What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-08-05 · 301 added, 252 removed, 705 unchanged (44% of the section changed)

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

As of 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:

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

September 30,

2024 December 31, 2023

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(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 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.

The decrease in AFG net assets, excluding its equity investments in subsidiaries, during 2024 was driven by net cash outflows from the acquisition of Beat Capital Partners Limited ("Beat"), transaction costs associated with the 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.

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

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

Third Quarter 2024 Form 10-Q

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

Three Months Ended September 30, 2024 Three Months Ended September 30, 2023

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

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

Distribution Corporate & Other Consoli-dated

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Pretax income (loss) (9) 9 (8) (18) (27) 69 — 2 (4) 68

EBITDA 36 (1) 2 (11) 27 14 — 2 (4) 12

13 9 2 (18) 6 91 — 4 (4) 91

Ambac Stockholders’ Equity (1)

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Redeemable noncontrolling interest 204 204 22 22

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

Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023

Legacy Financial Guarantee Insurance Specialty Property and Casualty Insurance Insurance

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

Distribution Corporate & Other Consoli-dated

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

(2) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $(0.3) and $0.6 for the three months ended September 30, 2024 and 2023, respectively, and of $1.1 and $1.8 for the nine months ended September 30, 2024 and 2023, respectively.

These noncontrolling interests are in the Insurance Distribution segment.

Sale of Consolidated National Insurance Company

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 which is one of Everspan's admitted carriers.

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.

The closing of this transaction occurred on September 1, 2024, resulting in a gain of approximately $7 million.

The sale of CNIC will not have any adverse impact on the group's operations or growth prospects.

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").

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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:

This pending Sale had no impact on the financial statements at September 30, 2024, other than incurred transaction expenses of approximately $2 and $9 for the three and nine months ended September 30, 2024.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Third Quarter 2024 Form 10-Q

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

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

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estimated incremental transaction expenses 13

Impact of sale of AAC on stockholders' equity $ (549)

Reclassification of Accumulated Other Comprehensive Income to earnings $ (90)

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.

Total (loss on disposal) recognized in net income $ (639)

Purchase of Beat

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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.

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

Refer to Note 1.

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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 $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's cash balances held at banks was $70 as of September 30, 2024 and $27 as of December 31, 2023.

Substantially all of these cash balances were uninsured as of September 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 $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.

Included in the cash balances above are $42 and $16 as of September 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 $62 and $246 as of June 30, 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 $47 and $246 as of September 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 $156 and $169 as of June 30, 2024 and December 31, 2023, respectively.

Ambac also has exposure to banks through its fixed maturity investment portfolio totaling $154 and $169 as of September 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 BBB+ as of June 30, 2024.

The average rating of our fixed income investment in banks was A- as of September 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 six months ended June 30, 2024 and 2023, included the following:

Six Months Ended June 30, 2024 2023

The impact of currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the nine months ended September 30, 2024 and 2023, included the following:

Nine Months Ended September 30, 2024 2023

Net income (1)

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Impact on total comprehensive income (loss) (2)

(1) A portion of Ambac UK's, and to a lesser extent AAC's, assets and liabilities are denominated in currencies other than its functional currency.

(1) A portion of Ambac UK's, Beat's and to a lesser extent AAC's, assets and liabilities are denominated in currencies other than its functional currency.

Other than the foreign currency impact on unrealized gains (losses) on available-for-sale securities, which is included in Other comprehensive income, foreign currency transaction gains/(losses) as a result of changes to foreign currency rates are reported through Net income in the Unaudited Consolidated Statement of Total Comprehensive Income (Loss).

(2) Excludes adjustments to attribute net income (loss) of $(1) and gain (loss) on foreign currency translation of $5 to noncontrolling interests for the nine months ended September 30, 2024.

The above amounts do not include gains of $6 included in net income (loss) attributable to common stockholders for the nine months ended September 30, 2024 arising from changes in fair value of foreign exchange forward contracts used by Beat to partially hedge its foreign currency exposure and by Ambac to protect against currency fluctuations related to the purchase of Beat.

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

Refer to Part II, Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for further information on the impact of future currency rate changes on Ambac's financial instruments.

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

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

2023, for further information on the impact of future currency rate changes on Ambac's financial instruments.

SEC Final Rules on Climate Related Information

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

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.

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.

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

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

As a result of the acquisition of Beat, the growth in our Specialty Property and Casualty Insurance segment and the pending sale of Ambac Assurance, Ambac expects to make changes to its critical accounting estimates in the fourth quarter of 2024.

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 June 30, 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 September 30, 2024 and December 31, 2023.

($ in billions)

September 30,

2024 December 31,

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Watch List $ 2,563 $ 2,181 $ (116) (4) %

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 $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.

The decrease in total and ACC net par outstanding resulted from active de-risking, scheduled maturities, amortizations, refundings and calls, partially offset by a weakening of the USD versus the GBP which increased total net par outstanding by $357.

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

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

September 30,

2024 December 31,

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Total net par outstanding $ 18,756 $ 19,541

(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:

(1) Includes $3,321 and $3,371 of Military Housing net par outstanding at September 30, 2024 and December 31, 2023, respectively.

Ambac Financial Group, Inc.

Third 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 September 30, 2024:

Bond Kind Country-Bond Type Ambac

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IF AUK PFI - Hospitals UK-Infrastructure BBB+ 2046 776 4.1 %

IF AUK PFI - Accommodation UK-Infrastructure A- 2040 721 3.9 %

IF AUK Investor Owned Utility Other - unsecured UK-Utility A- 2035 752 4.0 %

IF AUK Other Asset Securitizations UK-Asset Securitizations BBB+ 2033 651 3.5 %

IF AUK PFI - Accommodation UK-Infrastructure A- 2040 750 4.0 %

IF AUK Investor Owned Utility Electric - unsecured UK-Utility BBB+ 2036 670 3.6 %

IF AUK Other Asset Securitizations UK-Asset Securitizations BBB+ 2033 659 3.5 %

IF AUK Sub-Sovereign Italy-Sub-Sovereign BBB- 2035 564 3.0 %

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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 ($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 June 30, 2024, and 31% at December 31, 2023.

Net par related to the top ten exposures increased $216 from December 31, 2023.

Exposures are impacted by changes in foreign exchange rates ($249 increase during the nine months ended September 30, 2024), certain indexation rates linked to inflation measures in the United Kingdom (RPI) and scheduled and unscheduled paydowns.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) was 34% at September 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 $29 per single risk, with insured exposures ranging up to $303 and a median net par outstanding of $5.

Exposure Currency

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

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

Currency Net Par Amount

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Total $ 18,756

Ambac Financial Group, Inc.

Third 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 June 30, 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 June 30,

Bond Type September 30,

2024 December 31,

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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.

Third Quarter 2024 Form 10-Q

Results of Operations

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A summary of our financial results is shown below:

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

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

2024 2023 2024 2023

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Other income 10 2 28 7

Total revenue 114 74 321 194

Losses and loss adjustment expenses (benefit) 38 (76) 54 (51)

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Interest expense 20 16 51 48

Total expenses 141 6 320 166

Provision for income taxes 3 1 10 7

Net income (loss) (29) 66 (9) 21

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

net (gain) loss attributable to noncontrolling interest 2 — 1 (1)

Net income (loss) attributable to common stockholders $ (28) $ 66 $ (8) $ 19

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.

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

Gross Premiums Written.

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,

Gross premiums written increased $34 and $130 for the three and nine months ended September 30, 2024, compared to the same period in the prior year, as shown by segment below.

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

2024 2023 2024 2023

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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 $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,

Net premiums written increased $4 and $92 for the three and nine months ended September 30, 2024, compared to the same period in the prior year, as shown by segment below:

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

2024 2023 2024 2023

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Total $ 31 $ 27 $ 92 $ —

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.

Legacy Financial Guarantee Insurance net premiums written in the nine months ended September 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 $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

Net premiums earned increased $15 and $51 for the three and nine months ended September 30, 2024, compared to the same period in the prior year as shown by segment below.

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

Legacy Financial Guaranty Insurance $ 6 $ 6 $ 19 $ 20

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

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

Financial Guarantee segment;

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and Other investments is summarized in the table below:

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

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

2024 2023 2024 2023

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Securities available-for-sale:

Ambac-insured (including secured notes) 6 6 $ 12 $ 11

Ambac-insured 6 6 $ 18 $ 17

Net investment income (loss) $ 38 $ 30 $ 116 $ 100

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 income increased $8 and $16 for the three and nine months ended September 30, 2024 compared to the prior year period.

• Net investment income from available-for-sale and short-term securities, other than Ambac-insured increased $1 and $9 for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year due primarily to higher portfolio yields.

• Other investments income (loss) increased $8 and $7 for the three and nine months ended September 30, 2024, respectively, compared to the same periods in the prior year.

Improved performance on equity fund investments, along with higher allocations to high-yield and convertible bond funds drove the majority of the increase for the three and nine months ended September 30, 2024.

• Net investment income from Ambac-insured securities for the three and nine months ended September 30, 2024, was generally flat compared to prior year periods.

Net Investment Gains (Losses), including Impairments.

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

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

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

2024 2023 2024 2023

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Net investment gains (losses), including impairments $ (2) $ 1 $ 3 $ (7)

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.

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

Foreign exchange (losses) gains relate primarily to US dollar denominated securities held by Ambac UK.

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.

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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.

Credit impairments for the three and nine months ended September 30, 2024 also included a write-down in carrying value of $1 and $2, respectively 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.

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

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.

Net gains (losses) on derivative contracts includes results from the Company's legacy interest rate derivatives portfolio and, since the acquisition of Beat, foreign exchange derivatives within the insurance distribution segment.

Through the first quarter of 2023, the legacy financial guarantee 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 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.

Net gains (losses) on interest rate derivatives reflect mark-to-market gains (losses) in the legacy 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.

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

Net gains (losses) on interest rate derivatives for the three and six months ended June 30, 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.

Foreign exchange derivatives are used by Beat to economically hedge the impact of exchange rate volatility on non-pound sterling transactions.

Additionally, Ambac entered into foreign exchange forward contracts to stabilize the US dollar purchase price leading up to its acquisition of 60% of Beat.

Net gains (losses) on derivative contracts for the three and nine months ended September 30, 2024, were $5 and $7, respectively, compared to $4 and $1 for the three and nine months ended September 30, 2023.

Results for the three and nine months ended September 30, 2024, were driven by foreign exchange contract gains of $7 and $6, respectively.

Legacy interest rate derivatives gains (losses) were $(1) and $1, for the three and nine months ended September 30, 2024, and $4 and $2 for the three and nine months ended September 30, 2023, inclusive of the effect of changes to counterparty credit adjustments as described below.

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

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

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

Inclusion of counterparty credit adjustments in the valuation of

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $(2) and $1 for the three and nine months ended September 30, 2024, respectively and $4 and $4 for the three and nine months ended September 30, 2023, respectively.

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

Commission Income and Commission Expense.

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.

Commission income for the three and nine months ended September 30, 2024, was $23 and $54 compared to $15 and $39, for the three and nine months ended September 30, 2023.

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

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 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.

The increase was primarily driven by commissions earned by Beat following the acquisition in August 2024 and full periods of production from Riverton Insurance Agency, acquired in August 2023, as well as organic growth during the quarter.

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

For the three and nine months ended September 30, 2024, commission expense of $9 and $27 compared to $8 and $22 in three and nine months ended September 30, 2023, driven primarily by the same factors as commission income.

For the MGAs in the Insurance Distribution segment, when sub-producers or agents are involved in procuring policies, the related contracts are evaluated in accordance with the ASC 606 revenue recognition guidance to determine the income statement presentation of commission revenue and commission expense.

Based on that evaluation, for certain MGAs commissions paid by the carrier for insurance placement are reported as revenue and the associated sub-producer commissions paid by the MGAs are reported as expense on the income statement.

For certain other MGAs, commissions paid by the carrier for insurance placement are recognized as revenue and there is no associated expense incurred or recognized.

Other Income.

Other income included various LFG fees, foreign exchange gains (losses) unrelated to investments or loss reserves and, during the three and nine months ended September 30, 2024, the gain on the sale of CNIC of $7, where Everspan sold its ownership in CNIC and CNIC's related insurance licenses for proceeds of approximately $19 million.

For the nine months ended September 30, 2024, other income included $12 related to the termination of a LFG postretirement plan.

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

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 $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.

Income (loss) on variable interest entities was $3 and $5 for the three and nine months ended September 30, 2024, compared to $1

and $— for the three and nine months ended September 30, 2023.

The three and nine months ended September 30, 2024, increased from the prior year period due to inclusion of the operating results of 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.

Additionally, the nine months ended September 30, 2023, included accelerated discount accretion within interest expense resulting from partial redemption of certain Puerto Rico VIE debt.

Refer to Note 9.

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

Loss and loss expenses incurred increased $114 and decreased $105 for the three and nine months ended September 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 June 30, Six Months Ended June 30,

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

2024 2023 2024 2023

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The variance within legacy financial guarantee was driven by activities in the RMBS portfolio in both years.

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 and existing programs as well as adverse development on its commercial auto program and the addition of personal nonstandard auto.

The primary driver was largely the negative impact of discount rates in 2024 compared to RMBS recoveries and the positive impact of discount rates on the RMBS portfolio in 2023.

The higher loss and loss adjustment expenses in Specialty P&C is primarily due to increased business production from new and existing programs as well as higher loss expectations on commercial auto risk and the addition of a personal nonstandard auto program.

General and Administrative Expenses (G&A).

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

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

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

2024 2023 2024 2023

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Total G&A expenses $ 55 $ 49 139 122

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;

The increase in Compensation G&A expenses during the three and nine months ended September 30, 2024, was due to higher compensation costs from a net increase in staffing from the development and growth of the Specialty Property & Casualty Insurance and Insurance Distribution segments, including the effect of Insurance Distribution acquisitions;

offset by lower current year period expenses for severance and incentive compensation.

Variances in Non-Compensation G&A expenses for the three and nine months ended September 30, 2024, as compared to the three

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

and nine months ended September 30, 2023, were driven by expenses associated with the strategic review and proposed sale of the Legacy Financial Guarantee Insurance segment, transaction expenses related to the acquisition of Beat, 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.

For the three and nine months ended September 30, 2024, expenses attributable to the sale of AAC and acquisition of Beat aggregated $16 and $35 compared to $1 and $2 for the three and nine months ended September 30, 2023, respectively.

Intangible Amortization.

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.

Insurance intangible amortization for the three and nine months ended September 30, 2024, was $6 and $25 an increase of $— and $7 as compared to the the three and nine months ended September 30, 2023.

The increase for the nine months ended September 30, 2024, was driven primarily by LFG de-risking activities.

Other intangible amortization for the three and nine months ended September 30, 2024, was $6, and $9 and $1 and $3 for the three and nine months ended September 30, 2023, respectively.

The increase in other intangible amortization for the three and nine months ended September 30, 2024 related to the Beat acquisition of $6.

Interest Expense.

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

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

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

Beginning in the third quarter of 2024, Ambac borrowed under a short-term credit facility to partially fund the purchase of 60% of Beat.

Interest expense under the credit facility is attributed to the Insurance Distribution segment.

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

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

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

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

2024 2023 2024 2023

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Other (principally Ambac UK) — — 1 1

Short-term borrowing 4 — 4 —

Total interest expense $ 20 $ 16 $ 52 $ 48

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.

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

If OCI does not approve payments on or the acquisition of surplus notes over time, the ongoing accretion of interest on the notes may impair AAC's ability to extinguish the notes in full.

If OCI does not approve payments on or the acquisition of surplus notes over time, the ongoing accretion of interest on the notes may impair AAC's ability to extinguish

the notes in full.

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 scheduled payment date of June 7, 2024, was denied by OCI.

AAC requested OCI to authorize a full or partial payment of accrued interest due on the surplus notes along with a full or partial payment of outstanding principal of the surplus notes on June 7, 2024, and made a similar request in September 2024, but such requests were denied.

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.

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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 $500 at June 30, 2024.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Total accrued and unpaid interest for surplus notes outstanding was $512 at September 30, 2024.

Provision for Income Taxes.

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.

The provision for income taxes primarily relates to international operations and was $3 and $10 for the three and nine months ended September 30, 2024, compared to $1 and $7 for the three and nine months ended September 30, 2023, an increase of $2 for the quarter.

Results of Operations by Segment

Legacy Financial Guarantee Insurance

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

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

2024 2023 2024 2023

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(1) Abbreviated as "EBITDA" in future references

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

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

The Legacy Financial Guarantee Insurance segment is in active runoff.

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

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.

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

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 investments income (loss) resulting from changes in market conditions and other performance factors.

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

Net premiums earned.

Net premiums earned decreased $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 decreased $0 and $2 for the three and nine months ended September 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.

Net investment income increased $8 and $15 for the three and nine months ended September 30, 2024, compared to the prior year period, driven by higher fair value net gains on pooled investment funds and higher yields in fixed income.

Net investment gains (losses), including impairments declined $2 for the three months ended September 30, 2024, and improved $6 million for the nine months ended September 30, 2024, compared to the prior year periods, due to variances from foreign exchange and favorable variances in net realized gains on sales and credit impairment allowance adjustments.

Foreign exchange gains (losses) of $(5) and $2 for the three months ended September 30, 2024 and 2023, respectively, and $(6) and $(2) for the nine months ended September 30, 2024, respectively, relate primarily to US dollar denominated securities held by Ambac UK.

Net gains (losses) on derivatives for the three and nine months ended September 30, 2024, declined $5 and less than $1, respectively, compared to the prior year periods mostly driven by the impact of counterparty credit adjustments on certain derivative assets.

Additionally, the nine months ended September 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 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.

Other income increased $3 and $20 for the three and nine months ended September 30, 2024, respectively.

The increases for the three and nine months ended September 30, 2024 compared to the prior year periods include $2 and $5, respectively, related to results of VIEs as discussed above under Consolidated Results - Income (Loss) on Consolidated Variable Interest Entities.

The increase for the nine months ended September 30, 2024 also included 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.

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

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

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

2024 2023 2024 2023

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Totals $ 17 $ (86) $ (9) $ (71)

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.

Loss and loss adjustment expenses for the three months ended September 30, 2024, were largely driven by the negative impact of discount rates on the structured finance portfolio.

Loss and loss adjustment expenses (benefit) for the nine months ended September 30, 2024, were largely driven by the net positive impact of discount rates on the structured finance 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 three and nine months ended September 30, 2023, was largely driven by RMBS recoveries, the positive impact of discount rates on the RMBS portfolio and assumption changes in the international portfolio (nine months only).

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

G&A Expenses.

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

Segment G&A expenses decreased during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, primarily due to lower legal defense costs and compensation costs.

Ambac Financial Group, Inc.

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.

Third Quarter 2024 Form 10-Q

Specialty Property and Casualty Insurance

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

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

2024 2023 2024 2023

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

Other income 7 — 7 —

Total 40 16 102 35

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

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

Twenty-four programs were authorized to issue policies as of September 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.

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

Accessing programs as a reinsurer provides Everspan the ability to diversify its risk profile, efficiently manage its exposure limits and underwrite programs in a cost efficient manner, amongst other benefits.

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

Accessing programs as a reinsurer provides Everspan the ability to diversify its risk profile (temporarily or long-term), efficiently manage its exposure limits and underwrite programs in a cost efficient manner, amongst other benefits.

Everspan may participate as a reinsurer on up to

30% of a program, which is in line with its strategy to generally retain up to 30% per program.

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

Loss and loss expenses incurred increased for the three and 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 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.

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

Everspan's loss ratio (including ULAE) was 74.4% for the three months ended September 30, 2024, versus 78.0% for the three months ended September 30, 2023, inclusive of prior accident years development of 0.2% and (1.8)%, respectively.

The change in the loss ratio was driven by current accident year reserve strengthening during the three months ended September 30, 2023 of 8.9%, primarily related to increased loss selections for commercial auto.

Partially offsetting the decrease in loss ratio from the three months ended September 30, 2023, was a personal nonstandard auto program (through assumed reinsurance) which became effective in October 2023.

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

In addition to the decrease in the Loss and LAE ratio for the three months ended September 30, 2024, compared to September 30, 2023, was a decrease in the benefit to acquisition costs resulting from sliding scale commission arrangements with program partners.

Such benefit reduced the Specialty Property and Casualty Insurance segments expense ratio by 1.9% and 8.1% for the three months ended September 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.

In third quarter 2024, Everspan and a commercial auto program partner agreed to non-renew an existing program where Everspan participated on a net retention basis.

However, Everspan continues to support the MGA via another commercial auto program which is fully ceded to a reinsurer.

The shift in the production from a participating program to a fully ceded program will result in a shift in future underwriting results to be within program fee revenue instead of net premiums earned and losses incurred.

Additionally during the third quarter 2024, as part of Everspan's insurance portfolio balancing, Everspan reduced its participation on an assumed reinsurance personal auto transaction effective October 2024.

The reduction of this program is expected to result in a lower net retention, lower net premiums earned and lower losses incurred.

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

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

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

Due to the inherent uncertainty underlying loss reserve estimates, the final

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

resolution of the estimated liability for loss and loss adjustment expenses will likely be higher or lower than the related loss reserves at the reporting date.

In addition, our estimate of losses and loss expenses may change.

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

Ambac Financial Group, Inc.

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.

General and administrative costs were relatively flat for the three and nine months ended September 30, 2024, relative to the three and nine months ended September 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 June 30, Six Months Ended June 30,

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

2024 2023 2024 2023

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EBITDA 2 4 10 10

Interest expense 4 — 4 —

Depreciation (1)

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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 $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.

The Insurance Distribution segment placed premiums for its carriers of approximately $145 and $288 for the three and nine months ended September 30, 2024, up $83 and $108 or 133% and 60%, respectively, as compared to the three and nine months ended September 30, 2023.

Higher premiums placed were driven by the acquisition of Beat effective July 31, 2024 and Riverton Insurance Agency in August 2023, as well as organic growth at All Trans Risk Solutions during the quarter.

The increase in premiums placed and changes to the mix of business written led to the growth in commission income and commission expense of 58% and 12%, respectively.

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

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.

Business underwritten within our Insurance Distribution business can be seasonal which may result in revenue and earnings

concentrations in the first half of the calendar year.

As the Insurance Distribution business grows, we make additional acquisitions and launch additional de novo underwriting units, revenue and earnings concentrations may increase or may shift, perhaps meaningfully.

G&A Expenses.

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.

G&A expenses for the three and nine months ended September 30, 2024, increased $9 as a result of the Beat acquisition in the third quarter of 2024.

LIQUIDITY AND CAPITAL RESOURCES

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AFG is organized as a legal entity separate and distinct 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.).

AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $147 as of September 30, 2024, and secondarily on distributions, expense sharing payments from its operating subsidiaries and third party capital (e.g.

from credit facilities and equity issuance).

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

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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.

AFG is required 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.

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

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

AFG received distributions

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Third Quarter 2024 Form 10-Q

from Cirrata of $7.4 and $5.3 during the nine months ended September 30, 2024 and 2023.

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.

(i) the payment of G&A expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) 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 and (iii) making investments in technology and other operational infrastructure to improve the operational effectiveness and efficiency of our business and to support their growth.

Funding puts, calls and other capital commitments could require payments from AFG, the magnitude of which may depend 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.

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Operating Companies' Liquidity

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

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

recoveries on claim payments;

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• 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.

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.

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.

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

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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 such request was declined.

• As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, AAC requested OCI to authorize a full or partial payment of accrued interest due on the surplus notes along with a full or partial payment of outstanding principal of the surplus notes on June 7, 2024, and made a similar request in September 2024, but such requests were denied.

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 $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.

AAC's future interest obligations on long-term debt include $512 of accrued and unpaid interest as of September 30, 2024, 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.

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Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Third Quarter 2024 Form 10-Q

Consolidated Cash Flow Statement Discussion

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

Six Months Ended June 30, 2024 2023

Nine Months Ended September 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 six months ended June 30, 2024 and 2023, respectively.

Cash used in financing activities includes $0 and $113 from such AAC payments, for the nine months ended September 30, 2024 and 2023, respectively.

Operating activities

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.

Net cash provided by operating activities during the nine months ended September 30, 2024 and 2023, was $28 and $112, respectively.

During the nine months ended September 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 nine months ended September 30, 2024 were positively impacted by the growth in the Specialty P&C Insurance and Insurance Distribution businesses 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 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.

Financing activities for the nine months ended September 30, 2024, included short-term borrowing of $147 in connection with the purchase of Beat, and paydowns and maturities of VIE debt obligations of $131.

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

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.

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

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All collateral obligations are currently met.

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.

Collateral posted by AFS totaled a net amount of $53 (cash and securities collateral of $25 and $27, respectively), including independent amounts, under these contracts at September 30, 2024.

Obligations under the Credit Agreement drawn upon to fund the acquisition of shares in Beat are secured on a first-priority basis by (i) a pledge by AFG of all of the capital stock of Everspan Holdings, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company and (ii) a pledge of all of the capital stock of Beat held by the Company.

BALANCE SHEET

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.

Total assets increased by $828 from December 31, 2023, to $9,256 at September 30, 2024, primarily due to the increase in intangible assets, goodwill, and other assets related to the Beat acquisition, and increases in premium receivables and reinsurance recoverables as a result of growth in the specialty P&C businesses.

Total liabilities increased by approximately $386 from December 31, 2023, to $7,383 as of September 30, 2024, primarily due to increase in short-term debt and other liabilities related to the Beat acquisition, higher loss and loss adjustment expense reserve and ceded premium payables from the specialty P&C businesses.

As of September 30, 2024, total Ambac Financial Group stockholders’ equity was $1,465, compared with total stockholders’ equity of $1,362 at December 31, 2023.

The increase is primarily driven by foreign currency translation gains of $51 and unrealized fixed maturity securities gains of $34 and the issuance of stock for the Beat acquisition of $29.

Investment Portfolio

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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

Third Quarter 2024 Form 10-Q

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

September 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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$ 2,299 $ 199 $ 16 $ 119 $ 2,634 $ 2,310 $ 162 $ 4 $ 188 $ 2,664

(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.

(1) Includes investments denominated in non-US dollar currencies with a fair value of £347 ($464) and €21 ($23) as of September 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.

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:

The following charts provide the ratings (1) distribution of the fixed maturity investment portfolio based on fair value at September 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 17% and 21% of the June 30, 2024, and December 31, 2023, combined fixed maturity portfolio, respectively.

(2) Below investment grade and not rated bonds insured by Ambac represent 18% and 21% of the September 30, 2024, and December 31, 2023, combined fixed maturity portfolio, respectively.

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Third Quarter 2024 Form 10-Q

Premium Receivables

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

Ambac's premium receivables increased to $342 at September 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 June 30, 2024, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $232 and $85, respectively.

At September 30, 2024, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $227 and $114, 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 $66 from its reinsurers at June 30, 2024.

Ambac benefited from letters of credit and collateral amounting to approximately $76 from its reinsurers at September 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.

As of September 30, 2024 and December 31, 2023, reinsurance recoverable on paid and unpaid losses were $311 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 $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.

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 $224 at September 30, 2024, (ii) intangible assets established as part of acquisitions in the Insurance Distribution business of $363 at September 30, 2024, and (iii) indefinite-lived intangible assets in the Specialty P&C business as part of its acquisitions of $11 at September 30, 2024.

As of September 30, 2024 and December 31, 2023, intangible assets were $598 and $307, respectively.

The increase is primarily driven by the intangible asset related to the acquisition of Beat of $312, partially offset by amortization of $33.

Loss and Loss Expense Reserves and Subrogation Recoverable

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

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

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of September 30, 2024 and December 31, 2023, were $814 and $756, respectively.

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

June 30, 2024:

September 30, 2024:

December 31, 2023:

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Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Third 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 June 30, 2024 and December 31, 2023:

June 30, 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 September 30, 2024 and December 31, 2023:

September 30, 2024:

December 31, 2023:

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Totals $ 2,736 $ 700 $ (195) $ (15) $ 491 $ 3,838 $ 780 $ (194) $ (28) $ 559

(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.

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves were $320 and $26 respectively, at September 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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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.

The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at September 30, 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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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 occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for Ambac, including (without limitation)

impairing the ability of AAC to honor its financial obligations, particularly its outstanding surplus note and preferred stock obligations;

the initiation of rehabilitation proceedings against AAC;

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Structured Finance Variability:

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

Using the approaches described above, the possible increase in loss reserves for structured finance credits for which we have an estimate of expected loss at September 30, 2024, could be approximately $50 and there can be no assurance that losses may not exceed such amounts.

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.

Third Quarter 2024 Form 10-Q

Domestic Public Finance Variability:

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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.

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.

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 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.

For the public finance credits for which we have an estimate of expected loss at September 30, 2024, the sum of all the highest stress case loss scenarios is $190 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 $45 greater than the loss reserves at June 30, 2024.

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

Long-term Debt

Short and Long-term Debt

Short-term debt consists of a Credit Facility that was issued in the third quarter of 2024 by our insurance distribution segment, which is secured on a first-priority basis by (i) a pledge by AFG of all of the capital stock of Everspan Holdings, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company and (ii) a pledge by the Purchaser of all of the capital stock of Beat held by Purchaser.

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

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

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

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

September 30,

2024 December 31, 2023

Short-term debt

Credit Facility $ 148 $ —

Total short-term debt $ 148 $ —

Long-term debt

Surplus notes $ 495 $ 491

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The increase in long-term debt from December 31, 2023, resulted from accretion on the carrying value of surplus notes and Ambac UK debt.

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

VARIABLE INTEREST ENTITIES

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ACCOUNTING STANDARDS

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

Please refer to Note 1.

Business and Basis of Presentation to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for a discussion of new accounting pronouncements and the potential impact on Ambac’s financial condition and results of operations.

INSURANCE STATUTORY BASIS FINANCIAL RESULTS

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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 $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.

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $789 and $1,093 at September 30, 2024, respectively, as compared to $897 and $1,201 at December 31, 2023, respectively.

As of September 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 $512 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 $6 for the six months ended June 30, 2024.

The primary drivers to the net decrease in policyholder surplus were the statutory net loss of $43 for the nine months ended September 30, 2024 and an increase in investments that are non-admitted under statutory accounting.

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

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

(i) loss reserve development, (ii) approval by OCI of payments on surplus notes, (iii) ongoing

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

Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $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.

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $117 at September 30, 2024, as compared to $108 at December 31, 2023.

The drivers within the period was net income at Everspan Indemnity Insurance Company, including its subsidiaries, of $7 during the nine months ended September 30, 2024, which includes a net gain related to Everspan's sale of CNIC of approximately $8 million.

Additionally, Everspan policyholders surplus increased due to changes in non-admitted assets.

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 £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.

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 £515 at September 30, 2024, as compared to £489 at December 31, 2023.

At September 30, 2024, the carrying value of cash and investments was £549, 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 and investment gains, partially offset by foreign exchange losses, general and administrative expenses and tax payments.

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

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NON-GAAP FINANCIAL MEASURES

($ in millions)

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

EBITDA, Adjusted Net Income and Adjusted Book Value.

These amounts are derived from our consolidated financial information, but are not presented in our consolidated financial statements prepared in accordance with GAAP.We present non-GAAP supplemental financial information because we believe such information is of interest to the investment community, and that it provides greater transparency and enhanced visibility into the underlying drivers and performance of our businesses on a basis that may not be otherwise apparent on a GAAP basis.

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

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

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

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

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

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

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, would occur in future reporting periods.

The following paragraphs define each non-GAAP financial measure.

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

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

intangible assets.

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

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

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

Three Months Ended September 30, 2024 Three Months Ended September 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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$ 13 $ 9 $ 2 $ (18) $ 6 $ 91 $ — $ 4 $ (4) $ 91

(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.

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $(0.3) and $0.6 for the three months ended September 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

Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023

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EBITDA $ 101 $ 10 $ 10 $ (33) $ 87 $ 96 $ (1) $ 10 $ (8) $ 98

(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.

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $1.1 and $1.8 for the nine months ended September 30, 2024 and 2023, respectively.

These noncontrolling interests are in the Insurance Distribution segment.

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

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

Ambac Financial Group, Inc.

Third Quarter 2024 Form 10-Q

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

Three Months Ended June 30, 2024 2023

Three Months Ended September 30,

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

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Adjusted Net Income (Loss) $ (19) $ (0.46) $ 94 $ 2.00

Ambac Financial Group, Inc.

Second Quarter 2024 Form 10-Q

Six Months Ended June 30, 2024 2023

Nine Months Ended September 30,

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

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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:

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

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

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Adjusted book value 1,389 $ 29.28 $ 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).

The increase in Adjusted Book Value since December 31, 2023, was primarily attributable the strengthening of the British Pound and the issuance on stock in connection with the acquisition of Beat for $29.

Quantitative and Qualitative Disclosure About Market Risk

As of September 30, 2024, there are no material changes in the market risks that the Company is exposed to compared to December 31, 2023.

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