What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-05 compared with 2024-05-06 · 332 added, 248 removed, 625 unchanged (48% of the section changed)

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Business and Note 1.

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

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

Organization of Information

MD&A includes the following sections:

Executive Summary 33

Critical Accounting Estimates 40

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Non-GAAP Financial Measures 55

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 March 31, 2024 and December 31, 2023, AFG's stand alone net assets, excluding its equity investments in subsidiaries are shown in the following table:

March 31, 2024 December 31, 2023

As of June 30, 2024, and December 31, 2023, AFG's stand alone net assets, excluding its equity investments in subsidiaries are shown in the following table:

2024 December 31, 2023

Cash and short-term investments $ 171 $ 153

Other investments (1)

Other net assets 23 23

Other net (liabilities) assets (1) 23

Total $ 202 $ 209

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

The decrease in AFG net assets, excluding its equity investments in subsidiaries, during 2024 was driven by operating expenses, partially offset by interest income and distributions received from subsidiaries.

The decrease in AFG net assets, excluding its equity investments in subsidiaries, during 2024 was driven by diligence and other costs associated with the purchase of Beat and sale of AAC and other operating expenses, partially offset by net realized gains on strategic investments, interest income and distributions received from subsidiaries.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

AFG's subsidiaries/businesses are divided into three segments with results for the three months ended March 31, 2024 and 2023 as follows:

Three Months Ended March 31, 2024 Three Months Ended March 31, 2023

Second Quarter 2024 Form 10-Q

AFG's subsidiaries/businesses are divided into three segments with results for the three and six months ended June 30, 2024, and 2023, as follows:

Three Months Ended June 30, 2024 Three Months Ended June 30, 2023

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

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Redeemable noncontrolling interest 17 17 20 20

Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

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 $ 144 $ 144 $ 118 $ 118

Gross premiums written $ 4 $ 208 $ 211 $ 10 $ 105 $ 115

Net premiums written $ 3 $ 59 $ 62 $ (45) $ 18 $ (27)

Total revenues $ 107 $ 61 $ 31 $ 8 $ 207 $ 71 $ 20 $ 25 $ 4 $ 120

Total expenses $ 69 $ 61 $ 26 $ 24 $ 180 $ 111 $ 21 $ 20 $ 8 $ 160

Pretax income (loss) $ 38 $ 1 $ 5 $ (16) $ 27 $ (40) $ (1) $ 4 $ (3) $ (40)

$ 89 $ 1 $ 7 $ (16) $ 81 $ 5 $ (1) $ 6 $ (3) $ 7

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

On January 12, 2024, Everspan Insurance Company entered into a Stock Purchase Agreement with Hagerty Insurance Holdings, Inc., to sell its ownership interests in Consolidated National Insurance Company.

The closing of the Transaction is subject to customary closing conditions, including obtaining regulatory approval from the Colorado Division of Insurance (such request for approval having been filed on February 12, 2024).

Subject to the satisfactory completion of closing conditions, the closing is expected to occur in the second quarter of 2024.

Sale of Consolidated National Insurance Company

The closing of this transaction is subject to customary closing conditions, including obtaining regulatory approval from the Colorado Division of Insurance (such request for approval having been filed on February 12, 2024).

Subject to the satisfactory completion of closing conditions, the closing is expected to occur in the third quarter of 2024.

On June 4, 2024, AFG entered into a stock purchase agreement with American Acorn Corporation (the “Buyer”), a Delaware corporation owned by funds managed by Oaktree Capital Management, L.P., pursuant to which and subject to the conditions set forth therein, AFG will sell all of the issued and outstanding shares of common stock of AAC, a wholly-owned subsidiary of AFG, to Buyer for aggregate consideration of $420 in cash (the "Sale").

The terms of the Sale as contemplated by the stock purchase agreement provide that, at the closing of the Sale (the “Closing”), Buyer will acquire complete common equity ownership of AAC and all of its wholly owned subsidiaries, including Ambac UK.

In connection with and pursuant to the stock purchase agreement, AFG has agreed to issue to Buyer a warrant exercisable for a number of shares of common stock, par

value $0.01, of AFG representing 9.9% of the fully diluted shares of AFG’s common stock as of March 31, 2024, pro forma for the issuance of the warrant The warrant will have an exercise price per share of $18.50 with a six and a half-year term from the date of issuance and will be immediately exercisable.

Payment of the exercise price may be settled, at AFG’s option, by way of a cash exercise or by net share settlement.

Refer to Note 1.

Business and Basis of Presentation for further details on the pending sale of AAC.

This pending transaction has had no impact on the financial statements at June 30, 2024, other than incurred transaction expenses of approximately $5 and $7 for the three and six months ended June 30, 2024.

If the transaction was completed on June 30, 2024, Ambac would have reflected the below:

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Fair value of consideration received (cash less estimated value of warrants issued) $ 404

Carrying value of noncontrolling interest 51

carrying amount of AACs net assets 987

estimated incremental transaction expenses 15

Reclassification of Accumulated Other Comprehensive Income to earnings $ (168)

Total gain (loss on disposal) recognized in net income $ (715)

If the transaction was completed on June 30, 2024, the impact of the sale of AAC on stockholders' equity would have been a reduction of $547.

Purchase of Beat

On June 4, 2024, AFG entered into a share purchase agreement (the “Beat Purchase Agreement”), by and among AFG, Cirrata V LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of AFG (the “Purchaser”), certain sellers set forth therein (the “Sellers”) and Beat, pursuant to which the Purchaser purchased from the Sellers approximately 60% of the entire issued share capital of Beat, for total consideration, as of the closing date, of approximately $278, of which approximately $249 was paid in cash and the remainder of which was satisfied through the issuance of 2,216,023 shares of AFG common stock.

The acquisition closed with an effective date of July 31, 2024.

Beat’s management team and Bain Capital Credit LP (“Bain” and, together with certain members of Beat’s management team, the “Rollover Shareholders”) each retained approximately 20% of Beat’s issued share capital immediately after closing.

Refer to Note 1.

Business and Basis of Presentation for further details on the acquisition of Beat.

Banking Sector Crisis of 2023

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

Ambac's cash balances held at banks was $44 as of March 31, 2024 and $27 as of December 31, 2023.

Substantially all of these cash balances were uninsured as of March 31, 2024 and December 31, 2023 because they either (i) exceeded the two hundred and fifty thousand FDIC insurance limit or (ii) were held in foreign banks.

Ambac's cash balances held at banks was $35 as of June 30, 2024 and $27 as of December 31, 2023.

Substantially all of these cash balances were uninsured as of June 30, 2024 and December 31,

2023 because they either (i) exceeded the two hundred and fifty thousand FDIC insurance limit or (ii) were held in foreign banks.

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

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

Included in the cash balances above are $13 and $16 as of March 31, 2024

and December 31, 2023, respectively, of cash from companies Ambac has acquired within its insurance distribution businesses that are held in regional banks.

Included in the cash balances above are $14 and $16 as of June 30, 2024 and December 31, 2023, respectively, of cash from 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 $252 and $246 as of March 31, 2024 and December 31, 2023, respectively.

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 $62 and $246 as of June 30, 2024 and December 31, 2023, respectively.

These amounts relate primarily to cash collateral posted against derivative assets and reserve balances 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 $151 and $169 as of March 31, 2024 and December 31, 2023, respectively.

Ambac also has exposure to banks through its fixed maturity investment portfolio totaling $156 and $169 as of June 30, 2024 and December 31, 2023, respectively.

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

The average rating of our fixed income investment in banks was A- as of March 31, 2024.

The average rating of our fixed income investment in banks was BBB+ as of June 30, 2024.

Financial Statement Impact of Foreign Currency:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

three months ended March 31, 2024 and 2023, included the following:

Three Months Ended March 31, 2024 2023

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the six months ended June 30, 2024 and 2023, included the following:

Six Months Ended June 30, 2024 2023

Net income (1)

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On March 6, 2024, the U.S.

Securities and Exchange Commission (“SEC”) adopted The Enhancement and Standardization of Climate-Related Disclosures for Investors ("Final Rule") , which will require registrants to disclose extensive climate-related information in their Form 10-K annual reports and registration statements.

Securities and Exchange Commission (“SEC”) adopted The Enhancement and Standardization of Climate-Related Disclosures for Investors ("Final Rule") , which

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

will require registrants to disclose extensive climate-related information in their Form 10-K annual reports and registration statements.

The Final Rule was scheduled to become effective May 28, 2024;

however, the SEC has voluntarily stayed the rule’s effective date pending judicial review of legal challenges.

The compliance dates for large accelerated filers such as Ambac for annual reports or registration statements that include financial statements for the year ending December 31 are phased in from 2025 through 2033.

The compliance dates for accelerated filers for annual reports or registration statements that include financial statements for the year ending December 31 are phased in from 2026 through 2031.

Depending on when the legal challenges are resolved, the compliance dates may be retained or delayed.

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generally accepted accounting principles (“GAAP”), which require the use of material estimates and assumptions.

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

Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2023.

For a discussion of Ambac’s critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2023.

FINANCIAL GUARANTEES IN FORCE

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

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

Guaranteed net par

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

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

The following table provides a comparison of total, adversely classified credits ("ACC") and watch list credit net par outstanding in the insured portfolio at March 31, 2024 and December 31, 2023.

The following table provides a comparison of total, adversely classified credits ("ACC") and watch list credit net par outstanding in the insured portfolio at June 30, 2024 and December 31, 2023.

($ in billions)

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The decrease in total and ACC net par outstanding resulted from active de-risking, scheduled maturities, amortizations, refundings and calls and a strengthening of the USD versus the GBP of $93 on the total net par outstanding.

Additionally, we upgraded (from ACC to Watch List) one credit that has net par outstanding of $563 at March 31, 2024.

The following table provides a breakdown of guaranteed net par outstanding by market at March 31, 2024 and December 31, 2023.

Additionally, we upgraded (from ACC to Watch List) one credit that has net par outstanding of $542 at June 30, 2024.

The following table provides a breakdown of guaranteed net par outstanding by market at June 30, 2024 and December 31, 2023.

2024 December 31,

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Total net par outstanding $ 18,668 $ 19,541

(1) Includes $3,355 and $3,371 of Military Housing net par outstanding at March 31, 2024 and December 31, 2023, respectively.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at March 31, 2024:

(1) Includes $3,338 and $3,371 of Military Housing net par outstanding at June 30, 2024 and December 31, 2023, respectively.

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at June 30, 2024:

Bond Kind Country-Bond Type Ambac

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BIG denotes credits deemed below investment grade.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Net par related to the top ten exposures decreased $68 from December 31, 2023.

Exposures are impacted by changes in foreign exchange rates ($63 decrease during the three months ended March 31, 2024), certain indexation rates linked to inflation measures in the United Kingdom (RPI) and scheduled and unscheduled paydowns.

Exposures are impacted by changes in foreign exchange rates ($59 decrease during the six months ended June 30, 2024), 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) was 32% at March 31, 2024, and 31% at December 31, 2023.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) was 32% at June 30, 2024, and 31% at December 31, 2023.

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 $292 and a median net par outstanding of $5.

Exposure Currency

The table below shows the distribution by currency of AAC’s insured exposure as of March 31, 2024:

The table below shows the distribution by currency of Ambac’s insured exposure as of June 30, 2024:

Currency Net Par Amount

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Total $ 18,668

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

Ratings Distribution

The following charts provide a rating distribution of net par outstanding based upon internal Ambac credit ratings (1) and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at March 31, 2024 and December 31, 2023.

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

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Ambac credit ratings are subject to revision at any time and do not constitute investment advice.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Summary of Below Investment Grade Exposure:

Net Par Outstanding

Bond Type March 31,

Bond Type June 30,

2024 December 31,

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Military Housing $ 359 $ 361

General Obligations 84 85

Lease and tax-backed revenue 78 80

General Obligations 77 85

Total Public Finance 550 563

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Total $ 2,688 $ 3,470

The net decline in below investment grade exposures is primarily due de-risking activities and an upgrade of a sub-sovereign exposure.

The net decline in below investment grade exposures is primarily due to de-risking activities and an upgrade of a sub-sovereign exposure.

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 increase in the future.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

Results of Operations

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A summary of our financial results is shown below:

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Gross premiums written $ 113 $ 55 $ 211 $ 115

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Net income (loss) attributable to common stockholders $ (1) $ (13) $ 19 $ (47)

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three months ended March 31, 2024 and 2023, respectively.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three and six months ended June 30, 2024 and 2023, respectively.

Gross Premiums Written.

Gross premiums written increased $37 for the three months ended March 31, 2024, compared to the same period in the prior year, as shown by segment below.

Three Months Ended March 31, 2024 2023

Gross premiums written increased $58 and $96 for the three and six months ended June 30, 2024, compared to the same period in the prior year, as shown by segment below.

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

2024 2023 2024 2023

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

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

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

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

Net Premiums Written.

Net premiums written increased $10 for the three months ended March 31, 2024 compared to the same period in the prior year, as shown by segment below:

Three Months Ended March 31, 2024 2023

Net premiums written increased $79 and $89 for the three and six months ended June 30, 2024, compared to the same period in the prior year, as shown by segment below:

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

2024 2023 2024 2023

Legacy Financial Guaranty Insurance $ 2 $ (54) $ 3 $ (45)

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Total $ 34 $ (45) $ 62 $ (27)

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

Legacy Financial Guarantee Insurance net premiums written in the three and six months ended June 30, 2023 were impacted by a significant reinsurance cession as part of its de-risking activities.

Specialty P&C growth was driven by new programs, including assumed premium written by Everspan as a reinsurer, and growth in existing programs.

Net Premiums Earned.

Net premiums earned increased $19 for the three months ended March 31, 2024, compared to the same period in the prior year as shown by segment below.

Three Months Ended March 31, 2024 2023

Net premiums earned increased $17 and $36 for the three and six months ended June 30, 2024, compared to the same period in the prior year as shown by segment below.

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

2024 2023 2024 2023

Legacy Financial Guaranty Insurance $ 6 $ 8 $ 13 $ 14

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Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.

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

Net investment income for the periods presented were driven by the Legacy

Financial Guarantee segment;

other segments' results were not significant.

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and Other investments is summarized in the table below:

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Securities available-for-sale and short-term other than Ambac-insured $ 20 $ 16 40 32

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Net investment income (loss) $ 36 $ 35 $ 78 $ 69

Net investment income (loss) increased $8 for the three months ended March 31, 2024 compared to the prior year period.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

• Net investment income from available-for-sale and short-term securities, other than Ambac-insured increased for the three months ended March 31, 2024, compared to the same periods in the prior year due primarily to higher portfolio yields.

• Other investments income (loss) increased $2 for the three months ended March 31, 2024, compared to the same period in the prior year driven by the higher increase in fair value of securities received in the Puerto Rico restructurings and classified as trading.

Income from pooled fund investments for the three months ended March 31, 2024, was flat compared to the prior year period.

Stronger average performance in the first quarter of 2024 offset the effect of portfolio allocation out of pooled funds since March 31, 2023.

• Net investment income from Ambac-insured securities for the three months ended March 31, 2024, increase $2 compared to prior year period due to additional purchases of AAC-insured student loan securities during 2023.

Net investment income (loss) increased $1 and $9 for the three and six months ended June 30, 2024 compared to the prior year period.

• Net investment income from available-for-sale and short-term securities, other than Ambac-insured increased $4 and $8 for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year due primarily to higher portfolio yields.

• Other investments income (loss) decreased $3 and $1 for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year due primarily to a smaller increase in fair value of securities received in the Puerto Rico restructurings and classified as trading.

Income from pooled fund investments for the three and six months ended June 30, 2024, was also lower compared to the prior year periods, which benefited from above average equity market returns.

• Net investment income from Ambac-insured securities for the three and six months ended June 30, 2024, increased less than $1 and $2 compared to prior year periods due to additional purchases of AAC-insured student loan securities during 2023.

A significant majority of these student loan securities were transferred to a non-consolidated trust in March 2024 in connection with the commutation of the associated AAC financial guarantees.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Net Investment Gains (Losses), including Impairments.

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

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Net gains (losses) on securities sold or called $ 6 $ (1) $ 6 $ (3)

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Net investment gains (losses), including impairments $ 4 $ (3) $ 4 $ (8)

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

Net gains (losses) on securities sold or called for the three and six months ended June 30, 2024 were driven by gains from the conversion and early settlement of certain convertible notes, including make-whole payments.

Credit impairments on available-for-sale fixed maturity investments are recorded as an allowance for credit losses with changes in the allowance recorded through earnings.

When credit impairments are recorded, any non-credit related impairment amounts on the securities are recorded in other comprehensive income.

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(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.

Credit impairments for the three and six months ended June 30, 2024 also included a write-down in carrying value of $1 on an investment in preferred securities that do not have a readily determinable fair value and are carried at cost less impairments.

Net Gains (Losses) on Derivative Contracts.

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Through the first quarter of 2023, the interest rate derivatives portfolio was positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee insurance and investment portfolios.

This economic hedge was substantially reduced since September 30, 2022 and was fully removed during the second quarter of 2023.

This economic hedge 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.

The removal of the economic hedge does not change the

exposure of future results to counterparty credit adjustments.

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

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

Net gains (losses) on interest rate derivatives for the three months ended March 31, 2024, were $2 compared to ($4) for the three months ended March 31, 2023.

Results for the three months ended March 31, 2024 and 2023 were driven by counterparty credit adjustments as described below.

Additionally, the three months ended March 31, 2023, included losses of $2 related to declines in interest rates during the period.

Net gains (losses) on interest rate derivatives for the three and six months ended June 30, 2024, were $0 and $2, respectively, compared to $0 and $(3) for the three and six months ended June 30, 2023.

Results for the three and six months ended June 30, 2024 and 2023 include the effect of changes to counterparty credit adjustments as described below.

Additionally, the three and

six months ended June 30, 2023, included losses of $(1) and $(3), respectively related to declines in interest rates during the period.

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

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

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $2 and $(1) for the three months ended March 31, 2024 and 2023, respectively.

Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $1 and $2 for the three and six months ended June 30, 2024, respectively and $1 and $0 for the three and six months ended June 30, 2023, respectively.

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

Commission Income and Commission Expense.

Commission income for the three months ended March 31, 2024, was $18 compared to $14, for the three months ended March 31, 2023.

Commission income for the three and six months ended June 30, 2024, was $13 and $31 compared to $10 and $25, for the three and six months ended June 30, 2023.

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

The increase was driven by commissions earned by Riverton Insurance Agency, which was purchased in August 2023, and organic growth.

The increase was primarily driven by commissions earned by Riverton Insurance Agency, which was purchased in August 2023, and organic growth.

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

For the three months ended March 31, 2024, commission expense of $10 compared to $8 in three months ended March 31, 2023, driven primarily by the same factors as commission income.

For the three and six months ended June 30, 2024, commission expense of $8 and $18 compared to $6 and $14 in three and six months ended June 30, 2023, driven primarily by the same factors as commission income.

Income (Loss) on Variable Interest Entities.

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

Income (loss) on variable interest entities was $3 for the three months ended March 31, 2024, compared to $(1) for the three months ended March 31, 2023.

Results for the three months ended March 31, 2024 increased from the prior year period due to inclusion of contract revenues from a LFG-VIE initially consolidated in the fourth quarter 2023, partially offset by lower

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

fair value gains on the net assets of other LFG-VIEs in the three months ended March 31, 2024 compared to the prior year period.

Income (loss) on variable interest entities was $0 and $2 for the three and six months ended June 30, 2024, compared to $0 and $(1) for the three and six months ended June 30, 2023.

Results for the six months ended June 30, 2024 increased from the prior year period due lower net interest expense on Puerto Rico VIEs and inclusion of contract revenues from a LFG-VIE initially consolidated in the fourth quarter 2023, partially offset by lower fair value gains on the net assets of other LFG-VIEs.

Refer to Note 8.

Variable Interest Entities to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further information on the accounting for LFG- VIEs.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Losses and Loss Adjustment Expenses (Benefit).

Loss and loss expenses incurred decreased $19 for the three months ended March 31, 2024, compared to the same period in the prior year.

Loss and loss expenses incurred increased $10 and decreased $9 for the three and six months ended June 30, 2024, compared to the same period in the prior year.

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

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Legacy financial guarantee $ (5) $ 2 $ (26) 15

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The primary driver was largely the positive impact of discount rates in 2024 compared to the negative impact of discount rates in 2023.

The higher loss and loss adjustment expenses in Specialty P&C is primarily due to an increase business production from new programs, including production from assumed reinsurance, and growth in existing programs.

The higher loss and loss adjustment expenses in Specialty P&C is primarily due to an increase business production from new and existing programs as well as adverse development on its commercial auto program and the addition of personal nonstandard auto.

General and Administrative Expenses (G&A).

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

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Compensation $ 17 $ 18 $ 34 $ 34

1 unchanged sentence

Total G&A expenses $ 47 $ 36 83 72

The increase in Compensation G&A expenses during the three months ended March 31, 2024, was due to higher compensation costs from a net increase in staffing from the development and growth, both organic and via acquisitions, of the Specialty Property & Casualty Insurance and Insurance Distribution segments;

offset by lower current year period expenses for severance costs and incentive compensation expense, including the impact of performance factor adjustments on stock-based compensation.

The decrease in Non-Compensation G&A expenses during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, was due to lower Legacy Financial Guarantee Insurance segment's legal defense costs, offset by expenses associated with the ongoing strategic review of the Legacy Financial Guarantee Insurance segment and growth of the Specialty Property & Casualty Insurance and Insurance Distribution segments.

The decrease in Compensation G&A expenses during the three and six months ended June 30, 2024, was due to lower current year period expenses for severance costs and incentive compensation expense, including the impact of performance factor adjustments on stock-based compensation;

offset by higher compensation costs from a net increase in staffing from the development and growth, both organic and via acquisitions, of the Specialty Property & Casualty Insurance and Insurance Distribution segments.

The increase in Non-Compensation G&A expenses during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, was due to expenses associated with the strategic review of the Legacy Financial Guarantee Insurance segment and growth of the Specialty Property & Casualty Insurance and Insurance Distribution segments;

offset by lower Legacy Financial Guarantee Insurance segment's legal defense costs.

For the three and six months ended June 30, 2024, expenses attributable to the sale of AAC and the acquisition of Beat aggregated $16 and $18 compared to $0 and $1 for the three and six months ended June 30, 2023, respectively.

Intangible Amortization.

Insurance intangible amortization for the three months ended March 31, 2024, was $11 an increase of $5 as compared to the the three months ended March 31, 2023.

The increase for the three months ended March 31, 2024, was

driven primarily by de-risking activities.

Other intangible amortization for the three months ended March 31, 2024, was $1, and $1 for the three months ended March 31, 2023, respectively.

Insurance intangible amortization for the three and six months ended June 30, 2024, was $7 and $18 an increase of $1 and $7 as compared to the the three and six months ended June 30, 2023.

The increase for the three and six

months ended June 30, 2024, was driven primarily by de-risking activities.

Other intangible amortization for the three and six months ended June 30, 2024, was $1, and $1 and $1 and $2 for the three and six months ended June 30, 2023, respectively.

Interest Expense.

2 unchanged sentences

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

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Surplus notes $ 16 $ 16 $ 31 $ 31

2 unchanged sentences

Total interest expense $ 16 $ 16 $ 32 $ 32

Interest expense for the three months ended March 31, 2024, decreased less than $1 compared to the three months ended March 31, 2023, due to the final redemption of Tier 2 secured notes in the first quarter of 2023.

Interest expense for the six months ended June 30, 2024 decreased compared to the six months ended June 30, 2023, due to the final redemption of Tier 2 secured notes in the first quarter of 2023.

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

5 unchanged sentences

Surplus notes are subordinated in right of payment to policyholder and other claims.

AAC's recent request to pay principal of, and interest on, surplus notes on the next scheduled payment date of June 7, 2024, remains pending as of May 6, 2024.

If OCI declines such request the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, will be extended until OCI grants approval to make such payment.

AAC's recent request to pay principal of, and interest on, surplus notes on the scheduled payment date of June 7, 2024, was denied by OCI.

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

1 unchanged sentence

Interest on the outstanding surplus notes was 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 was $487 at March 31, 2024.

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.

Total accrued and unpaid interest for surplus notes outstanding was $500 at June 30, 2024.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

Second Quarter 2024 Form 10-Q

Provision for Income Taxes.

The provision for income taxes primarily relates to international operations and was $5 for the three months ended March 31, 2024, compared to $4 for the three months ended March 31, 2023, an increase of $1 for the quarter.

The provision for income taxes primarily relates to international operations and was $2 and $7 for the three and six months ended June 30, 2024, compared to $2 and $6 for the three and six months ended June 30, 2023, an increase of $1 for the quarter.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Net premiums earned $ 6 $ 8 $ 13 $ 14

3 unchanged sentences

Other income 16 2 21 4

Total 53 39 107 71

Loss and loss expenses (benefit) (5) 2 (26) 15

General and administrative expenses 22 23 44 52

Total 17 25 18 66

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

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

The variability in the segment financial results are primarily driven by (i) change in loss and loss expenses resulting from, amongst other items, credit developments, interest rates and de-risking transactions (may also impact intangible amortization) and (ii) volatility from Other investments income (loss) resulting from changes in market conditions and other performance factors.

The variability in the segment financial results is primarily driven by (i) change in loss and loss expenses resulting from, among other items, credit developments, interest rates and de-risking transactions (may also impact intangible amortization) and (ii) volatility from Other investments income (loss) resulting from changes in market conditions and other performance factors.

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

Net premiums earned.

Net premiums earned increased $1 for the three months ended March 31, 2024, compared to the same period in the prior year.

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

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

The positive impact on net premiums earned related to credit losses amounted to $1 fo r the three months ended March 31, 2024 , as compared to $0 f or the three months ended March 31, 2023.

Investment and Derivative Results.

Net investment income increased $7 for the three months ended March 31, 2024, compared to the prior year period, driven by higher yields in fixed income and fair value gains on fixed maturity securities classified as trading.

Net investment gains (losses), including impairments increased $5 for the three months ended March 31, 2024, compared to the prior year period, primarily as a result of foreign exchange gains on US dollar denominated securities held by Ambac UK and impairment charges in first quarter 2023.

Derivative results improved by $5 compared to first quarter 2023 mostly driven by the impact of counterparty credit adjustments on certain derivative assets that are hedged against interest rate risk.

Additionally, the three months ended March 31, 2023 included losses on positions held as partial hedges against interest rate risk elsewhere in the Legacy Financial Guarantee segment.

Ambac has exited the derivative positions that led to the first quarter 2023 losses.

Net premiums earned decreased $2 and $1 for the three and six months ended June 30, 2024, compared to the same period in the prior year.

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

Other Revenue Items.

Net investment income increased $0 and $7 for the three and six months ended June 30, 2024, compared to the prior year period, driven by higher yields in fixed income, offset by lower fair value gains on other investments, including fixed maturity securities classified as trading.

Net investment gains (losses), including impairments improved $2 and $8 for the three and six months ended June 30, 2024, compared to the prior year periods, primarily as a result of lower foreign exchange losses on US dollar denominated securities held by Ambac UK and net losses on sales in the prior year periods.

Net gains (losses) on derivatives for the three and six months ended June 30, 2024 declined $1 and improved $4, respectively, compared to the prior year periods mostly driven by the impact of counterparty credit adjustments on certain derivative assets.

Additionally, the six months ended June 30, 2023 included losses on positions held as partial hedges against interest rate risk elsewhere in the Legacy Financial Guarantee segment.

Ambac has exited the derivative positions that led to the first half 2023 losses.

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

Other income increased $13 and $17 for the three and six months ended June 30, 2024, respectively, primarily related to the termination of a postretirement plan.

The gain represents the amount of the accrued and deferred liabilities in excess of the final payment made under the plan.

Losses and Loss Adjustment Expenses (Benefit).

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

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Structured Finance $ (5) $ 1 $ (21) $ 21

2 unchanged sentences

Totals $ (5) $ 2 $ (26) $ 15

Loss and loss adjustment expenses (benefit) for the three months ended March 31, 2024, was largely driven by the positive impact of discount rates on the structured insurance portfolio, and assumption changes in the public finance and international portfolios.

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

Loss and loss adjustment expenses (benefit) for the three and six months ended June 30, 2024, were largely driven by the positive impact of discount rates on the structured insurance portfolio, and assumption changes in the international portfolio, partially offset by adverse development in the public finance portfolio.

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

G&A Expenses.

Segment G&A expenses decreased during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023, primarily due to (i) the timing of the reimbursement of expenses paid to the Corporate segment of $4 (2023 was paid in three months ended March 31, 2023 and 2024 will be paid in the second quarter of 2024) ii) lower legal defense costs and lower compensation costs than the prior year period.

These relative reductions in expenses were partially offset by expenses incurred in the first quarter of 2024 related to the strategic review of the Legacy Financial Guarantee segment.

Segment G&A expenses decreased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to lower legal defense costs and compensation costs than the prior year period, partially offset by the timing of the reimbursement of $4 of expenses paid to the Corporate segment (2023 was paid in in

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

Second Quarter 2024 Form 10-Q

the first quarter of 2023 and 2024 was paid in the second quarter of 2024).

These relative reductions in expenses were also partially offset by expenses incurred in the first quarter of 2024 related to the strategic review of the Legacy Financial Guarantee segment.

Specialty Property and Casualty Insurance

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Gross premiums written $ 111 $ 53 $ 208 $ 105

4 unchanged sentences

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

Total 32 11 61 20

Losses and loss expenses incurred 23 6 42 10

1 unchanged sentence

General and administrative expenses 5 4 8 8

Total 33 11 61 21

EBITDA (1) $ — 1 $ (1)

1 unchanged sentence

Retention Ratio (1)

29.0% 17.1% 28.2% 17.4%

Loss and LAE Ratio (2)

85.1% 73.7% 80.5% 70.4%

Expense Ratio (3)

24.3% 39.0% 23.5% 46.7%

Combined Ratio (4)

109.4% 112.7% 104.0% 117.1%

Ambac's stockholders equity (5)

5 unchanged sentences

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

Twenty-two programs were authorized to issue policies as of March 31, 2024, including Everspan participating on two programs as a reinsurer.

Twenty-three programs were authorized to issue policies as of June 30, 2024, including Everspan participating on two programs as a reinsurer.

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

3 unchanged sentences

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

Loss and loss expenses incurred increased for the three months ended March 31, 2024, relative to the three months ended March 31, 2023, primarily due to the growth and diversification of the business.

Everspan's loss ratio (including ULAE) was 75.7% at March 31, 2024 versus 66.6% at March 31, 2023, inclusive of prior years development of 4.4% and 0.6%, respectively.

Loss and loss expenses incurred increased for the three and six months ended June 30, 2024, relative to the three and six months ended June 30, 2023.

Everspan's loss ratio (including ULAE) was 85.1% at June 30, 2024, versus 73.7% at June 30, 2023, inclusive of prior accident years development of 6.9% and 4.2%, respectively and the impact of reserve strengthening in the current accident year of 4.2% for the three months ended June 30, 2024 primarily related to commercial auto.

The shift in the loss ratio was driven by commercial auto losses, the addition of personal nonstandard auto (through assumed reinsurance), excess auto claims and other liability claims.

Everspan's loss ratio may fluctuate as the still nascent inforce book of business scales and seeks to diversify.

The increase in the Loss and LAE ratio for the three months ended March 31, 2024, compared to March 31, 2023, 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 6.1% and 0.6% for the three months ended March 31, 2024 and 2023, respectively.

Everspan's loss ratio may fluctuate as the still nascent inforce book of business scales and seeks to achieve benefits from diversification.

The increase in the Loss and LAE ratio for the three months ended June 30, 2024, compared to June 30, 2023, 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 5.6% and 4.2% for the three months ended June 30, 2024 and 2023, respectively.

Certain Everspan programs were structured to include sliding scale commission arrangements within a loss ratio range.

These sliding scale arrangements help mitigate losses, protect underwriting results and limit earnings volatility.

In June 2024, one of Everspan's commercial auto program partners agreed with Everspan to temporarily suspend underwriting new business in order for the parties and Everspan's reinsurers to review pricing and loss controls in advance of considering the program's renewal.

Loss and loss expenses incurred may be adversely impacted by economic and social inflation.

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.

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

3 unchanged sentences

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

General and administrative costs were flat for the three months ended March 31, 2024, relative to the three months ended March 31, 2023, as increases from the ramp up in Everspan's staffing and operations was mostly offset by the timing of incentive compensation accruals.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

Second Quarter 2024 Form 10-Q

General and administrative costs were flat for the three and six months ended June 30, 2024, relative to the three and six months ended June 30, 2023, as increases from the ramp up in Everspan's staffing and operations was mostly offset by the timing of incentive compensation accruals.

Insurance Distribution

Three Months Ended March 31, 2024 2023

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

2024 2023 2024 2023

Premiums placed $ 53 $ 41 $ 144 $ 118

3 unchanged sentences

General and administrative expenses (1)

EBITDA 2 2 7 6

Depreciation (1)

1 unchanged sentence

Pretax income (loss) $ 1 $ 1 $ 5 $ 4

Ambac's stockholders equity (2)

Ambac's stockholders

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

3 unchanged sentences

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

The Insurance Distribution segment placed premiums for its carriers of approximately $90 for the three months ended March 31, 2024, up $13 or 17%, respectively, as compared to the three months ended March 31, 2023.

The Insurance Distribution segment placed premiums for its carriers of approximately $53 and $144 for the three and six months ended June 30, 2024, up $12 and $25 or 31% and 21%, respectively, as compared to the three and six months ended June 30, 2023.

Higher premiums placed were driven by the acquisition of Riverton Insurance Agency and organic growth.

1 unchanged sentence

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.

Employer Stop Loss is Xchange's largest business.

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

G&A Expenses.

G&A expenses for the three months ended March 31, 2024, increased compared to the three months ended March 31, 2023, primarily as a result of the Riverton acquisition.

G&A expenses for the three and six months ended June 30, 2024, increased compared to the three and six months ended June 30, 2023, primarily as a result of the Riverton acquisition.

LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

AFG is organized as a legal entity separate and distinct from its operating subsidiaries.

AFG is a holding company with no outstanding debt.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $209 as of March 31, 2024, and secondarily on

distributions and expense sharing payments from its operating subsidiaries.

AFG is a holding company with no outstanding debt at June 30, 2024.

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $202 as of June 30, 2024, and secondarily on distributions, expense sharing payments from its operating subsidiaries and third party capital (credit facilities, equity issuance, etc.).

• Effective July 31, 2024, AFG closed the acquisition of a controlling 60% interest in Beat.

In connection with the acquisition, Cirrata incurred $150 of debt maturing in 364 days funded by a global bank (the "Credit Facility").

Repayment of debt under the Credit Facility is guaranteed by AFG.

It is AFG's intent to repay this debt upon the closing of the sale of AAC or otherwise refinance such short-term debt with longer-term debt.

• 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 was approved by OCI and will be paid to AFG during the second quarter of 2024.

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

The $4 reimbursement was approved by OCI and was paid to AFG during the second quarter of 2024.

As further described in Note 1.

Business and Basis of Presentation, AFG entered into a stock purchase agreement, pursuant to which and subject to the conditions set forth therein, AFG will sell all of the issued and outstanding shares of common stock of AAC.

The sale of AAC is expected to close in the fourth quarter of 2024 or the first quarter of 2025 and, accordingly, it is unlikely for AFG to receive this reimbursement in the future.

• If AFG were to not sell AAC, its ability to receive dividends from AAC and the timing of any such potential dividends would depend on the results of the OCI Capital Model, regulatory approval and the satisfaction of certain obligations senior to AFG's equity interest (e.g.

surplus notes).

• Subject to the approvals required for the sale of AAC as described in Note 1.

Business and Basis of Presentation, AFG will receive $420 of proceeds at closing less applicable legal, advisory and other expenses incurred in connection with the sale.

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

1 unchanged sentence

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

AFG received distributions from Cirrata of $2.9 and $1.9 during the three months ended March 31, 2024 and 2023.

AFG received distributions from Cirrata of $4.7 and $3.6 during the six months ended June 30, 2024 and 2023.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

AFG's principal uses of liquidity are:

(i) the payment of G&A expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which are generally illiquid and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses, including through the acquisition of noncontrolling interests as a result of the exercise of outstanding puts and/or calls.

Including the acquisition of Beat, funding these puts, calls and other commitments could require payments from AFG, depending on the performance of the underlying businesses and other considerations, of approximately $350 through 2030.

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

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

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

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

However, events, opportunities, acquisitions, the exercise of puts and calls, the need to refinance outstanding debt, or other circumstances could require AFG to seek additional capital (e.g.

through the issuance of debt, equity or hybrid securities).

The Credit Facility includes covenants that restrict our ability to manage capital resources by limiting, among other actions, the issuance of debt or capital stock;

the creation of liens;

the disposition of assets;

engaging in transactions with affiliates;

making restricted payments, including dividends and the purchase or redemption of capital stock;

and making acquisitions and other investments.

The Credit Facility also requires the prepayment of the borrowings thereunder with proceeds of certain debt or equity issuances and certain asset sales.

These requirements will impact our financial and operational flexibility while the Credit Facility remains in place.

Operating Companies' Liquidity

7 unchanged sentences

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

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

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

AAC intends to make these requests at least four times a year with respect to payment of a partial amount, as well as the full amount, of the principal and interest then due, unless otherwise directed by OCI.

intends to make these requests at least four times a year with respect to payment of a partial amount, as well as the full amount, of the principal and interest then due, unless otherwise directed by OCI.

OCI’s approval of AAC’s requests for surplus note payments may be granted or denied in OCI’s sole discretion.

3 unchanged sentences

Surplus notes are subordinated in right of payment to policyholder and other claims.

• As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, AAC requested approval from OCI to pay principal of, and interest on, the surplus notes on June 7, 2024, but as of the filing of this Form 10-Q, AAC has yet to receive a response from OCI to such request.

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

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

AAC's future interest obligations on long-term debt include $500 of accrued and unpaid interest all or a portion of which would be payable on surplus notes if approved by OCI on or before the next scheduled payment date of June 7, 2025.

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

7 unchanged sentences

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

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Consolidated Cash Flow Statement Discussion

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

Three Months Ended March 31, 2024 2023

Six Months Ended June 30, 2024 2023

Cash provided by (used in):

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

Cash used in financing activities includes $0 and $108 from such AAC payments, for the three months ended March 31, 2024 and 2023, respectively.

Cash used in financing activities includes $0 and $108 from such AAC payments, for the six months ended June 30, 2024 and 2023, respectively.

Operating activities

The following represents the significant cash operating activity during the three months ended March 31, 2024 and 2023:

• Cash provided by (i) gross premiums were $64 and $48 for the three months ended March 31, 2024 and 2023, respectively;

and (ii) investment portfolio income was $25 and $20 for the three months ended March 31, 2024 and 2023, respectively.

The increase in gross premiums were driven by the growth in the Specialty Property and Casualty Insurance segment.

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

• Payments related to (i) G&A expenses we re $41 and $37 for the three months ended March 31, 2024 and 2023, respectively;

and (ii) reinsurance premiums paid were $34 and $31 for the three months ended March 31, 2024 and 2023, respectively.

The increase in reinsurance premiums paid were driven by the growth in the Specialty Property and Casualty Insurance segment.

• Net Legacy Financial Guarantee Insurance loss and loss expenses paid (recovered), including commutation payments, during the three months ended March 31, 2024 and 2023 were ($11) and ($140), respectively.

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

Net cash provided by operating activities during the six months ended June 30, 2024 and 2023 was $32 and $101, respectively.

During the six months ended June 30, 2023, Ambac received proceeds from a R&W settlement and repaid the remaining secured debt outstanding (net operating cash inflows of $90).

Operating cash flows in the six months ended June 30, 2024 were positively impacted by the growth in the Specialty P&C Insurance business and higher investment portfolio inflows, partially offset by transaction related costs for the acquisition of Beat and the sale of AAC.

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

Financing Activities

Financing activities for the three months ended March 31, 2024, included paydowns and maturities of VIE debt obligations of $46.

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

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

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

Financing activities for the six months ended June 30, 2024, included paydowns and maturities of VIE debt obligations of $87.

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

AFS hedged a portion of the interest rate risk in the Legacy Financial Guarantee Insurance segment financial guarantee and

investment portfolios, along with legacy customer interest rate swaps, with standardized derivative contracts, which contain collateral or margin requirements.

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

2 unchanged sentences

All collateral obligations are currently met.

Collateral posted by AFS totaled a net amount of $44 (cash and securities collateral of $18 and $26, respectively), including independent amounts, under these contracts at March 31, 2024.

Collateral posted by AFS totaled a net amount of $44 (cash and securities collateral of $25 and $18, respectively), including independent amounts, under these contracts at June 30, 2024.

BALANCE SHEET

Total assets increased by less than a million dollars from December 31, 2023, to $8,429 at March 31, 2024, primarily due to (i) higher non-VIE invested assets and (ii) increases in premium receivables, reinsurance recoverables and deferred ceded premiums as a result of growth in the specialty P&C businesses;

offset by a decrease in asset values of VIEs and reductions in intangible assets are a result of amortization during the three months ended March 31, 2024.

Total liabilities decreased by approximately $3 from December 31, 2023, to $6,993 as of March 31, 2024, primarily due to decreases in the value of VIE liabilities;

partially offset by (i) higher other liabilities from an increase in payable for securities and (ii) higher unearned premiums, deferred program fees and ceded premium payables from the specialty P&C businesses.

As of March 31, 2024, total stockholders’ equity was $1,418, compared with total stockholders’ equity of $1,415 at December 31, 2023.

This increase was primarily due to total comprehensive income for the three months ended March 31, 2024, of $5.

Total assets decreased by $244 from December 31, 2023, to $8,184 at June 30, 2024, primarily due to lower VIE assets partially offset by increases in premium receivables, reinsurance recoverables and deferred ceded premiums as a result of growth in the specialty P&C businesses.

Total liabilities decreased by approximately $248 from December 31, 2023, to $6,748 as of June 30, 2024, primarily due to decreases in VIE liabilities;

partially offset by higher unearned premiums, deferred program fees and ceded premium payables from the specialty P&C businesses.

As of June 30, 2024, total stockholders’ equity was $1,419, compared with total stockholders’ equity of $1,415 at December 31, 2023.

Investment Portfolio

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

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at March 31, 2024 and December 31, 2023:

March 31, 2024 December 31, 2023

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at carrying value at June 30, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

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

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$ 2,254 $ 180 $ 5 $ 193 $ 2,632 $ 2,310 $ 162 $ 4 $ 188 $ 2,664

(1) Includes investments denominated in non-US dollar currencies with a fair value of £347 ($438) and €22 ($24) as of March 31, 2024 and £342 ($436) and €25 ($27) as of December 31, 2023.

(1) Includes investments denominated in non-US dollar currencies with a fair value of £344 ($435) and €21 ($23) as of June 30, 2024 and £342 ($436) and €25 ($27) as of December 31, 2023.

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

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

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at March 31, 2024 and December 31, 2023:

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at June 30, 2024 and December 31, 2023:

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

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

(2) Below investment grade and not rated bonds insured by Ambac represent 18% and 21% of the March 31, 2024, and December 31, 2023, combined fixed maturity portfolio, respectively.

(2) Below investment grade and not rated bonds insured by Ambac represent 17% and 21% of the June 30, 2024, and December 31, 2023, combined fixed maturity portfolio, respectively.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Premium Receivables

Ambac's premium receivables increased to $299 at March 31, 2024, from $290 at December 31, 2023.

Ambac's premium receivables increased to $317 at June 30, 2024, from $290 at December 31, 2023.

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

At March 31, 2024, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $237 and $62, respectively.

At June 30, 2024, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $232 and $85, respectively.

Premium receivables by payment currency were as follows:

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

Ambac benefited from letters of credit and collateral amounting to approximately $127 from its reinsurers at March 31, 2024.

Additionally, while legacy liabilities from the recent Specialty P&C acquisitions were fully

ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from the respective sellers to mitigate any residual risk to these reinsurers.

As of March 31, 2024 and December 31, 2023, reinsurance recoverable on paid and unpaid losses were $224 and $195, respectively primarily due to growth in the Specialty P&C Insurance Segment.

Ambac benefited from letters of credit and collateral amounting to approximately $66 from its reinsurers at June 30, 2024.

Additionally, while legacy liabilities from the recent Specialty P&C acquisitions were fully ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from the respective sellers to mitigate any residual risk to these reinsurers.

As of June 30, 2024 and December 31, 2023, reinsurance recoverable on paid and unpaid losses were $277 and $195, respectively primarily due to growth in the Specialty P&C Insurance Segment.

Intangible Assets

Intangible assets primarily include (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy (Legacy Financial Guarantee Insurance Segment) in 2013, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities of $233 at March 31, 2024, (ii) intangible assets established as part of acquisitions in the Insurance Distribution business of $46 at March 31, 2024, (iii) indefinite-lived intangible assets in the Specialty P&C business as part of its acquisitions of $14 at March 31, 2024.

As of March 31, 2024 and December 31, 2023, intangible assets were $293 and $307, respectively.

The decline is primarily driven by amortization during the three months ended March 31, 2024.

Intangible assets primarily include (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy (Legacy Financial Guarantee Insurance Segment) in 2013, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities of $226 at June 30, 2024, (ii) intangible assets established as part of acquisitions in the Insurance Distribution business of $45 at June 30, 2024, (iii) indefinite-lived intangible assets in the Specialty P&C business as part of its acquisitions of $14 at June 30, 2024.

As of June 30, 2024 and December 31, 2023, intangible assets were $285 and $307, respectively.

The decline is primarily driven by amortization during the six months ended June 30, 2024.

Loss and Loss Expense Reserves and Subrogation Recoverable

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

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2.

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.

Basis of Presentation and Significant Accounting Policies and Note 8.

Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for further information on loss and loss expenses.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of March 31, 2024 and December 31, 2023, were $721 and $756, respectively.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of June 30, 2024 and December 31, 2023, were $762 and $756, respectively.

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

March 31, 2024:

June 30, 2024:

December 31, 2023:

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Totals $ 286 $ 676 $ (186) $ (14) $ 762 $ 197 $ 780 $ (194) $ (28) $ 756

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Legacy Financial Guarantee Insurance:

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These bond types represent 91% of our ever-to-date insurance claims recorded, with RMBS comprising 60%.

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at March 31, 2024 and December 31, 2023:

March 31, 2024:

The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at June 30, 2024 and December 31, 2023:

June 30, 2024:

December 31, 2023:

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Totals $ 2,581 $ 676 $ (186) $ (14) $ 476 $ 3,838 $ 780 $ (194) $ (28) $ 559

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves were $366 and $25 respectively, at March 31, 2024, and $362 and $30 , respectively at December 31, 2023.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves were $279 and $26 respectively, at June 30, 2024, and $362 and $30, respectively at December 31, 2023.

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

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

We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the

probability-weighted outcome recorded.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at March 31, 2024, and assumes an inability to execute any commutation transactions with issuers and/or investors.

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

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at June 30, 2024, and assumes an inability to execute any commutation transactions with issuers and/or investors.

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

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

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

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

7 of the Company's 2023 Annual Report on Form 10-K, and Part II, Item1A "Risk Factors" of this Quarterly Report, for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes.

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;

See “Risk Factors” in Part I, Item 1A as well as the descriptions of "Variability of Expected Losses and Recoveries" in Part II, Item 7 of the Company's 2023 Annual Report on Form 10-K, and Part II, Item 1A "Risk Factors" of this Quarterly Report, for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes.

The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of

operations and financial condition and may result in materially adverse consequence for Ambac, including (without limitation) impairing the ability of AAC to honor its financial obligations, particularly its outstanding surplus note and preferred stock obligations;

the initiation of rehabilitation proceedings against AAC;

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

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

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

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

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

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Structured Finance Variability:

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at March 31, 2024, could be approximately $55 and there can be no assurance that losses may not exceed such amounts.

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at June 30, 2024, could be

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

approximately $50 and there can be no assurance that losses may not exceed such amounts.

Domestic Public Finance Variability:

public finance portfolio consists of municipal bonds such as general and revenue obligations and lease and tax-

backed obligations of state and local government entities;

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

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

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In certain cases, judicial decisions may be contrary to AAC's expectations or understanding of the law or its rights thereunder, which may lead to worse outcomes in Chapter 9 or similar proceedings than anticipated at the outset.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

law that could reduce certain municipal investors' appetite for tax-exempt municipal bonds or put pressure on issuers in states with high state and local taxes.

Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as changes in tax law that could reduce certain municipal investors' appetite for tax-exempt municipal bonds or put pressure on issuers in states with high state and local taxes.

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

For the public finance credits for which we have an estimate of expected loss at March 31, 2024, the sum of all the highest stress case loss scenarios is $120 and there can be no assurance that losses may not exceed such amounts.

For the public finance credits for which we have an estimate of expected loss at June 30, 2024, the sum of all the highest stress case loss scenarios is $185 and there can be no assurance that losses may not exceed such amounts.

Other Credits, including International Finance Variability:

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

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $75 greater than the loss reserves at March 31, 2024.

For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $45 greater than the loss reserves at June 30, 2024.

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

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

The carrying value of each of these as of March 31, 2024 and December 31, 2023 is below:

The carrying value of each of these as of June 30, 2024 and December 31, 2023 is below:

2024 December 31, 2023

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

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

INSURANCE 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.

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.

The National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) is adopted as a component of prescribed practices by each domiciliary state.

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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 $878 and $1,181 at March 31, 2024, respectively, as compared to $897 and $1,201 at December 31, 2023, respectively.

As of March 31, 2024, statutory policyholder surplus and qualified statutory capital included $519 principal balance of surplus notes outstanding and $115 liquidation preference of preferred stock outstanding.

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $894 and $1,197 at June 30, 2024, respectively, as compared to $897 and $1,201 at December 31, 2023, respectively.

As of June 30, 2024, statutory policyholder surplus and qualified statutory capital included $519 principal balance of surplus notes outstanding and $115 liquidation preference of preferred stock outstanding.

These surplus notes (in addition to related accrued interest of $500 that is not recorded under statutory basis accounting principles);

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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 drivers to the net decrease in policyholder surplus were the statutory net loss of $25 for the three months ended March 31, 2024, partially offset by investment valuation changes that are direct increases (decreases) to surplus of $6.

The statutory net loss for the three months ended March 31, 2024, was driven by the de-risking of certain student loan exposures,

The drivers to the net decrease in policyholder surplus were the statutory net loss of $6 for the six months ended June 30, 2024.

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

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Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $108 at March 31, 2024, as compared to $108 at December 31, 2023.

The drivers within the period was net income at Everspan Indemnity Insurance Company, including its

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

subsidiaries, of $1 during the three months ended March 31, 2024, offset by a reduction in policyholders surplus for changes in capital contributions, primarily related to incentive compensation awards.

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $106 at June 30, 2024, as compared to $108 at December 31, 2023.

The drivers within the period was net loss at

Everspan Indemnity Insurance Company, including its subsidiaries, of $1 during the six months ended June 30, 2024, in addition to a reduction in policyholders surplus for changes in capital contributions, primarily related to incentive compensation awards.

AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES

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 £499 at March 31, 2024, as compared to £489 at December 31, 2023.

At March 31, 2024, the carrying value of cash and investments was £546, a increase from £535 at December 31, 2023.

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 £505 at June 30, 2024, as compared to £489 at December 31, 2023.

At June 30, 2024, the carrying value of cash and investments was £546, a increase from £535 at December 31, 2023.

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

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

Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £430 at December 31, 2023, the most recently published position.

Eligible capital resources at December 31, 2023 were in comparison to regulatory capital requirements of £220.

Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £210 at December 31, 2023.

Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £448 at June 30, 2024, the most recently published position.

Eligible capital resources at June 30, 2024, were in comparison to regulatory capital requirements of £213.

Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £235 at June 30, 2024.

NON-GAAP FINANCIAL MEASURES

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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.

In connection with the sale of AAC and the acquisition of Beat, management is considering making changes to the current non-GAAP measures which, if any, may occur in future reporting periods.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

The following paragraphs define each non-GAAP financial measure.

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

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

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

intangible assets.

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

Three Months Ended March 31, 2024 Three Months Ended March 31, 2023

Three Months Ended June 30, 2024 Three Months Ended June 30, 2023

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

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Amortization of intangible assets 7 — 1 — 8 6 — 1 — 7

$ 36 $ (1) $ 2 $ (11) $ 27 $ 14 $ — $ 2 $ (4) $ 12

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $0.4 and $0.3 for the three months ended June 30, 2024 and 2023, respectively.

These noncontrolling interests are in the Insurance Distribution segment.

Six Months Ended June 30, 2024 Six Months Ended June 30, 2023

Net income (loss)

$ 31 $ 1 $ 5 $ (16) $ 20 $ (45) $ (1) $ 4 $ (4) $ (46)

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

Income taxes 7 — — — 7 5 — — — 6

Depreciation — — — 1 1 1 — — — 1

Amortization of intangible assets 18 — 2 — 21 11 — 2 — 13

EBITDA $ 89 $ 1 $ 7 $ (16) $ 81 $ 5 $ (1) $ 6 $ (3) $ 7

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $0.9 and $0.9 for the three months ended March 31, 2024 and 2023, respectively.

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $1.4 and $1.2 for the six months ended June 30, 2024 and 2023 , respectively.

These noncontrolling interests are primarily in the Insurance Distribution segment.

Ambac Financial Group, Inc.

First Quarter 2024 Form 10-Q

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

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

Three Months Ended March 31, 2024 2023

Three Months Ended June 30, 2024 2023

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

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Adjusted Net Income (Loss) $ 8 $ 0.18 $ 3 $ 0.07

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Six Months Ended June 30, 2024 2023

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

Net income (loss) attributable to common shareholders $ 19 $ 0.41 $ (47) $ (1.02)

Net investment (gains) losses, including impairments (4) (0.09) 8 0.17

Intangible amortization 21 0.44 13 0.29

Litigation costs 11 0.24 16 0.36

Foreign exchange (gains) losses 1 0.02 — (0.01)

Workforce change costs — — 1 0.02

Pretax adjusted net income (loss) 48 $ 1.02 (9) $ (0.19)

Income tax effects — (0.01) (2) (0.03)

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

Adjusted Net Income (Loss) $ 47 $ 1.00 $ (10) $ (0.23)

Adjusted Book Value .

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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.

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.

This adjustment is only made for financial guarantee contracts since such premiums are non-refundable.

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

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

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Adjusted book value 1,322 $ 29.23 $ 1,299 $ 28.74

The increase in Adjusted Book Value since December 31, 2023 was primarily attributable to Ambac's net income (excluding earned premium previously included in Adjusted Book Value), partially offset by the negative effect foreign exchange rates.

Quantitative and Qualitative Disclosure About Market Risk

As of March 31, 2024, there were no material changes in the market risks that the Company is exposed to since December 31, 2023.

The increase in Adjusted Book Value since December 31, 2023, was primarily attributable to Ambac's net income (excluding earned premium previously included in Adjusted Book Value).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis