OCTAVE SPECIALTY GROUP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ($ and £ in millions) The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our consolidated financial statements with the following: • A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results; • Context to the unaudited consolidated financial statements; and • Information that allows assessment of the likelihood that past performance is indicative of future performance. The following discussion should be read in conjunction with our consolidated financial statements in Part I, Item 1 and the matters described under Part II, Item 1A Risk Factors in this Quarterly Report and under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023. Refer to Item 1. Business and Note 1. Business and Basis of Presentation for a description of our business and our key strategies to achieve our primary goal to maximize shareholder value. Organization of Information MD&A includes the following sections: Page Overview 39 Critical Accounting Estimates 42 Financial Guarantees in Force 42 Results of Operations 45 Liquidity and Capital Resources 51 Balance Sheet 53 Variable Interest Entities 58 Accounting Standards 58 U.S. Insurance Statutory Basis Financial Results 58 Ambac UK Financial Results under UK Accounting Principles 58 Non-GAAP Financial Measures 58 OVERVIEW AFG Net Assets AFG has the following net assets to support its goals and strategies, including the development and growth of its Specialty Property and Casualty Insurance and Insurance Distribution businesses, acquisitions and capital management. 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 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 Cash and short-term investments $ 97 $ 156 Other investments (1) 32 32 Other net (liabilities) assets 18 23 Total $ 147 $ 211 (1) Includes strategic minority investments in insurance services businesses of $26. The decrease in AFG net assets, excluding its equity investments in subsidiaries, during 2024 was driven by net cash outflows from the acquisition of Beat Capital Partners Limited ("Beat"), transaction costs associated with the sale of AAC, and other operating expenses, partially offset by net realized gains on strategic investments, interest income and distributions received from subsidiaries. Ambac Financial Group, Inc. 39 Third Quarter 2024 Form 10-Q Table of Contents AFG's subsidiaries/businesses are divided into three segments with results for the three and nine months ended September 30, 2024, and 2023, as follows: Three Months Ended September 30, 2024 Three Months Ended September 30, 2023 ($ 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 Premiums placed $ 145 $ 145 $ 62 $ 62 Gross premiums written $ (2) $ 115 114 $ 2 $ 77 80 Net premiums written (2) 33 31 2 25 27 Total revenues 44 40 24 $ 6 114 41 16 15 $ 3 74 Total expenses 54 31 32 24 141 (28) 15 12 7 6 Pretax income (loss) (9) 9 (8) (18) (27) 69 — 2 (4) 68 EBITDA (2) 13 9 2 (18) 6 91 — 4 (4) 91 Ambac Stockholders’ Equity (1) 943 134 242 147 1,465 836 116 103 210 1,265 Non-redeemable noncontrolling interest 51 — $ 154 205 51 2 53 Total stockholders’ equity 994 134 396 147 1,670 887 118 103 210 1,318 Redeemable noncontrolling interest 204 204 22 22 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 Premiums placed $ 288 $ 288 $ 180 $ 180 Gross premiums written $ 2 $ 323 $ 325 $ 12 $ 183 $ 195 Net premiums written $ 1 $ 91 $ 92 $ (43) $ 43 $ — Total revenues $ 151 $ 102 $ 55 $ 14 $ 321 $ 112 $ 35 $ 39 $ 7 $ 194 Total expenses $ 122 $ 92 $ 58 $ 48 $ 320 $ 83 $ 36 $ 33 $ 14 $ 166 Pretax income (loss) $ 28 $ 10 $ (3) $ (34) $ 1 $ 29 $ (1) $ 7 $ (8) $ 28 EBITDA (2) $ 101 $ 10 $ 10 $ (33) $ 87 $ 96 $ (1) $ 10 $ (8) $ 98 (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 ("CNIC"), which was one of Everspan's admitted carriers. 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. Sale of AAC On June 4, 2024, AFG entered into a stock purchase agreement with American Acorn Corporation (the “Buyer”), a Delaware corporation owned by funds managed by Oaktree Capital Management, L.P., pursuant to which and subject to the conditions set forth therein, AFG will sell all of the issued and outstanding shares of common stock of AAC, a wholly-owned subsidiary of AFG, to Buyer for aggregate consideration of $420 in cash (the "Sale"). The terms of the Sale as contemplated by the stock purchase agreement provide that, at the closing of the Sale (the “Closing”), Buyer will acquire complete common equity ownership of AAC and all of its wholly owned subsidiaries, including Ambac UK. In connection with and pursuant to the stock purchase agreement, AFG has agreed to issue to Buyer a warrant exercisable for a number of shares of common stock, par value $0.01, of AFG representing 9.9% of the fully diluted shares of AFG’s common stock as of March 31, 2024, pro forma for the issuance of the warrant The warrant will have an exercise price per share of $18.50 with a six and a half-year term from the date of issuance and will be immediately exercisable. Payment of the exercise price may be settled, at AFG’s option, by way of a cash exercise or by net share settlement. Refer to Note 1. Business and Basis of Presentation for further details on the pending sale of AAC. This pending 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. 40 Third Quarter 2024 Form 10-Q Table of Contents 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 Carrying value of noncontrolling interest 51 455 Less: carrying amount of AACs net assets 991 Less: estimated incremental transaction expenses 13 Impact of sale of AAC on stockholders' equity $ (549) Reclassification of Accumulated Other Comprehensive Income to earnings $ (90) Total (loss on disposal) recognized in net income $ (639) Purchase of Beat On June 4, 2024, AFG entered into a share purchase agreement (the “Beat Purchase Agreement”), by and among AFG, Cirrata V LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of AFG (the “Purchaser”), certain sellers set forth therein (the “Sellers”) and Beat, pursuant to which the Purchaser purchased from the Sellers approximately 60% of the entire issued share capital of Beat, for total consideration, as of the closing date, of approximately $281, of which approximately $252 was paid in cash and the remainder of which was satisfied through the issuance of 2,216,023 shares of AFG common stock. The acquisition closed with an effective date of July 31, 2024. Beat’s management team and Bain Capital Credit LP (together, the “Rollover Shareholders”) each retained approximately 20% of Beat’s issued share capital immediately after closing. Refer to Note 1. Business and Basis of Presentation for further details on the acquisition of Beat. Banking Sector Crisis of 2023 The collapse of several banks in early 2023 and extending into 2024 precipitated a sudden loss of confidence in the banking system, prompting bank runs and the U.S. government to provide direct support to failed banks and, through an expansive emergency lending program, the system more broadly. In the U.S., this crisis was in part a consequence of rising interest rates, resulting in large declines in the market value of U.S. Treasury and government-backed debt held by banking institutions. The risk of additional bank financial stress and/or failures due to asset-liability mismatches or other risks, such as outsized exposure to commercial real estate, remains. Despite actions by government agencies and regulators to mitigate the consequences of these bank failures by providing liquidity and guaranteeing uninsured deposits, there is no guarantee that they will provide similar support in the event of additional bank failures. In Europe, regulators stepped in to facilitate mergers of stressed banks into more stable institutions. The ability or willingness of healthy banks to merge with stressed banks in the future is also subject to significant uncertainty. Ambac's cash balances held at banks was $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 $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 $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 $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 A- as of September 30, 2024. Financial Statement Impact of Foreign Currency: 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) $ (8) $ (2) Gain (losses) on foreign currency translation (net of tax) 51 8 Unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax) (7) (2) Impact on total comprehensive income (loss) (2) $ 36 $ 4 (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, Ambac Financial Group, Inc. 41 Third Quarter 2024 Form 10-Q Table of Contents 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 will require registrants to disclose extensive climate-related information in their Form 10-K annual reports and registration statements. The Final Rule was scheduled to become effective May 28, 2024; however, the SEC has voluntarily stayed the rule’s effective date pending judicial review of legal challenges. The compliance dates for accelerated filers for annual reports or registration statements that include financial statements for the year ending December 31 are phased in from 2026 through 2031. Depending on when the legal challenges are resolved, the compliance dates may be retained or delayed. Ambac is reviewing the Final Rule and is currently assessing our related compliance obligations and other effects on our operations. CRITICAL ACCOUNTING ESTIMATES Ambac’s Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the use of material estimates and assumptions. For a discussion of Ambac’s critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2023. 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 Financial guarantee products were sold in three principal markets: U.S. public finance, U.S. structured finance and international finance. Net par exposures within the U.S. public finance market include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds. Guaranteed net par outstanding includes the exposures of policies insuring variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC. Guaranteed net par outstanding 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 September 30, 2024 and December 31, 2023. ($ in billions) September 30, 2024 December 31, 2023 Variance Total $ 18,756 $ 19,541 $ (785) (4) % ACC $ 2,677 $ 3,504 $ (99) (4) % 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, 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, 2023 Public Finance (1) $ 6,919 $ 7,562 Structured Finance 2,870 3,315 International Finance 8,967 8,664 Total net par outstanding $ 18,756 $ 19,541 (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. 42 Third Quarter 2024 Form 10-Q Table of Contents 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: Sector Co. Bond Kind Country-Bond Type Ambac Ratings (1) Ultimate Maturity Year Net Par Outstanding % of Total Net Par Outstanding IF AUK Investor Owned Utility Gas - unsecured UK-Utility BBB+ 2037 $ 971 5.2 % IF AUK PFI - Hospitals UK-Infrastructure BBB+ 2046 776 4.1 % IF AUK Investor Owned Utility Other - unsecured UK-Utility A- 2035 752 4.0 % 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 % IF AUK PFI - Accommodation UK-Infrastructure A- 2038 479 2.6 % PF AAC US State Lease/Appropriation US-Lease and Tax-backed Revenue BBB 2036 357 1.9 % IF AUK PFI - Hospitals UK-Infrastructure BBB- 2040 329 1.8 % Total $ 6,307 33.7 % PF = Public Finance, SF = Structured Finance, IF = International Finance AAC = Ambac Assurance, AUK = Ambac UK (1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG denotes credits deemed below investment grade. 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 September 30, 2024: Currency Net Par Amount Outstanding in Base Currency Net Par Amount Outstanding in U.S. Dollars U.S. Dollars $ 9,927 $ 9,927 British Pounds £ 5,746 7,682 Euros € 779 867 Australian Dollars A$ 405 280 Total $ 18,756 Ambac Financial Group, Inc. 43 Third Quarter 2024 Form 10-Q Table of Contents 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 September 30, 2024 and December 31, 2023. BIG is defined as those exposures with an Ambac internal credit rating below BBB-: Note: AAA is less than 1% in both periods. (1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. Summary of Below Investment Grade Exposure: Net Par Outstanding Bond Type September 30, 2024 December 31, 2023 Public Finance: Military Housing $ 357 $ 361 Lease and tax-backed revenue 76 80 General Obligations 77 85 Other 33 37 Total Public Finance 543 563 Structured Finance: RMBS 1,526 1,642 Student Loans 167 264 Total Structured Finance 1,693 1,906 International Finance: Transportation 303 307 Sovereign/sub-sovereign 121 693 Other 1 1 Total International Finance 425 1,001 Total $ 2,661 $ 3,470 The net decline in below investment grade exposures is primarily due to de-risking activities and an upgrade of a sub-sovereign exposure. Below investment grade exposures could increase as a relative proportion of the guarantee portfolio given that Ambac hasn't written any new financial guarantee business since 2008 and stressed borrowers generally have less ability to prepay or refinance their debt. Accordingly, due to these and other factors, it is not unreasonable to expect the proportion of below investment grade exposure in the guarantee portfolio to increase in the future. Ambac Financial Group, Inc. 44 Third Quarter 2024 Form 10-Q Table of Contents Results of Operations Consolidated Results A summary of our financial results is shown below: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Gross premiums written $ 114 $ 80 $ 325 $ 195 Net premiums written 31 27 92 — Revenues: Net premiums earned $ 33 $ 18 $ 99 $ 47 Commission income 23 15 54 39 Program fees 4 2 10 6 Net investment income 38 30 116 100 Net investment gains (losses), including impairments (1) 1 3 (7) Net gains (losses) on derivative contracts 5 4 7 1 Income (loss) on variable interest entities 3 1 5 — Other income 10 2 28 7 Total revenue 114 74 321 194 Expenses: Losses and loss adjustment expenses (benefit) 38 (76) 54 (51) Amortization of deferred acquisition costs, net 6 2 16 5 Commission expense 9 8 27 22 General and administrative expenses 55 49 139 122 Intangible amortization 13 7 33 21 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 Less: 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 nine months ended September 30, 2024 and 2023, respectively. Gross Premiums Written. 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 Legacy Financial Guaranty Insurance $ (2) $ 2 $ 2 $ 12 Specialty Property & Casualty Insurance 115 77 323 183 Total $ 114 $ 80 $ 325 $ 195 Legacy Financial Guarantee Insurance gross written premiums relate to changes in expected and contractual premium cash flows for existing financial guarantees in force. Specialty Property & Casualty Insurance growth in gross premiums written 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 $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 Legacy Financial Guaranty Insurance $ (2) $ 2 $ 1 $ (43) Specialty Property & Casualty Insurance 33 25 91 43 Total $ 31 $ 27 $ 92 $ — 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 $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, 2 2 2 2 Legacy Financial Guaranty Insurance $ 6 $ 6 $ 19 $ 20 Specialty Property & Casualty Insurance 27 12 80 27 Total $ 33 $ 18 $ 99 $ 47 The increase in Specialty Property & Casualty Insurance was driven by new programs, including premiums earned via assumed reinsurance, and growth in existing programs. Net Investment Income. Net investment income primarily consists of interest and net discount accretion on fixed maturity securities classified as available-for-sale, interest and changes in fair value of fixed maturity securities classified as trading and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets. Fixed maturity securities include investments in Ambac-insured securities that are made opportunistically based on their risk/reward and asset-liability management characteristics. Investments in pooled investment funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method. These funds and other investments are reported in Other investments on the Unaudited Consolidated Balance Sheets, which consists primarily of pooled fund investments in diversified asset classes. For further information about investment funds held, refer to Note 4. Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q. Net investment income for the periods presented were driven by the Legacy Ambac Financial Group, Inc. 45 Third Quarter 2024 Form 10-Q Table of Contents Financial Guarantee segment; other segments' results were not significant. Net investment income from Ambac-insured securities; available-for-sale and short-term securities, other than Ambac-insured; and Other investments is summarized in the table below: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Securities available-for-sale and short-term other than Ambac-insured $ 19 $ 18 59 50 Other investments (includes trading securities) 14 6 39 33 Securities available-for-sale: Ambac-insured 6 6 $ 18 $ 17 Net investment income (loss) $ 38 $ 30 $ 116 $ 100 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net gains (losses) on securities sold or called $ 3 $ (1) $ 9 $ (3) Net foreign exchange gains (losses) (5) 2 (6) (2) Credit impairments — (1) (1) (2) Intent / requirement to sell impairments — — — — Net investment gains (losses), including impairments $ (2) $ 1 $ 3 $ (7) 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. When credit impairments are recorded, any non-credit related impairment amounts on the securities are recorded in other comprehensive income. If management either: (i) has the intent to sell its investment in a debt security or (ii) determines that the Company is more likely than not will be required to sell the debt security before its anticipated recovery, then the amortized cost of the security is written-down to fair value with a corresponding impairment charge recognized in earnings. 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 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 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. 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. In periods when credit spreads are stable, counterparty credit adjustments will generally have a proportionate offsetting impact to gains or losses on derivative assets, relative to fully collateralized assets. In addition to the impact of interest rates on the underlying derivative asset values, the changes in counterparty credit adjustments are driven by movement of credit spreads. 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 Ambac Financial Group, Inc. 46 Third Quarter 2024 Form 10-Q Table of Contents 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 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 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. Included within Income (loss) on variable interest entities are income statement amounts relating to LFG-VIEs, consolidated under the Consolidation Topic of the ASC as a result of Ambac's variable interest arising from financial guarantees written by Ambac's subsidiaries, including gains or losses attributable to consolidating or deconsolidating LFG-VIEs during the periods reported. Generally, the Company’s consolidated LFG-VIEs are entities for which Ambac has provided financial guarantees on all of or a portion of its assets or liabilities. Income (loss) on variable interest entities was $3 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. Losses and Loss Adjustment Expenses (Benefit). 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Legacy financial guarantee $ 17 $ (86) $ (9) (71) Specialty property and casualty insurance 20 10 63 20 Total $ 38 $ (76) 54 (51) The variance within legacy financial guarantee was driven by activities in the RMBS portfolio in both years. 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Compensation $ 24 $ 18 $ 58 $ 52 Non-compensation 31 31 81 70 Total G&A expenses $ 55 $ 49 139 122 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. 47 Third Quarter 2024 Form 10-Q Table of Contents 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 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 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. 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Surplus notes $ 15 $ 16 $ 47 $ 47 Tier 2 Notes — — — 1 Other (principally Ambac UK) — — 1 1 Short-term borrowing 4 — 4 — Total interest expense $ 20 $ 16 $ 52 $ 48 As required by the terms of surplus notes and/or otherwise, AAC will continue to seek OCI’s approval to make payments of principal and interest on its surplus notes. AAC intends to make these requests at least four times a year with respect to payment of a partial amount, as well as the full amount, of the principal and interest then due, unless otherwise directed by OCI. OCI’s approval of AAC’s requests for surplus note payments may be granted or denied in OCI’s sole discretion. Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments. Ambac can provide no assurance as to when or if surplus note principal and interest payments will be made. 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 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. Interest will accrue, compounded on each anniversary of the original scheduled payment date or scheduled maturity date, on any unpaid principal or interest through the actual date of payment, at 5.1% per annum. Holders of surplus notes have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount. 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 $512 at September 30, 2024. Provision for Income Taxes. 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenues: Net premiums earned $ 6 $ 6 $ 19 $ 20 Net investment income 34 27 105 90 Net investment gains (losses), including impairments (1) 1 (1) (7) Net gains (losses) on derivative contracts (1) 4 1 2 Other income 6 3 27 7 Total 44 41 151 112 Expenses: Loss and loss expenses (benefit) 17 (86) (9) (71) General and administrative expenses 14 35 58 87 Total 31 (50) 49 16 Earnings before interest, taxes, depreciation and amortization (1) 13 91 101 96 Interest expense 16 16 48 48 Depreciation — — 1 1 Intangible amortization 6 6 25 18 Pretax income (loss) $ (9) $ 69 $ 28 $ 29 Stockholders equity (2) $ 943 $ 836 (1) Abbreviated as "EBITDA" in future references Ambac Financial Group, Inc. 48 Third Quarter 2024 Form 10-Q Table of Contents (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, 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 $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 $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 $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. Losses and Loss Adjustment Expenses (Benefit). The following provides details for losses and loss adjustment expenses (benefit) incurred for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Structured Finance $ 18 $ (80) $ (3) $ (59) Domestic Public Finance — (8) 2 (7) Other, including International Finance (2) 2 (7) (5) Totals $ 17 $ (86) $ (9) $ (71) 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 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. 49 Third Quarter 2024 Form 10-Q Table of Contents Specialty Property and Casualty Insurance Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Gross premiums written $ 115 $ 77 $ 323 $ 183 Net premiums written 33 25 91 43 Revenues: Net premiums earned $ 27 $ 12 $ 80 $ 27 Program fees 4 2 10 6 Investment income 2 1 5 3 Net investment gains (losses), including impairments — — — — Other income 7 — 7 — Total 40 16 102 35 Expenses: Losses and loss expenses incurred 20 10 63 20 Amortization of deferred acquisition costs, net 6 2 16 5 General and administrative expenses 5 4 13 12 Total 31 15 92 36 EBITDA 9 $ — 10 $ (1) Pretax income (loss) $ 9 $ — $ 10 $ (1) Retention Ratio (1) 28.4% 32.0% 28.3% 23.6% Loss and LAE Ratio (2) 74.4% 78.0% 78.4% 73.8% Expense Ratio (3) 26.1% 28.5% 24.4% 38.5% Combined Ratio (4) 100.5% 106.5% 102.8% 112.3% Ambac's stockholders equity (5) $ 134 $ 116 (1) Retention ratio is defined as net premiums written divided by gross premiums written (2) Loss and LAE ratio is defined as losses and loss expenses incurred divided by net premiums earned (3) Expense Ratio is defined as acquisition costs and general and administrative expenses, reduced by program fees divided by net premiums earned (4) Combined ratio is defined as Loss and LAE ratio plus Expense Ratio (5) Represents Ambac stockholders equity in the Specialty Property and Casualty Insurance segment, including intercompany eliminations. The Specialty Property and Casualty Insurance segment has grown significantly since underwriting its first program in May 2021. 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 (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 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 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. The impact of inflation on ultimate loss reserves is difficult to estimate, particularly in light of recent disruptions to the judicial system, supply chains and labor markets. In addition, going forward, we may not be able to offset the impact of inflation on our loss costs with sufficient price increases. 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 Ambac Financial Group, Inc. 50 Third Quarter 2024 Form 10-Q Table of Contents 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. 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Premiums placed $ 145 $ 62 $ 288 $ 180 Commission income $ 23 $ 15 $ 54 $ 39 Commission expense 9 8 27 22 Net commissions 14 6 27 17 Expenses: General and administrative expenses (1) 12 3 18 7 EBITDA 2 4 10 10 Interest expense 4 — 4 — Depreciation (1) — — — — Intangible amortization 6 1 9 3 Pretax income (loss) $ (8) $ 2 $ (3) $ 7 Ambac's stockholders equity (2) $ 242 $ 103 (1) The Consolidated Statements of Comprehensive Income presents the sum of these items as General and Administrative Expenses. (2) Represents the share of Ambac stockholders equity for each subsidiary within the Insurance Distribution segment, including intercompany eliminations. Ambac's Insurance Distribution businesses are compensated for their services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices. Commission revenues are usually based on a percentage of the premiums placed. 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 $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. 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 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 Holding Company Liquidity AFG is organized as a legal entity separate and distinct from its operating subsidiaries. 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. In connection with the acquisition, Cirrata incurred $150 of debt maturing in 364 days funded by a global bank (the "Credit Facility"). Repayment of debt under the Credit Facility is guaranteed by AFG. 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. The $4 reimbursement was approved by OCI and was paid to AFG during the second quarter of 2024. As further described in Note 1. Business and Basis of Presentation, AFG entered into a stock purchase agreement, pursuant to which and subject to the conditions set forth therein, AFG will sell all of the issued and outstanding shares of common stock of AAC. The sale of AAC is expected to close in the fourth quarter of 2024 or the first quarter of 2025 and, accordingly, it is unlikely for AFG to receive this reimbursement in the future. • If AFG were to not sell AAC, its ability to receive dividends from AAC and the timing of any such potential dividends would depend on the results of the OCI Capital Model, regulatory approval and the satisfaction of certain obligations senior to AFG's equity interest (e.g. surplus notes). • Subject to the approvals required for the sale of AAC as described in Note 1. Business and Basis of Presentation, AFG will receive $420 of proceeds at closing less applicable legal, advisory and other expenses incurred in connection with the sale. • Everspan's ability to make future dividend payments will mostly depend on its future profitability relative to its capital needs to support growth. Everspan is not expected to pay dividends in the near term. • Cirrata does not have any regulatory restrictions on its ability to make distributions. AFG received distributions Ambac Financial Group, Inc. 51 Third Quarter 2024 Form 10-Q Table of Contents 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) 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. In the opinion of the Company’s management the net assets and expected funding sources of AFG are currently sufficient to meet AFG’s current liquidity requirements. However, events, opportunities, acquisitions, the exercise of puts and calls, the need to refinance outstanding debt, or other circumstances could require AFG to seek additional capital (e.g. through the issuance of debt, equity or hybrid securities). The Credit Facility includes covenants that restrict our ability to manage capital resources by limiting, among other actions, the issuance of debt or capital stock; the creation of liens; the disposition of assets; engaging in transactions with affiliates; making restricted payments, including dividends and the purchase or redemption of capital stock; and making acquisitions and other investments. The Credit Facility also requires the prepayment of the borrowings thereunder with proceeds of certain debt or equity issuances and certain asset sales. These requirements will impact our financial and operational flexibility while the Credit Facility remains in place. Operating Companies' Liquidity Insurance Sources of liquidity for the Company’s insurance subsidiaries are funds generated from premiums; recoveries on claim payments; reinsurance recoveries; fees; investment income and maturities and sales of investments. • See Note 6. Insurance Contracts to the Consolidated Financial Statements included in Part I, Item 1., in this Form 10-Q for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK. Termination of financial guarantee policies on an accelerated basis may adversely impact AAC’s liquidity. Cash provided from these sources is used primarily for claim payments and commutations, loss expenses and acquisition costs (Specialty Property & Casualty Insurance segment only), debt service on outstanding debt (Legacy Financial Guarantee segment only), G&A expenses, reinsurance payments and purchases of securities and other investments, some of which may not be immediately convertible into cash. • As required by the terms of surplus notes and/or otherwise, AAC will continue to seek OCI’s approval to make payments of principal and interest on its surplus notes. AAC intends to make these requests at least four times a year with respect to payment of a partial amount, as well as the full amount, of the principal and interest then due, unless otherwise directed by OCI. OCI’s approval of AAC’s requests for surplus note payments may be granted or denied in OCI’s sole discretion. Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments. Ambac can provide no assurance as to when or if surplus note principal and interest payments will be made. 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. • 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 $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. AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and G&A expenses. Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI. Insurance subsidiaries manage their liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times. It is the opinion of the Company’s management that the insurance subsidiaries’ near term liquidity needs will be adequately met from the sources described above. Insurance Distribution: The liquidity requirements of our Insurance Distribution subsidiaries are met primarily by funds generated from commission receipts (both base and profit commissions). Base commissions are generally received monthly, whereas profit commissions are received only if the business underwritten is profitable. Cash provided from these sources is used primarily for commissions paid to sub-producers, G&A expenses and distributions to AFG and other members. Ambac Financial Group, Inc. 52 Third Quarter 2024 Form 10-Q Table of Contents Consolidated Cash Flow Statement Discussion The following table summarizes the net cash flows for the periods presented. Nine Months Ended September 30, 2024 2023 Cash provided by (used in): Operating activities $ 28 $ 112 Investing activities (200) 521 Financing activities (1) 14 (392) Foreign exchange impact on cash and cash equivalents — — Net cash flow $ (158) $ 241 (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 $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 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 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). Collateral 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. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral posting or a termination have been triggered. All collateral obligations are currently met. 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 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 Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan Group, Ambac UK and AFG. Refer to "Description of the Business – Investments and Investment Policy" located in Part I. Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for further description of Ambac's investment policies and applicable regulations. Ambac's investment policies and objectives do not apply to the assets of VIEs consolidated as a result of financial guarantees written by its insurance subsidiaries. Ambac Financial Group, Inc. 53 Third Quarter 2024 Form 10-Q Table of Contents 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 Fixed maturity securities $ 1,599 $ 142 $ — $ — $ 1,740 $ 1,575 $ 121 $ — $ 14 $ 1,710 Fixed maturity securities - trading — — — — — 27 — — — 27 Short-term 145 58 16 86 305 225 41 4 156 426 Other investments 528 — — 32 561 457 — — 18 475 Fixed maturity securities pledged as collateral 27 — — — 27 27 — — — 27 Total investments (1) $ 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 £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. Other investments primarily consist of diversified interests in pooled funds. Refer to Note 4. 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 September 30, 2024 and December 31, 2023: (1) Ratings are based on the lower of Moody’s or S&P ratings. If ratings are unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating. (2) Below investment grade and not rated bonds insured by Ambac represent 18% and 21% of the September 30, 2024, and December 31, 2023, combined fixed maturity portfolio, respectively. Ambac Financial Group, Inc. 54 Third Quarter 2024 Form 10-Q Table of Contents Premium Receivables 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 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: Currency Premium Receivable in Payment Currency Premium Receivable in U.S. Dollars U.S. Dollars $ 262 $ 262 British Pounds £ 50 67 Euros € 11 12 Total $ 342 Reinsurance Recoverable on Paid and Unpaid Losses Ambac has reinsurance in place pursuant to surplus share treaty and facultative agreements. To minimize its exposure to losses from reinsurers, Ambac (i) monitors the financial condition of its reinsurers; (ii) is entitled to receive collateral from its reinsurance counterparties under certain reinsurance contracts; and (iii) has certain cancellation rights that can be exercised in the event of rating agency downgrades of a reinsurer (among other events and circumstances). Those reinsurance counterparties that do not currently post collateral are well capitalized, highly rated, authorized capacity providers. Ambac benefited from letters of credit and collateral amounting to approximately $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 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 $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 Loss and loss expense reserves are based upon estimates of the ultimate aggregate losses inherent in insurance policies issued to beneficiaries, excluding consolidated VIEs. The evaluation process for determining the level of reserves is subject to certain estimates and judgments. Refer to the "Critical Accounting Policies and Estimates" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2. Basis of Presentation and Significant Accounting Policies and Note 8. Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for further information on loss and loss expenses. The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of 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: September 30, 2024: December 31, 2023: Specialty Property and Casualty Legacy Financial Guarantee Specialty Property and Casualty Legacy Financial Guarantee Present Value of Expected Net Cash Flows Unearned Premium Revenue Gross Loss and Loss Expense Reserves Present Value of Expected Net Cash Flows Unearned Premium Revenue Gross Loss and Loss Expense Reserves Balance Sheet Line Item Gross Loss and Loss Expense Reserves Claims and Loss Expenses Recoveries Gross Loss and Loss Expense Reserves Claims and Loss Expenses Recoveries Loss and loss expense reserves $ 323 $ 693 $ (63) $ (15) $ 938 $ 197 $ 779 $ (55) $ (28) $ 893 Subrogation recoverable — 8 (131) — (124) — 1 (139) — (137) Totals $ 323 $ 700 $ (195) $ (15) $ 814 $ 197 $ 780 $ (194) $ (28) $ 756 Ambac Financial Group, Inc. 55 Third Quarter 2024 Form 10-Q Table of Contents Legacy Financial Guarantee Insurance: Ambac has exposure to various bond types issued in the debt capital markets. The bond types that have experienced significant claims, including through commutations, are residential mortgage-backed securities (“RMBS”), student loan securities and public finance securities. 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 September 30, 2024 and December 31, 2023: September 30, 2024: December 31, 2023: Gross Par Outstanding (1) Present Value of Expected Net Cash Flows Unearned Premium Revenue Gross Loss and Loss Expense Reserves (1)(2) Gross Par Outstanding (1) Present Value of Expected Net Cash Flows Unearned Premium Revenue Gross Loss and Loss Expense Reserves (1)(2) Claims and Loss Expenses Recoveries Claims and Loss Expenses Recoveries Structured Finance $ 1,657 $ 621 $ (174) $ (7) $ 440 $ 1,860 $ 679 $ (172) $ (10) $ 497 Domestic Public Finance 940 78 (8) (8) 62 834 82 (8) (8) 66 Other, including International finance 138 1 (13) — (12) 1,144 15 (13) (10) (8) Loss expenses — 1 — — 1 — 4 — — 4 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 $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. (2) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position. Variability of Expected Losses and Recoveries Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there can be no assurance that the ultimate liability will not be higher than such estimates. While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions. Accordingly, it is possible that our estimated loss reserves, gross of reinsurance, for financial guarantee insurance policies could be understated. We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded. The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at 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. In arriving at such view, management makes considerable judgments about the possibility of various future events. Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases. See “Risk Factors” in Part I, Item 1A as well as the descriptions of "Variability of Expected Losses and Recoveries" in Part II, Item 7 of the Company's 2023 Annual Report on Form 10-K, and Part II, Item 1A "Risk Factors" of this Quarterly Report, for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes. The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of operations and financial condition and may result in materially adverse consequence for Ambac, including (without limitation) impairing the ability of AAC to honor its financial obligations, particularly its outstanding surplus note and preferred stock obligations; the initiation of rehabilitation proceedings against AAC; decreased likelihood of AAC delivering value to AFG, through dividends or otherwise; and a significant drop in the value of securities issued or insured by AFG or AAC. Structured Finance Variability RMBS : Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the general effect of a weakened economy characterized by growing unemployment and wage pressures. Projected losses in our RMBS exposures and related loss reserves, may increase or decrease in the future. Possible stress case losses assume higher default rates, loss severities and lower prepayments. Student Loans: Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other factors, including the economic impact from public health crises and/or natural or other catastrophic events. Such factors may also include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by the Consumer Finance Protection Bureau. 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 September 30, 2024, could be approximately $50 and there can be no assurance that losses may not exceed such amounts. Ambac Financial Group, Inc. 56 Third Quarter 2024 Form 10-Q Table of Contents Domestic Public Finance Variability: Ambac’s U.S. public finance portfolio consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities; however, the portfolio also includes a wide array of non-municipal types of bonds, including transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests, the largest sector of which is U.S. military housing. It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends. Additionally, our loss reserves may be under-estimated because of the local, regional or national economic impact from public health crises and/or natural or other catastrophic events. Our experience with the city of Detroit's bankruptcy and Commonwealth of Puerto Rico's Title III proceedings as well as other municipal bankruptcies demonstrates the preferential treatment of certain creditor classes, especially public pensions. The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have exposure, such as Chicago's school district, the State of New Jersey and others. Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors. Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer. In the case of the Puerto Rico COFINA sales tax bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings, AAC and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds. In the COFINA case, the senior bonds still received a reduction or "haircut" despite the existence of junior COFINA bonds, which received a recovery rate equal to about 56% of pre-petition amounts owed. In addition, municipal entities may be more inclined to use bankruptcy to resolve their financial stresses if they believe preferred outcomes for various creditor groups can be achieved. We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent. Moreover, issuers in Chapter 9 or similar proceedings may obtain judicial rulings and orders that impair creditors' rights or their ability to collect on amounts owed. 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. 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 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 September 30, 2024. There can be no assurance that losses may not exceed such amounts. 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 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 Ambac UK debt 17 17 Total Long-term Debt $ 512 $ 508 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. 57 Third Quarter 2024 Form 10-Q Table of Contents VARIABLE INTEREST ENTITIES Please refer to Note 9. Variable Interest Entities to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q and Note 2. Basis of Presentation and Significant Accounting Policies and Note 12. Variable Interest Entities to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for information regarding variable interest entities. ACCOUNTING STANDARDS 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. U.S. INSURANCE STATUTORY BASIS FINANCIAL RESULTS AFG's U.S. insurance subsidiaries prepare financial statements under accounting practices prescribed or permitted by its domiciliary state regulator (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company. The National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) is adopted as a component of prescribed practices by each domiciliary state. For further information, see "Ambac Assurance Statutory Basis Financial Results," in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Ambac Assurance Corporation 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); preferred stock; and all other liabilities, including insurance claims are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC. The 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. Everspan Indemnity Insurance Company 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 £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. The basis of preparation of this information is significantly different from both US GAAP and UK GAAP. Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £448 at June 30, 2024, the most recently published position. Eligible capital resources at June 30, 2024, were in comparison to regulatory capital requirements of £213. Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £235 at June 30, 2024. NON-GAAP FINANCIAL MEASURES 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 Ambac Financial Group, Inc. 58 Third Quarter 2024 Form 10-Q Table of Contents 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, 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. 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 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 Net income (loss) $ (13) $ 8 $ (7) $ (17) $ (29) $ 66 $ — $ 2 $ (2) $ 66 Adjustments: Interest expense 16 — 4 — 20 16 — — — 16 Income taxes 4 1 (1) (1) 3 3 — — (2) 1 Depreciation — — — — 1 — — — — — Amortization of intangible assets 6 — 6 — 13 6 — 1 — 7 EBITDA (1) $ 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 $(0.3) and $0.6 for the three months ended September 30, 2024 and 2023, respectively. These noncontrolling interests are in the Insurance Distribution segment. Nine Months Ended September 30, 2024 Nine 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 Net income (loss) $ 18 $ 9 $ (2) $ (33) $ (9) $ 21 $ (1) $ 7 $ (6) $ 21 Adjustments: Interest expense 48 — 4 — 51 48 — — — 48 Income taxes 11 1 (1) (1) 10 8 — — (1) 7 Depreciation 1 — — 1 2 1 — — — 1 Amortization of intangible assets 25 — 9 — 33 18 — 3 — 21 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 $1.1 and $1.8 for the nine months ended September 30, 2024 and 2023, respectively. These noncontrolling interests are in the Insurance Distribution segment. Adjusted Net Income (Loss) — We define Adjusted Net Income (Loss) as net income (loss) attributable to common stockholders adjusted to reflect the following items: (i) net investment (gains) losses, including impairments; (ii) amortization of intangible assets; (iii) litigation costs, including attorneys fees and other expenses to defend litigation against the Company, excluding loss adjustment expenses; (iv) foreign exchange (gains) losses; (v) workforce change costs, which primarily include severance and other costs related to employee terminations; and (vi) net (gain) loss on extinguishment of debt. Adjusted Net Income is also adjusted for the effect of the above items on both income taxes and noncontrolling interests. The income tax effects are determined by applying the statutory tax rate in each jurisdiction that generate these adjustments. The noncontrolling interest adjustments relate to subsidiaries where Ambac does not own 100% Ambac Financial Group, Inc. 59 Third Quarter 2024 Form 10-Q Table of Contents The following table reconciles net income (loss) attributable to common stockholders to the non-GAAP measure, Adjusted net income: Three Months Ended September 30, 2024 2023 ($ in millions, except share data) $ Amount Per Share $ Amount Per Share Net income (loss) attributable to common shareholders $ (28) $ (0.63) $ 66 1.41 Adjustments: Net investment (gains) losses, including impairments 1 0.03 (1) (0.02) Intangible amortization 13 0.27 7 0.15 Litigation costs 2 0.04 21 0.44 Foreign exchange (gains) losses (4) (0.09) 1 0.01 Workforce change costs — — — — Pretax adjusted net income (loss) (16) $ (0.38) 94 $ 1.99 Income tax effects (2) (0.04) — 0.01 Net (gains) attributable to noncontrolling interests (2) (0.04) — — Adjusted Net Income (Loss) $ (19) $ (0.46) $ 94 $ 2.00 Nine Months Ended September 30, 2024 2023 ($ in millions, except share data) $ Amount Per Share $ Amount Per Share Net income (loss) attributable to common shareholders $ (8) $ (0.23) $ 19 $ 0.41 Adjustments: Net investment (gains) losses, including impairments (3) (0.06) 7 0.15 Intangible amortization 33 0.71 21 0.44 Litigation costs 13 0.27 37 0.79 Foreign exchange (gains) losses (3) (0.07) — — Workforce change costs — — 1 0.02 Pretax adjusted net income (loss) 32 $ 0.62 85 $ 1.81 Income tax effects (2) (0.05) (1) (0.03) Net (gains) attributable to noncontrolling interests (2) (0.05) (1) (0.01) Adjusted Net Income (Loss) $ 27 $ 0.52 $ 83 $ 1.77 Adjusted Book Value . Adjusted book value is defined as Total Ambac Financial Group, Inc. stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following: • Insurance intangible asset: Elimination of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC. • Net unearned premiums and fees in excess of expected losses: Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance. This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis. In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR. However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity. 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. • Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income: Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”), net of income taxes. Ambac has a significant U.S. tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result of this, tax planning strategies and other considerations, we utilized a 0% effective tax rate for non-GAAP operating adjustments to Adjusted Book. The following table reconciles Total Ambac Financial Group, Inc. stockholders’ equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented: September 30, 2024 December 31, 2023 ($ in millions, except share data) $ Amount Per Share $ Amount Per Share Total Ambac Financial Group, Inc. stockholders’ equity $ 1,465 $ 30.89 $ 1,362 $ 30.13 Adjustments: Insurance intangible asset (224) (4.73) (245) (5.43) Net unearned premiums and fees in excess of expected losses 161 3.40 162 3.59 Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income (13) (0.28) 20 0.45 Adjusted book value 1,389 $ 29.28 $ 1,299 $ 28.74 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. Item 3. 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.