

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

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

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

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

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Domestic Public Finance (5) (192)

Other (2) (6)

$ (69) $ (406)

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

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

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

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

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

(1) Includes loss expenses incurred of $4 and $29 for the year ended years ended December 31, 2023 and 2022 , respectively.

Loss and loss expenses (benefit) for 2023, was largely driven by RMBS recoveries and favorable development related to student loans, partially offset by the negative impact of discount rates on the RMBS portfolio.

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.

Losses and loss expenses (benefit) for 2022, were driven by favorable RMBS development due to the impact of the settlement agreements with the BOA Parties and Nomura of $123, the positive impact of discount rates, and favorable loss development in domestic public finance (primarily due to the Puerto Rico restructurings of $180).

G&A Expenses.

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

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

The increase in Legacy Financial Guarantee Insurance segment operating expenses during the year ended December 31, 2023, as compared to the year ended December 31, 2022, is driven primarily by additional costs related to defensive litigation, partially offset by the impact of headcount and other cost reductions in the segment.

Specialty Property and Casualty Insurance

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Program fees 8 3

Losses and loss adjustment expenses (benefit) 9 —

Losses and loss adjustment expenses 37 9

Amortization of deferred acquisition costs, net 11 3

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Pretax income (loss) $ — $ (6)

Loss and LAE Ratio 65.4 % NM

Combined Ratio 158.1 % NM

Loss and LAE Ratio 70.7 % 65.4 %

Combined Ratio 106.5 % 156.5 %

Ambac's stockholders equity (1)

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

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

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

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

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

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

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

Twenty-three programs were authorized to issue policies as of December 31, 2023.

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

Ambac Financial Group, Inc 42

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

Losses and Loss Adjustment Expenses (Benefit).

Loss and loss expenses incurred increased for the year ended December 31, 2023, relative to the year ended December 31, 2022, primarily due to the growth and diversification of the business.

Everspan's loss ratio (including ULAE) was 70.7% and 65.4% for the years ended December 31, 2023 and 2022, respectively, inclusive of prior years development of 0.3% and 0.2%, respectively.

The shift in the loss ratio was driven by commercial auto loss experience in the current accident year and diversification, primarily due to the addition of personal auto and workers compensation programs through assumed reinsurance.

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 year ended December 31, 2023, compared to December 31, 2022, was partially offset by a benefit to acquisition costs as a result of sliding scale commission arrangements with program partners.

Such benefit reduced the Specialty Property and Casualty Insurance segments expense ratio by 3.2% and 1.3% for the years ended December 31, 2023 and 2022, respectively.

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

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

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

The estimation of loss reserves may also be more difficult during extreme events, such as a 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 adjustment expenses will likely be higher or lower than the related loss reserves at the reporting date.

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

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

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

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

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

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

G&A Expenses.

General and administrative costs increased for the year ended December 31, 2023, relative to the year ended December 31, 2022, primarily resulting from the growth in Everspan's staffing and operations.

The impact of growing operations was muted by costs incurred in 2022 in connection with the acquisition of additional shell insurance companies.

Insurance Distribution

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General and administrative expenses 11 6

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

Depreciation (1)

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

All Trans, a full service managing general underwriter with delegated underwriting authority in commercial automobile insurance for

specific "for-hire" auto classes;

and Capacity Marine, a wholesale and retail brokerage and reinsurance intermediary specializing in marine and international risk.

All Trans, an MGA specializing in commercial automobile insurance for specific "for-hire" auto classes;

Capacity Marine, a wholesale and retail brokerage and reinsurance intermediary specializing in marine and international risk;

and Riverton Insurance Agency, an insurance services business specializing in professional liability lines and consisting of a MGA and a retail agency.

The Insurance Distribution business is typically compensated for its services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices and, in some cases, the managing of claims under an agency agreement.

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Cirrata business placed premiums for its carriers of approximately $231 for the year ended December 31, 2023, up $95 or 70% as compared to the year ended December 31, 2022.

The growth was primarily driven by premiums placed by All Trans and Capacity Marine since their acquisition in November 2022.

Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which result in revenue and earnings concentrations in the first and third quarters each calendar year, however, we expect this to become less pronounced over time as Cirrata continues to grow and diversify into other classes of business.

The growth was primarily driven by (i) premiums placed by All Trans and Capacity Marine since their acquisition in November 2022;

(ii) premiums placed by Riverton since its acquisition in August 2023 and (iii) organic growth at Xchange of approximately 10%.

Insurance Distribution businesses may experience seasonal impacts on their revenues and operations.

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

Seasonal impacts on the Insurance Distribution segment, and therefore Ambac's results, may increase or decrease over time depending on the relative growth of certain classes of business as well as acquisitions.

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G&A Expenses.

General and Administrative expenses for the year ended December 31, 2022 increased slightly as compared to the year ended December 31, 2021 as a result of employees hired to support the ESL renewal rights acquisition that occurred on April 29, 2022 and operating costs at All Trans and Capacity Marine since their acquisition in November 2022.

General and Administrative expenses for the year ended December 31, 2023, increased as compared to the year ended December 31, 2022, as a result of the addition of the operating expenses of All Trans, Capacity Marine and Riverton, which were acquired in November 2022, November 2022, and August 2023, respectively.

LIQUIDITY AND CAPITAL RESOURCES

($ in millions)

Holding Company Liquidity

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

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

The $4 reimbursement for 2022 expenses was approved by OCI and paid to AFG in March 2023.

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

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

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

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

such capital investments include investments in technology to support the efficient operation of our Specialty Property and Casualty and Insurance Distribution businesses.

such capital investments include investments in technology to support the efficient operation of our Specialty Property and Casualty Insurance and Insurance Distribution businesses.

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

AFG supported the development of the Specialty Property and Casualty Insurance business, and its acquisitions, with cash contributions of $6 and $14 to the Everspan group of companies during the years ended December 31, 2023 and 2022, respectively.

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

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

However, events, opportunities or circumstances could arise that may cause AFG to seek additional capital (e.g.

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• See Note 7.

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

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

Cash provided from these sources is used primarily for claim payments and commutations, loss expenses, acquisition costs (Specialty Property and Casualty Insurance segment only), debt service (Legacy Financial Guarantee segment only), operating expenses, reinsurance payments and purchases of securities and other investments.

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

Cash provided from these sources is used primarily for claim payments and commutations, loss expenses, acquisition costs (Specialty Property and Casualty Insurance segment only), debt service (Legacy Financial Guarantee Insurance segment only), operating expenses, reinsurance payments and purchases of securities and other investments.

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

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

• As further described in Note 1.

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

(i) effective October 29, 2022, AAC wholly redeemed the Sitka AAC Note and partially redeemed Tier

2 Notes and (ii) effective January 15, 2023, AAC fully redeemed the remaining Tier 2 Notes.

Additionally, in the second and fourth quarters of 2022, AAC repurchased $334 current par of surplus notes (including $67 from AFG).

Following these redemptions and repurchases, current principal outstanding on AAC's long-term debt consisted of $519 of surplus notes.

AAC's future interest obligations on long-term debt after giving effect to these redemptions include $447 of accrued and unpaid interest that would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2023.

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

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

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 $475 of accrued and unpaid interest.

• AFS provided interest rate derivatives to financial guarantee customers and used derivatives to provide a partial hedge against interest rate risk in AAC's insurance and investment portfolios.

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

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

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

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

Cash provided from these sources is used primarily

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for commissions paid to sub-producers, operating expenses and distributions to AFG and other members.

Consolidated Cash Flow Statement Discussion

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Net cash flow $ 213 $ 38 $ (12)

(1) During the 2022, AAC made payments of $476 to accelerate AAC-insured PRIFA, CCDA and HTA bonds that were not commuted and were deposited into trusts established under the Puerto Rico restructurings.

Also during 2022, AAC received $165 for redemption of PRIFA trust units held in its investment portfolio.

Because these trusts are consolidated VIEs, this net cash activity of

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$311 is reflected as payments of VIE liabilities in financing activities for the year ended December 31, 2022.

(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 the trusts are reflected as payments of VIE liabilities within financing activities.

Cash used in financing activities includes $113 and $311 from such AAC payments for the years ended December 31, 2023 and 2022, respectively.

Operating activities

The following represents the significant cash operating activities during the years ended December 31, 2023 and 2022:

• Cash provided by (i) gross premiums (net of commissions paid) were $139 and $38 for the years ended December 31, 2022 and 2021, respectively;

• Cash provided by (i) gross premiums (net of commissions) were $209 and $139 for the years ended December 31, 2023 and 2022, respectively;

(ii) non-VIE interest rate derivatives were $22 and $84 for the years ended December 31, 2023 and 2022, respectively;

(iii) VIE derivative payments were $(326) and $(24) for the years ended December 31, 2022 and 2021, respectively;

(iv) non-VIE investment portfolio income was $82 and $80 for the years ended December 31, 2022 and 2021, respectively;

and (v) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts were $47 for the year ended December 31, 2022.

• Payments for non VIE debt service and accreted interest on redemptions and debt repurchases of the Sitka AAC Note, Tier 2 Notes and Surplus Notes were $59, $70 and $154, respectively, for the year ended December 31, 2022.

Debt service payments on the LSNI Ambac Note and Sitka AAC Note were $51 and $30, respectively, for the year ended December 31, 2021.

(iii) non-VIE investment portfolio income was $96 and $82 for the years ended December 31, 2023 and 2022, respectively;

and (iv) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts were $47 for the year ended December 31, 2022.

• Payments for accreted interest on redemption of the Tier 2 Notes were $50 for the year ended December 31, 2023.

Payments for debt service and accreted interest on redemptions and debt repurchases of the Sitka AAC Note, Tier 2 Notes and Surplus Notes were $59, $70 and $154, respectively, for the year ended December 31, 2022.

• Payments related to (i) operating expenses we re $120 and $94 for the years ended December 31, 2023 and 2022, respectively;

and (ii) reinsurance premiums paid were $66 and $26 for the years ended December 31, 2022 and 2021, respectively

(ii) reinsurance premiums paid (net of commissions) were $137 and $66 for the years ended December 31, 2023 and 2022, respectively;

and (iii) VIE derivative payments were $326 for the year ended December 31, 2022.

• Fraud litigation recoveries of $126 allocated from the BOA Settlement Payment.

• Net Legacy Financial Guarantee Insurance loss and loss adjustment expenses paid (recovered), including commutation payments, during the years ended December 31, 2023 and 2022 are detailed below:

Year Ended December 31,

Net loss and loss adjustment expenses paid (recovered):

Net losses paid $ 30 $ 298

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Net cash flow $ (194) $ (1,605)

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

2022 includes the majority of the recoveries from the BOA Settlement Payment except for the portion allocated to fraud litigation recoveries.

The fraud litigation recoveries were $126 and are also included in cash flows from operations.

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

Financing Activities

Financing activities for the year ended December 31, 2022, included payments for repurchase of surplus notes of $191, redemption of Sitka AAC Note of $1,210, partial redemption of Tier 2 Notes of $143, share repurchases of $14, repurchases of auction market preferred shares of $8 and paydowns and maturities of VIE debt obligations of $591 (including payments

for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

Financing activities for the year ended December 31, 2021, include paydowns of the LSNI Ambac Note of $1,641 and paydowns and maturities of VIE debt obligations of $170.

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

Future financing activities will include additional accelerations and redemptions of the VIE trusts created from the Puerto Rico restructuring, including $136 through February 16, 2023.

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

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

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

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

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

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

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

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

Financing activities for the year ended December 31, 2023, included payments for the redemption of Tier 2 Notes of $97, share repurchases of $5 and paydowns and maturities of VIE debt obligations of $315.

Financing activities for the year ended December 31, 2022, included payments for repurchase of surplus notes of $191, redemption of the Sitka AAC Note of $1,210, partial redemption of Tier 2 Notes of $143, share repurchases of $14, repurchases of auction market preferred shares of $8 and paydowns and maturities of VIE debt obligations of $591 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

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

Since the second quarter of 2023, AFS's only remaining derivative positions include a limited number of legacy customer swaps and their associated hedges.

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

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

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

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

All collateral and margin obligations are currently met.

Collateral and margin posted by AFS totaled $70 (cash and securities, at fair value, of $6 and $64 respectively), including independent amounts, under these contracts at December 31, 2022.

BALANCE SHEET ($ in millions)

Total assets decreased by approximately $4,330 from December 31, 2021 to $7,973 at December 31, 2022, primarily due to the reduction in asset values of VIEs of $2,162 and subrogation recoverables of $1,821.

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

The decline in subrogation recoverables was largely due to receipts under the settlement agreement with Bank of America Corporation and certain affiliates.

Additional declines in total assets were the result of (i) the payment of loss and loss adjustment expenses, interest and operating expenses, (ii) declines in invested asset values, (iii) lower derivative assets caused by rising interest rates, (iv) repurchases of Ambac common stock and AAC surplus notes and (v) lower premium receivables and intangible assets from

Collateral posted by AFS totaled $50 (cash of $23 and securities at fair value of $27), including independent amounts, under these contracts at December 31, 2023.

BALANCE SHEET

Total assets increased by approximately $456 from December 31, 2022 to $8,428 at December 31, 2023, primarily due to (i) the increase in asset values of VIEs, driven by a new VIE consolidated in the fourth quarter of 2023 and the weakening of the US dollar against the British Pound Sterling and (ii) the impact on premium receivables, reinsurance

Ambac Financial Group, Inc 45

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the continued runoff of the financial guarantee insurance portfolio.

Total liabilities decreased by approximately $4,540 from December 31, 2021, to $6,647 as of December 31, 2022, primarily due to reductions in the value of VIEs liabilities of $1,996 based on consistent factors as noted above in assets.

Additional liability declines driven by (i) the significant reduction in gross loss reserves from the Puerto Rico restructuring;

(ii) the impacts of the redemption of secured notes of $1,352 described in Note 1.

Background and Business Description in this Annual Report on Form 10-K located in Part II.

Item 8, (iii) repurchases of AAC surplus notes during 2022 with a carrying value of principal and interest of $461 at December 31, 2021, and (iv) lower derivative liabilities caused by rising interest rates.

recoverables and deferred ceded premiums from growth in the Specialty Property and Casualty Insurance business.

Total liabilities increased by approximately $349 from December 31, 2022, to $6,997 as of December 31, 2023, primarily due to (i) increases in the value of VIEs liabilities based on consistent factors as noted above in assets, and (ii) higher unearned premiums and ceded premiums payable from the growth in the Specialty Property and Casualty Insurance business, partially offset by the reduction in long-term debt that was fully redeemed on January 15, 2023, primarily from the Nomura Settlement Payment as more fully described in Note 1.

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

As of December 31, 2023, total stockholders’ equity was $1,415, compared with total stockholders’ equity of $1,305 at December 31, 2022.

This increase was primarily due to a Total Comprehensive Income during 2022 primarily driven by the net

income attributable to common stockholders for the year ended December 31, 2022, of $522, partially offset by unrealized losses on investments of $225 and translation losses on the consolidation of AFG's foreign subsidiaries.of $85.

This increase was primarily due to a Total Comprehensive Income during 2023 primarily driven by the net income attributable to common stockholders for the year ended

December 31, 2023 of $4, unrealized gains on investments of $51 and translation gains on the consolidation of AFG's foreign subsidiaries.of $40.

Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan, Ambac UK and AFG.

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Item 8 for information about Ambac's consolidated investment portfolio.

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

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.

Investment Portfolio

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

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

December 31, 2022

December 31, 2023 December 31, 2022

Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance

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

Insurance Distribution Corporate & Other Consolidated

Fixed maturity securities $ 1,575 $ 121 $ — $ 14 $ 1,710 $ 1,281 $ 102 $ — $ 12 $ 1,395

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$ 2,310 $ 162 $ 4 $ 188 $ 2,664 $ 2,259 $ 131 $ — $ 203 $ 2,593

December 31, 2021

Fixed maturity securities $ 1,630 $ 72 $ — $ 28 $ 1,730

Fixed maturity securities - trading — — — — —

Short-term 258 32 — 124 414

Other investments 679 — — 11 690

Fixed maturity securities pledged as collateral 120 — — — 120

Total investments (1) $ 2,687 $ 104 $ — $ 164 $ 2,955

(1) Includes investments denominated in non-US dollar currencies with a fair value of £342 ($436) and €25 ($27) as of December 31, 2023 and £296 ($357) and €39 ($42) as of December 31, 2022.

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(2) Below investment grade and not rated bonds insured by Ambac represented 21% and 19% of the 2023 and 2022 combined fixed maturity investment portfolios, respectively.

The decrease is primarily due to the impact of the settlement of insured Puerto Rico bonds described above, under Financial Guarantees in Force.

The increase is primarily due to purchases of insured Student Loan bonds.

Premium Receivables.

Ambac's premium receivables decreased to $269 at December 31, 2022, from $323 at December 31, 2021.

Ambac's premium receivables increased to $290 at December 31, 2023, from $269 at December 31, 2022.

As further discussed in Note 7.

Insurance Contracts to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II.

Item 8, the decrease is due to premium receipts and adjustments for changes in expected and contractual cash flows on financial guarantee insurance contracts, partially offset by decreases to the

allowance for credit losses, accretion of the financial guarantee premium receivable discount and increases to premium receivables on the Specialty Property and Casualty Insurance business due to increased volume of policy issuances.

Item 8, the increase is primarily due to growth in the Specialty Property and Casualty Insurance Segment, including receivables related to a workers compensation program where Everspan participates as a reinsurer.

At December 31, 2023, Legacy Financial Guarantee

Insurance and Specialty Property and Casualty Insurance premiums receivables were $244 and $46, respectively.

Premium receivables by payment currency were as follows:

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As of December 31, 2023 and 2022, reinsurance recoverable on paid and unpaid losses were $195 and $115, respectively.

Special Property and Casualty Insurance amounted to $82 and $32 at December 31, 2022 and 2021, respectively.

Legacy Financial Guarantee amounted to $33 and $23 at December 31, 2022 and 2021, respectively.

The increase was primarily a result of the growth of the Special Property and Casualty Insurance business.

Specialty Property and Casualty Insurance amounted to $165 and $82 at December 31, 2023 and 2022, respectively;

increase driven largely from growth of the business.

Legacy Financial Guarantee Insurance amounted to $30 and $33 at December 31, 2023 and 2022, respectively.

Intangible Assets.

Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities, (ii) intangible assets established as part of the acquisition of Xchange in 2020, (iii) indefinite-lived intangible assets established as part of the acquisition of admitted carriers in both 2021 and 2022, and (iv) intangible assets established as part of the acquisition of All Trans and Capacity Marine in 2022.

Refer to Note 4.

Business Combination to the Consolidated Financial Statements, in this Annual Report Form 10-K located in Part II.

Item 8 for further information relating to the acquisitions of Xchange, All Trans and Capacity Marine.

Intangible assets includes (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy in 2013, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities;

(ii) intangible assets established as part of the acquisition of Xchange in 2020, All Trans and Capacity Marine in 2022, and Riverton in 2023;

and (iii) indefinite-lived intangible assets established as part of the acquisition of admitted carriers in both 2021 and 2022.

As of December 31, 2023 and 2022, the net intangible asset was $307 and $326, respectively.

The decline is driven by amortization and translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK), partially offset by the new assets established in 2022.

Derivative Assets and Liabilities.

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

Derivative assets and

The decline is driven by amortization;

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

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liabilities on the balance sheet primarily reflect the portion of the portfolio that is not subject to daily cash variation margin payments.

Derivative assets decreased from $76 at December 31, 2021, to $27 as of December 31, 2022.

Derivative liabilities decreased from $95 at December 31, 2021, to $38 as of December 31, 2022.

The decreases resulted primarily from higher interest rates during the year ended December 31, 2022, with the decline in assets partially offset by lower counterparty credit adjustments.

Loss and Loss Adjustment Expense Reserves and Subrogation Recoverable.

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

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

Refer to the "Critical Accounting Policies and Estimates" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2.

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

included in Note 2.

Basis of Presentation and Significant Accounting Policies and Note 7.

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

Specialty Property and Casualty Legacy Financial Guarantee

December 31, 2023:

December 31, 2022:

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

Present Value of Expected

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Revenue Gross Loss

Present Value of Expected

Net Cash Flows Unearned

Revenue Gross Loss

Balance Sheet Line Item Gross Loss

Reserves Claims and

Expenses Recoveries Gross Loss

Reserves Claims and

Expenses Recoveries

December 31, 2022:

Loss and loss adjustment expense reserves $ 197 $ 779 $ (55) $ (28) $ 893 $ 90 $ 787 $ (44) $ (28) $ 805

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Totals $ 197 $ 780 $ (194) $ (28) $ 756 $ 90 $ 791 $ (319) $ (28) $ 534

December 31, 2021:

Loss and loss adjustment expense reserves $ 32 $ 1,749 $ (155) $ (56) $ 1,570

Subrogation recoverable — 88 (2,180) — (2,092)

Totals $ 32 $ 1,837 $ (2,335) $ (56) $ (522)

(1) Present value of future recoveries include R&W subrogation recoveries of $140 and $1,730 at December 31, 2022 and 2021, respectively.

Legacy Financial Guarantee Insurance.

Ambac has exposure to various bond types issued in the debt capital markets.

The bond types that have experienced significant claims, including through commutations, are RMBS, student loan securities and public finance securities.

The bond types that have experienced the most significant claims, including through commutations, are RMBS, student loan securities and public finance securities.

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

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

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December 31, 2023:

December 31, 2022:

Present Value of Expected

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Expense Reserves (1)(2)

Present Value of Expected

Net Cash Flows Unearned

Revenue Gross Loss

Expense Reserves (1)(2)

($ in millions) Gross Par

Outstanding (1)

Expenses Recoveries Gross Par

Outstanding (1)

Expenses Recoveries

December 31, 2022:

Structured Finance $ 1,860 $ 679 $ (172) $ (10) $ 497 $ 2,050 $ 664 $ (296) $ (10) $ 358

Domestic Public Finance 834 82 (8) (8) 66 1,215 96 (11) (10) 75

1,215 96 (11) (10) 75

Other 1,144 15 (13) (10) (8) 782 23 (12) (8) 3

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Totals $ 3,838 $ 780 $ (194) $ (28) $ 559 $ 4,047 $ 791 $ (319) $ (28) $ 444

December 31, 2021:

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

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

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

Loss expenses — 45 — — 45

Totals $ 6,302 $ 1,837 $ (2,335) $ (56) $ (554)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss adjustment expense reserves were $362 and $30, respectively, at December 31, 2023 and $472 and $33, respectively at December 31, 2022.

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

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

Additionally, as a result of the Puerto Rico restructuring and subsequent consolidation of VIE's of AAC insured HTA bonds gross par outstanding was reduced by $410.

The table below reflects the timing of expected financial guarantee claim payments based on deal specific cash flows, excluding expected recoveries.

The table below reflects the timing of expected financial guarantee claim payments based on policy specific probability weighted cash flows, excluding expected recoveries.

These deal specific cash flows are based on the expected cash flows of the underlying transactions with the majority of these payments expected at or close to the final maturity of the related insurance policy.

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Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K for further discussion of our statistical loss reserve method.

The timing of these payments may vary significantly from the amounts shown above, especially for credits that are based on our statistical loss reserve method.

The timing of these payments may vary significantly from the amounts shown below, especially for credits that are based on our statistical loss reserve method.

Payments Due by Period

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$ 1,202 $ 93 $ 51 $ 42 $ 1,016

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Variability of Expected Losses and Recoveries

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

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

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

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

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The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at December 31, 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.

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

In arriving at such view, management makes considerable judgments about the possibility of various future events.

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

See “Risk Factors” in Part I, Item 1A in this Annual Report on Form 10-K as well as the descriptions of "Structured Finance Variability," "Public Finance Variability," and "Other Credits, including Ambac UK, Variability," below for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes appearing below.

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See “Risk Factors” in Part I, Item 1A in this Annual Report on Form 10-K as well as the descriptions of variability in "Structured Finance," "Public Finance," and "Other Credits, including Ambac UK," below for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes appearing below.

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

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Structured Finance

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

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

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

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.

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

The average estimated loan-

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

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

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

Student Loans:

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

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

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

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

Structured Finance Variability:

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at December 31, 2023, could be approximately $55.

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

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

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

Due to the uncertainties related to risks associated with structured finance credits, there can be no assurance that losses may not exceed our stress case estimates.

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

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

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

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

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

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

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

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

Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated

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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.

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

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51 2022 FORM 10-K

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Following the December 6, 2022, consummation of the PRHTA POA all of Ambac’s exposures to the Commonwealth of Puerto Rico across various instrumentalities have now been restructured and AAC's exposures to Puerto Rico has been reduced to $244 of net par outstanding at December 31, 2022.

AAC has further reduced its Puerto Rico exposure since year-end through accelerations and redemptions.

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

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

For the public finance credits, including Puerto Rico, for which we have an estimate of expected loss at December 31, 2022, the possible increase in loss reserves could be approximately $115 and there can be no assurance that losses may not exceed our stress case estimates.

Other Credits, including Ambac UK, Variability

For the public finance credits for which we have an estimate of expected loss at December 31, 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 Ambac UK

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.

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Surplus Notes $ 491 $ 477

LSNI Ambac Note — —

Sitka AAC Note — 1,154

Tier 2 Notes — 146

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Total Long-term Debt 508 639

The decrease in long-term debt from December 31, 2021 resulted from repurchases of surplus notes and the impact of the redemption of secured notes in 2022, described further in Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, partially offset by accretion on the carrying value of surplus notes and Ambac UK debt, and paid-in-kind interest on Tier 2 Notes.

Accrued Interest Payable

$ 983 $ 1,065

The decrease in long-term debt, including accrued interest payable, from December 31, 2022 resulted primarily from the full redemption of the Tier 2 Notes in 2023, described further in Note 1.

Background and Business Description to the Consolidated Financial Statements, included in this Annual Report on Form 10-K, partially offset by the accrual of interest on the surplus notes and Ambac UK debt.

In May 2023, OCI declined the request of AAC to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the then next scheduled payment date of June 7, 2023.

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

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

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.

Redeemable Noncontrolling Interest.

The increase during 2022 was the result the acquisition of All Trans and Capacity Marine partially offset by the remeasurement of the redemption value of the put option provided to the minority owners (noncontrolling interest holders) of Xchange as if it were exercisable on December 31, 2022.

Refer to Note 4.

Business Combination for further information relating to Ambac's acquisitions.

The decrease during 2023 was the result the remeasurement of the redemption value of put options provided to minority owners (noncontrolling interest holders) of Cirrata entities acquired as if the put was exercised on December 31, 2023, partially offset by new put options issued during the acquisition of Riverton during 2023.

No put options are exercisable at December 31, 2023.

ACCOUNTING STANDARDS

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

STATUTORY BASIS FINANCIAL RESULTS ($ in millions)

STATUTORY BASIS FINANCIAL RESULTS

insurance subsidiaries prepare financial statements under accounting practices prescribed or permitted by its domiciliary state regulator (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company.

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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 $598 and $1,191 at December 31, 2022, respectively, as compared to $757 and $1,322 at December 31, 2021, respectively.

As of December 31, 2022, 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 (including related accrued interest of $427 that is not recorded under statutory basis accounting principles);

preferred stock;

and all other liabilities, including insurance claims, and $146 principal balance of Tier 2 Notes are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC.

The significant drivers to the net decrease in policyholder surplus were surplus note repurchases at a cost of $440, contributions to contingency reserves of $28 and a decrease in the fair value of pooled investments of $16, partially offset by statutory net income of $328 for the year ended December 31, 2022.

Statutory net income for the year ended December 31, 2022 was positively impacted by (i) the R&W litigation settlements at amounts in excess of our carrying value;

(ii) the Puerto Rico restructuring;

and (iii) AFS' repayment of its intercompany loan with AAC that was previously impaired.

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

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and

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multiple factors, including:

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

mandatory contingency reserves) were $897 and $1,201, respectively, at December 31, 2023, as compared to $598 and $1,191, respectively, at December 31, 2022.

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

These surplus notes (including related accrued interest of $475 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 significant drivers to the net increase in policyholder surplus of $301 during 2023 was a reduction to contingency reserves of $290 and investment valuation changes that are direct charges to surplus of $10.

The decline in contingency reserves was the result of the release of excess contingency reserves (which was approved by OCI) of $298.

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

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

The significant differences between GAAP and SAP are that under SAP:

• Loss reserves are only established for losses on guaranteed obligations that have experienced a payment default in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights (5.1% as prescribed by OCI).

• Under SAP, loss reserves are only established for losses on guaranteed obligations that have experienced a payment default.

Loss reserves are established in an amount that is sufficient to cover the present value of the anticipated defaulted debt service payments over the expected period of default, less estimated recoveries under subrogation rights (5.1% as prescribed by OCI).

Under GAAP, in addition to the establishment of loss reserves for defaulted obligations, loss reserves are established (net of GAAP basis unearned premium revenue) for obligations that have experienced credit deterioration, but have not yet defaulted using a weighted-average risk-free discount rate, currently at 3.9%.

• Mandatory contingency reserves are required based upon the type of obligation insured, whereas GAAP does not require such a reserve.

Releases of the contingency reserves are generally subject to OCI approval and relate to a determination that the held reserves are deemed excessive.

Releases of the contingency reserves

are generally subject to OCI approval and relate to a determination that the held reserves are deemed excessive.

• Investment grade fixed maturity investments are stated at amortized cost and certain below investment grade fixed maturity investments are reported at the lower of amortized cost or fair value.

Under GAAP, all fixed maturity investments are reported at fair value.

• Wholly owned subsidiaries are not consolidated;

• Majority owned subsidiaries are not consolidated;

rather, the equity basis of accounting is utilized and the carrying values of these investments are subject to admissibility tests.

Ambac Assurance's cash loan to AFS is included on the SAP balance sheet, net of an allowance for uncollectible amounts and changes in the allowance are recognized through other income.

Under GAAP, all inter-company transactions are eliminated in consolidation.

• Variable interest entities ("VIE") are not required to be assessed for consolidation.

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For certain VIEs AAC has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under GAAP.

• All payments of principal and interest on the surplus notes are subject to the approval of the OCI.

Unpaid interest due on the surplus notes is expensed when the approval for payment of interest has been granted by the OCI.

• Under SAP, unpaid interest due on the surplus notes is expensed when the approval for payment of interest has been granted by the OCI.

Under GAAP, interest on surplus notes is accrued regardless of OCI approval.

Under SAP, the principal balance of surplus notes is included in surplus whereas under GAAP surplus note principal is reported at par, less unamortized discount within long-term debt.

All payments of principal and interest on surplus notes are subject to the approval of the OCI.

• Upfront premiums written are earned on a basis proportionate to the remaining scheduled debt service to the original total principal and interest insured.

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Under GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date.

Under GAAP, for installment premium transactions, a premium receivable asset and offsetting UPR liability are established in an amount equal to the present value of future premiums to be collected over the life of the transaction.

• Insurance intangibles that arose as a result of the implementation of Fresh Start reporting are not a concept within SAP.

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• Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts.

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Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $108 at December 31, 2023, as compared to $107 at December 31, 2022.

The significant drivers to the increase in policyholder surplus for the year ended December 31, 2022, were capital contributions of $16, primarily to support the acquisition of three admitted carriers and the growth of Everspan while maintaining a policyholders surplus in excess of $100, partially offset by a net loss and changes in investment in subsidiaries, primarily due to a limitation on the amount of goodwill that may be admitted in accordance with SAP.

The significant changes to policyholder surplus for the year ended December 31, 2023, were total capital contributions of $7.3, offset by a net loss at Everspan Indemnity Insurance Company, including its subsidiaries, of $7.1 during the year ended December 31, 2023, primarily driven by G&A expenses as the business continues to scale.

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

The significant differences between GAAP and SAP are that under SAP:

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rather, the equity basis of accounting is utilized and the carrying values of these investments are subject to admissibility tests.

• The acquisition of Providence Washington Insurance Company ("PWIC") and the 21st Century Companies were recorded as equity method investments, which include a goodwill component representing the acquisition cost in excess of the related entity's statutory surplus.

Goodwill is being amortized over ten years.

Under GAAP, the acquisition of the companies were recorded as asset acquisitions, which require i) all net assets to initially be recorded at fair value, and ii) the acquisition cost in excess of the fair value of net assets to be allocated to the bases of certain types of assets based on their relative fair values, if

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Providence Washington Insurance Company's ("PWIC") and the 21st Century Companies' (as defined in Note 7.

Insurance Contracts in Part II, Item 8 in the Consolidated Financial Statements included in this Annual Report on Form 10-K) carrying values include a goodwill component representing the acquisition cost in excess of the related entity's statutory surplus.

Goodwill is amortized over ten years.

Under GAAP, the initial acquisition of the companies were recorded as asset acquisitions, which required i) all net assets to initially be recorded at fair value, and ii) the acquisition costs in excess of the fair value of net assets to be allocated to the bases of certain types of assets based on their relative fair values, if applicable.

Acquired assets include intangible assets with indefinite lives.

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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 £489 at December 31, 2023, as compared to £468 at December 31, 2022.

At December 31, 2023, the carrying value of cash and investments was £535, an increase from £508 at December 31, 2022.

The increase in shareholder funds and cash and investments was primarily due to the continued receipt of premiums and investment income, and from foreign exchange gains within Ambac UK's investment portfolio, partially offset by loss expenses, operating expenses and tax payments.

The increase in shareholder funds and cash and investments was primarily due to the

continued receipt of premiums and investment income, and from foreign exchange gains within Ambac UK's investment portfolio, partially offset by loss expenses, operating expenses and tax payments.

The significant differences between US GAAP and UK GAAP are that under UK GAAP:

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• Investments in fixed maturity securities are stated at amortized cost, subject to an other-than-temporary impairment evaluation.

Under US GAAP, all bonds are reported at fair value.

Under US GAAP, all fixed maturity investments are reported at fair value.

• VIEs are not required to be assessed for consolidation.

Under US GAAP, as noted under AAC Statutory Basis Financial Results above, VIE's with certain characteristics are required to be consolidated.

For several VIEs Ambac

UK has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under U.S.

Under US GAAP, as noted under U.S.

Statutory Basis Financial Results above, VIE's with certain characteristics are required to be consolidated.

For several VIEs Ambac UK has the power to direct the most significant activities of the VIE and accordingly consolidates the related VIEs under U.S.

• Upfront premiums written are earned on a basis proportionate to the remaining scheduled debt service to the total principal and interest insured.

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Under US GAAP, premium revenues for both upfront and installment premiums are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date.

• Insurance intangibles that arose as a result of the implementation of Fresh Start reporting are not a concept within UK GAAP.

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• Unearned premiums and loss reserves are presented net of ceded amounts, while under GAAP, they are reflected gross of ceded amounts.

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

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Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £430 at December 31, 2023.

This is an increase from December 31, 2021, when available capital resources were £250 of which £240 were eligible to meet solvency capital requirements.

This is an increase from December 31, 2022, when available and eligible capital resources to meet solvency capital requirements were £338.

Eligible capital resources at December 31, 2023 and December 31, 2022, are in comparison to regulatory capital requirements of £220 and £213, respectively.

Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £210 at December 31, 2023, and was in a surplus position by £125 at December 31, 2022.

The surplus increased as of December 31, 2022, due to the combined impact of (i) the increase in long term interest rates, which resulted in a decrease in technical provision liabilities and hence an increase in eligible own funds and (ii) a decrease in capital requirements for non-life risk due to the maturity and de-risking of certain policies, together with natural run-off of the insured portfolio in the year.

Dialogue between Ambac UK management and its regulators remains ongoing with respect to options for strengthening the capital position further.

The surplus increased as of December 31, 2023, due to the combined impact of (i) a decrease in technical provision liabilities and hence an increase in eligible own funds due to regulatory changes which came into effect in December 2023 and (ii) an increase in eligible own funds from the increase in investments over the year.

Final annual Solvency II data and Ambac UK's annual Solvency and Financial Condition Report will be published on Ambac's website in April 2023.

NON-GAAP FINANCIAL MEASURES

($ in millions)

In addition to reporting the Company's financial results under GAAP,the Company currently reports three non-GAAP financial measures:

EBITDA, adjusted earnings and adjusted book value.

The most directly comparable GAAP measures are pre-tax net income for EBITDA, net income attributable to

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

EBITDA, Adjusted Net Income and Adjusted Book Value.

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

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

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

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

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

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

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.

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common stockholders for adjusted earnings and Total Ambac Financial Group, Inc.

stockholders’ equity for adjusted book value.

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

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

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

Ambac has a significant U.S.

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

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

which is subject to change.

The following paragraphs define each non-GAAP financial measure.

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

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

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

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

Year Ended December 31, 2023

Pretax income (loss) (1)

$ 540 $ (6) $ 5 $ (14) $ 525

Net income (loss) $ 9 $ — $ 7 $ (11) $ 5

Interest expense 64 — — — 64

Income taxes 8 — — (1) 7

Depreciation 1 — — — 2

Amortization of intangible assets 25 — 4 — 29

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

Earnings before interest, taxes, depreciation and amortization $ 754 $ (6) $ 6 $ (14) $ 740

$ 107 $ — $ 11 $ (12) $ 107

Year Ended December 31, 2022

Pretax income (loss) (1)

Net income (loss) $ 537 $ (6) $ 5 $ (13) $ 522

Interest expense 168 — — — 168

Income taxes 3 — — — 2

Depreciation 2 — — — 2

Amortization of intangible assets 44 — 3 — 47

$ 754 $ (6) $ 7 $ (14) $ 742

Year Ended December 31, 2021

Net income (loss) $ 4 $ (8) $ 4 $ (17) $ (16)

Interest expense 187 — — — 187

Income taxes 16 — — 2 18

Depreciation 2 — — — 2

Amortization of intangible assets 52 — 3 — 55

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

Earnings before interest, taxes, depreciation and amortization $ 262 $ (8) $ 5 $ (15) $ 245

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

Adjusted Earnings (Loss).

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

• Insurance intangible amortization:

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

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

• Foreign exchange (gains) losses:

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

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

$ 262 $ (8) $ 6 $ (15) $ 246

(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, $1 and $1 for the years ended December 31, 2023, 2022 and 2021, respectively.

The noncontrolling interest are primarily in the Insurance Distribution segment.

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

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

(ii) amortization of intangible assets;

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

(iv) foreign exchange (gains) losses;

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

(gain) loss on extinguishment of debt.

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

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

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

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

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

2023 2022 2021

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Net income (loss) attributable to common stockholders $ 4 $ 0.18 $ 522 $ 11.31 $ (17) $ (0.61)

Non-credit impairment fair value (gain) loss on credit derivatives — — — — — —

Insurance intangible amortization 44 0.95 52 1.12 57 1.23

Net investment (gains) losses, including impairments 22 0.49 (31) (0.68) (7) (0.14)

Intangible amortization 29 0.62 47 1.01 55 1.19

Litigation costs 41 0.87 33 0.71 7 0.15

Foreign exchange (gains) losses (1) (0.02) 3 0.06 3 0.06

Adjusted Earnings (Loss) (1)

$ 555 $ 12.01 $ 43 $ 0.66 $ (378) $ (8.19)

Workforce change costs 1 0.02 1 0.03 1 0.01

Net (gain) loss on extinguishment of debt — — (81) (1.75) (33) (0.70)

Pretax adjusted net income (loss) 96 2.16 494 10.69 9 (0.04)

Income tax effects (2) (0.03) 2 0.04 (1) (0.02)

Net (gains) attributable to noncontrolling interests (1) (0.02) (1) (0.01) (1) (0.01)

Adjusted Net Income (Loss) $ 93 $ 2.11 $ 495 $ 10.72 $ 7 $ (0.07)

(1) Per diluted share includes the impact of adjusting redeemable noncontrolling interest to its redemption value.

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This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis.

In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent

they exceed UPR.

However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity.

In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR.

However, when expected losses are less

than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity.

This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders’ equity for financial guarantee contracts where expected losses are less than UPR.

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• Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income:

Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”).

The AOCI component of the fair value adjustment on the investment portfolio may differ from realized gains and losses ultimately recognized by the Company based on the Company’s investment strategy.

This adjustment only allows for such gains and losses in adjusted book value when realized.

Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”), net of income taxes.

Ambac has a significant U.S.

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

As a result of this, tax planning strategies and other considerations, we utilized a 0% effective tax rate for non-GAAP operating adjustments to Adjusted Book.

The following table reconciles Total Ambac Financial Group, Inc.

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Adjusted Book Value $ 1,299 $ 28.74 $ 1,272 $ 28.29

The increase in Adjusted Book was primarily attributable to Adjusted earnings for the year ended December 31, 2022 (excluding earned premium previously included in Adjusted Book Value), partially offset by translation losses on the consolidation of AFG's foreign subsidiaries.

Factors that impact changes to Adjusted Book Value include many of the same factors that impact Adjusted Earnings, including the majority of revenues and expenses, but generally exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net

unearned premiums and fees in excess of expected losses adjustment.

Net unearned premiums and fees in excess of expected losses will affect Adjusted Book Value for (i) changes to future premium assumptions (e.g.

expected term, interest rates, foreign currency rates, time passage) and (ii) changes to expected losses for policies which do not exceed their related unearned premiums and (iii) new reinsurance transactions.

The increase in Adjusted Book was primarily attributable to Ambac's net income for the year ended December 31, 2023 (excluding earned premium previously included in Adjusted Book Value) and the positive effect of foreign exchange rates on the consolidation of AFG's foreign subsidiaries, partially offset by the impact of the reinsurance de-risking transaction executed during 2023.

Factors that impact changes to Adjusted Book Value include many of the same factors that impact Adjusted Net Income, including the majority of revenues and expenses, but generally exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net unearned premiums and fees in excess of expected losses adjustment.

Net unearned premiums and fees in excess of

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Table of Contents ,

expected losses will affect Adjusted Book Value for (i) changes to future premium assumptions (e.g.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis