What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2025-03-06 compared with 2024-02-27 · 1224 added, 2019 removed, 1251 unchanged (72% of the section changed)

11 unchanged sentences

Background and Business Description 56

Variable Interest Entities 104

Goodwill and Intangible Assets 86

Basis of Presentation and Significant Accounting Policies 56

Long-term Debt 107

Segment Information 65

Revenues From Contracts with Customers 87

Investments 84

Business Combination 67

Comprehensive Income 88

Fair Value Measurements 87

Discontinued Operation 68

Net Income Per Share 89

Financial Guarantees in Force 92

Investments 74

Income Taxes 89

Insurance Contracts 93

Fair Value Measurements 76

Employment Benefit Plans 91

Insurance Contracts 80

Insurance Regulatory Restrictions 84

Derivative Instruments 103

Commitments and Contingencies 94

Goodwill and Intangible Assets 104

Derivative Instruments 86

Quarterly Information (Unaudited) 97

Ambac Financial Group, Inc.

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement schedules I, II and III (collectively, the consolidated financial statements), and our report dated February 27, 2024 expressed an unqualified opinion on those consolidated financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated statements of total comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes and financial statement schedules I, II and III (collectively, the consolidated financial statements), and our report dated March 6, 2025 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired Beat Capital Partners Limited during 2024, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024, Beat Capital Partners Limited’s internal control over financial reporting associated with total assets of 1% and total revenues of 17% included in the consolidated financial statements of the Company as of and for the year ended December 31, 2024.

Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Beat Capital Partners Limited.

Basis for Opinion

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit of internal control over financial reporting included obtaining an understanding of internal control

over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

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New York, New York

February 27, 2024

March 6, 2025

Ambac Financial Group, Inc.

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 6, 2025 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be

communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Estimate of loss and loss adjustment expense reserves

As discussed in Notes 2 and 8 to the consolidated financial statements, the loss and loss adjustment expense reserves (reserves) for Specialty Property and Casualty policies represent the Company’s estimate of the ultimate liability for unpaid losses and loss expenses for claims that have been reported and claims that have been incurred but not yet reported as of the balance sheet date.

The reserves are estimated based upon experience and using a variety of actuarial methods.

The Company’s reserves balance at December 31, 2024 was $349,062 thousand.

We identified the assessment of the estimate of reserves for Specialty Property and Casualty policies as a critical audit matter.

The assessment of the Company’s selected methods and key assumptions used to develop the estimate of reserves required complex auditor judgment due to the significant measurement uncertainty.

Key assumptions included loss development factors, expected loss ratios, and the weighting of actuarial methods when more than one was used.

Specialized actuarial skills and knowledge were required to evaluate the actuarial method or methods and key assumptions used.

The following are the primary procedures we performed to address the critical audit matter.

With the assistance of actuarial professionals, when appropriate, we evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s reserving process.

This included controls over the Company’s process to develop the Company’s estimate of reserves based on actuarial methodologies and key assumptions employed by the Company’s actuaries.

We involved actuarial professionals with specialized skills and knowledge, who assisted in:

• for certain programs, evaluating the Company’s key assumptions and methods for consistency with actuarial standards of practice

• for certain programs, developing an independent range of reserves using methods and assumptions consistent with actuarial standards of practice and comparing it to the Company’s recorded reserves

• for certain programs, assessing the position in the range and the year-over-year movements of the Company’s recorded reserves within the independent range of reserves

Ambac Financial Group, Inc.

2024 Form 10-K

Table of Contents ,

Valuation of customer relationship intangibles for the Beat reporting unit

As discussed in Note 4 to the consolidated financial statements, on July 31, 2024, the Company completed the acquisition of 60% of Beat Capital Partners (Beat) for a purchase price of $281,278 thousand.

The acquisition was accounted for as a business combination using the acquisition method of accounting, which required the Company to allocate the total consideration transferred to the assets acquired, liabilities assumed, and noncontrolling interests based on their fair values at the date of acquisition.

As part of the transaction, the Company acquired a customer relationships intangible asset with an acquisition date fair value of $303,331 thousand, which was valued using the multi-period excess earnings method.

We identified the assessment of the acquisition date fair value of the customer relationships intangible asset as a critical audit matter.

Subjective auditor judgment and the involvement of valuation professionals with specialized skills and knowledge were required to assess the discount rate assumption used to estimate the acquisition date fair value for the customer relationships intangible asset due to the degree of measurement uncertainty associated with this assumption.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s acquisition date valuation process.

This included a control over the development of the discount rate used to value the customer relationships i ntangible asset.

We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the Company’s discount rate assumption used for the customer relationships intangible asset by independently developing a range of discount rates based on publicly available market data for comparable entities and comparing that range to the Company’s discount rate.

Estimate of loss and loss adjustment expense reserves and subrogation recoverable

As described in Notes 2 and 7 to the consolidated financial statements, the Company estimates financial guarantee loss and loss adjustment expense reserves and subrogation recoverable (loss reserves) on a policy-by-policy basis based upon the present value of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates.

As described in Note 5 to the consolidated financial statements, the Company estimates financial guarantee loss and loss adjustment expense reserves and subrogation recoverable (loss reserves) on a policy-by-policy basis based upon the present value of expected net claim cash outflows or expected net recovery cash inflows, discounted at risk-free rates.

Expected net claim cash outflows represent the present value of expected claim cash outflows, less the present value of expected recovery cash inflows.

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For such policies, a subrogation recoverable asset is recorded.

As of December 31, 2023, the Company recorded loss and loss adjustment expense reserves of $893 million and subrogation recoverable of $137 million.

As of December 31, 2024, the Company recorded loss and loss adjustment expense reserves of $577,167 thousand and subrogation recoverable of $113,962 thousand within Liabilities held-for-sale and Assets held-for-sale, respectively.

We identified the evaluation of loss adjustment reserves as a critical audit matter.

The evaluation encompassed the assessment of the loss reserves methodologies, including those methods used to estimate the following assumptions:

The evaluation encompassed the

assessment of the loss reserves methodologies, including those methods used to estimate the following assumptions:

(1) credit worthiness of the issuer of the insured security, (2) the likelihood of possible outcomes regarding the probability of default by the issuer of the insured security, (3) the expected loss severity for each insurance policy, and (4) the probability of remediation, settlement and restructuring outcomes.

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This included controls related to the determination of the assumptions and the sources of data and the analysis of the loss reserves.

We involved credit risk professionals with specialized skills and

Ambac Financial Group, Inc 60

2023 Form 10-K

Table of Contents ,

knowledge, who assisted in assessing the individual issuer ratings and credit classifications for certain policies by evaluating the financial performance of the issuer of the insured security and underlying collateral.

We involved credit risk professionals with specialized skills and knowledge, who assisted in assessing the individual issuer ratings and credit classifications for certain policies by evaluating the financial performance of the issuer of the insured security and underlying collateral.

We also involved valuation professionals with specialized skills and knowledge, who assisted in:

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New York, New York

February 27, 2024

March 6, 2025

Ambac Financial Group, Inc.

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Consolidated Balance Sheets

(Dollars in millions, except share data) December 31, 2023 2022

(Dollars in thousands, except share data) December 31, 2024 2023

Fixed maturity securities, at fair value (amortized cost of $ 162,124 and $ 141,179 )

$ 157,020 $ 135,224

Fixed maturity securities - trading, at fair value 27 59

Short-term investments, at fair value (amortized cost of $ 127,588 and $ 200,506 )

Short-term investments pledged as collateral, at fair value (amortized cost of $ 27 and $ 64 )

Other investments (includes $ 463 and $ 556 at fair value)

Total investments (net of allowance for credit losses of $ 3 and $ 0 )

127,601 200,510

Other investments (at cost, except for $ 7,499 and $ 5,817 at fair value)

28,294 18,317

Total investments 312,915 354,051

Cash and cash equivalents (including $ 17,669 and $ 11,881 of restricted cash)

Premium receivables (net of allowance for credit losses of $ 4 and $ 5 )

Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $ 0 and $ 0 )

47,275 19,223

Premium receivables 57,222 45,893

Commission and fees receivable 55,377 9,419

Reinsurance recoverable on paid and unpaid losses 306,191 164,997

Deferred ceded premium 148,300 110,407

Deferred acquisition costs 8,572 10,960

Subrogation recoverable 137 271

Intangible assets, less accumulated amortization 344,775 61,403

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Other assets 92,317 65,817

Variable interest entity assets:

Fixed maturity securities, at fair value 2,167 1,967

Restricted cash 246 17

Loans, at fair value 1,663 1,829

Derivative and other assets 318 241

Assets held-for-sale 6,267,200 7,516,456

Total assets $ 8,058,378 $ 8,428,320

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Deferred program fees and reinsurance commissions 7,500 5,777

Long-term debt 508 639

Commissions payable 71,431 6,932

Deferred taxes 70,135 —

Short-term debt 150,000 —

Accrued interest payable 2,560 —

Other liabilities 89,036 60,419

Variable interest entity liabilities:

Long-term debt (includes $ 2,710 and $ 2,788 at fair value)

Derivative liabilities 1,197 1,048

Other liabilities 240 5

Liabilities held-for-sale 5,887,685 6,541,866

Total liabilities 6,862,857 6,996,627

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Consolidated Statements of Total Comprehensive Income (Loss)

(Dollars in millions, except share data) Year Ended December 31, 2023 2022 2021

(Dollars in thousands, except share data) Year Ended December 31, 2024 2023 2022

Net premiums earned $ 99,005 $ 51,911 $ 13,869

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Net gains (losses) on derivative contracts 4,016 ( 279 ) 935

Net realized gains on extinguishment of debt — 81 33

Income (loss) on variable interest entities 3 21 7

Other income 11 10 1

Litigation recoveries — 126 —

Other revenue 13,314 200 577

Total revenues and other income 235,815 124,728 53,612

Losses and loss adjustment expenses 72,626 36,712 9,071

Amortization of deferred acquisition costs, net 11 3 1

Policy acquisition costs 23,666 10,557 2,535

Commission expense 40,876 29,465 17,641

General and administrative expenses 129,166 66,985 56,278

Depreciation expense 2,345 1,078 872

Intangible amortization 17,602 4,152 2,921

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Total expenses 295,660 148,949 89,318

Pretax income (loss) 12 525 2

Provision (benefit) for income taxes 7 2 18

Pretax income (loss) from continuing operations ( 59,845 ) ( 24,221 ) ( 35,706 )

Provision (benefit) for income taxes from continuing operations ( 924 ) ( 989 ) ( 462 )

Net income (loss) from continuing operations ( 58,921 ) ( 23,232 ) ( 35,244 )

Net income (loss) from discontinued operations, net of tax (including loss on disposal of $ 570,145 in 2024)

( 497,167 ) 28,183 557,364

Net income (loss) ( 556,088 ) 4,951 522,120

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gain on purchase of auction market preferred shares — — 1,131

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

Net income (loss) attributable to Ambac shareholders $ ( 556,449 ) $ 3,632 $ 522,380

Net income (loss) attributable to Ambac shareholders

Continuing operations $ ( 59,282 ) $ ( 24,551 ) $ ( 36,115 )

Discontinued operations ( 497,167 ) 28,183 558,495

Total $ ( 556,449 ) $ 3,632 $ 522,380

Other comprehensive income (loss), after tax

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Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $( 118 ), $ 177

( 356 ) ( 88 ) 340

Changes to postretirement benefit, net of income tax provision (benefit) of $ 0 , $ 0 and $ 0

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Total other comprehensive income (loss), net of income tax ( 28,390 ) 92,797 ( 310,454 )

Total comprehensive income, net of income tax 98 212 ( 38 )

Total comprehensive income (loss), net of income tax ( 584,478 ) 97,748 211,666

net (gain) loss attributable to noncontrolling interest ( 361 ) ( 1,319 ) ( 871 )

(gain) loss on foreign currency translation attributable to noncontrolling interest 3,074 — —

gain on purchase of auction market preferred shares — — 1,131

Total comprehensive income attributable to common stockholders $ 96 $ 212 $ ( 38 )

Net income (loss) per shared attributable to common stockholders

Total comprehensive income (loss) attributable to Ambac shareholders $ ( 581,765 ) $ 96,429 $ 211,926

Net income (loss) from continuing operations per share attributable to Ambac shareholders

Basic $ ( 0.13 ) $ ( 0.43 ) $ ( 0.74 )

Diluted $ ( 0.13 ) $ ( 0.43 ) $ ( 0.74 )

Net income (loss) from discontinued operations per share attributable to Ambac shareholders

Basic $ ( 10.58 ) $ 0.62 $ 12.22

Diluted $ ( 10.58 ) $ 0.62 $ 12.22

Net income (loss) per share attributable to Ambac shareholders

Basic $ ( 10.71 ) $ 0.18 $ 11.48

Diluted $ ( 10.71 ) $ 0.18 $ 11.48

Weighted average number of common shares outstanding:

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Ambac Financial Group, Inc.

($ in Millions) Total Preferred Stock Common Stock Additional Paid-in

($ in thousands) Total Preferred Stock Common Stock Additional Paid-in

Capital Accumulated

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Cost of shares (acquired) issued under equity plan ( 3,568 ) ( 5,446 ) 1,878

Changes to noncontrolling interest ( 12 ) — — — — ( 12 ) — —

Cost of shares repurchased ( 14,217 ) ( 14,217 )

Changes to NCI 2,504 2,504

Sale or NCI in subsidiary 2,173 172 2,001

Issuance of common stock 2 2

Purchase of Ambac Assurance auction market preferred shares ( 7,919 ) 1,131 ( 9,050 )

Balance at December 31, 2022 $ 1,305,250 $ — $ 467 $ 274,486 $ ( 252,843 ) $ 1,245,491 $ ( 15,270 ) $ 52,919

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Cost of shares repurchased ( 4,510 ) ( 4,510 )

Changes to noncontrolling interest 3 — — — — 3 — —

Sale of noncontrolling interest in subsidiary 2 — — — — — — 2

Purchase of Ambac Assurance auction market preferred shares ( 8 ) — — — — 1 — ( 9 )

Changes to NCI 4,836 4,797 39

Balance at December 31, 2023 $ 1,414,614 $ — $ 467 $ 291,761 $ ( 160,047 ) $ 1,246,048 $ ( 16,573 ) $ 52,958

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Cost of shares repurchased ( 11,699 ) ( 11,699 )

Changes to noncontrolling interest 5 — — — — 5 — —

Changes to NCI 49,966 1,044 53,220 ( 4,298 )

Issuance of common stock 29,229 22 29,207

Fair value of nonredeemable NCI in Beat Capital Partners at acquisition 149,095 149,095

Balance at December 31, 2024 $ 1,054,661 $ — $ 489 $ 331,007 $ ( 188,436 ) $ 742,185 $ ( 28,339 ) $ 197,755

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Consolidated Statements of Cash Flows

($ in millions) Year Ended December 31, 2023 2022 2021

($ in thousands) Year Ended December 31, 2024 2023 2022

Cash flows from operating activities:

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

Redeemable noncontrolling interest ( 1 ) ( 1 ) ( 1 )

Repurchase of auction market preferred shares — 1 —

Net income 5 522 ( 16 )

Adjustments to reconcile net income to net cash used in operating activities:

Net income (loss) ( 556,088 ) 4,951 522,120

Net income (loss) from discontinued operations ( 497,167 ) 28,183 557,364

Net income (loss) from continuing operations ( 58,921 ) ( 23,232 ) ( 35,244 )

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation 2,345 1,078 872

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Net investment gains (losses), including impairments 497 ( 19 ) 13,710

(Gain) loss on extinguishment of debt — ( 81 ) ( 33 )

Variable interest entity activities ( 3 ) ( 21 ) ( 7 )

Corporate costs reallocated to continuing operations 14,919 19,367 20,189

Other, net 237 ( 7,819 ) 37,260

Net cash provided by operating activities 200 1,335 ( 131 )

Net cash provided by (used in) operating activities from continuing operations 762 36,948 70,368

Cash flows from investing activities:

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Proceeds from sales of other invested assets 625 — —

Purchases of other invested assets ( 80 ) ( 112 ) ( 127 )

Purchases of other investments ( 2,522 ) ( 2,242 ) ( 4,788 )

Change in short-term investments 101,829 4,157 ( 48,386 )

Change in cash collateral ( 42 ) 44 9

Change in consolidated VIE cash collateral 235 — —

Proceeds from paydowns of consolidated VIE assets 199 504 171

Acquisitions, net of cash acquired ( 243,776 ) ( 6,953 ) ( 18,442 )

Proceeds from sale of subsidiary, net of cash transferred 14,119 — —

Other, net ( 3,750 ) ( 4,854 ) 2,329

Net cash provided by investing activities 435 866 776

Net cash provided by (used in) investing activities from continuing operations ( 166,371 ) ( 26,679 ) ( 41,162 )

Cash flows from financing activities:

Proceeds from issuance of Sitka AAC Note — — 1,163

Proceeds from issuance of Surplus Notes — — 11

Paydowns of LSNI Ambac Note — — ( 1,641 )

Payments for debt issuance costs — — ( 12 )

Payments for purchases of common stock ( 5 ) ( 14 ) —

Payments for purchase of surplus notes — ( 191 ) —

Payments for redemption of Sitka AAC Note — ( 1,210 ) —

Payments for redemption of Tier 2 Notes ( 97 ) ( 143 ) —

Payments for auction market preferred shares — ( 8 ) —

Proceeds from short-term debt 147,000 — —

Issuance of equity interest in subsidiary 62,000 — —

Payments for purchases of common stock held in treasury ( 11,698 ) ( 4,510 ) ( 14,217 )

Tax payments related to shares withheld for share-based compensation plans ( 692 ) ( 4,585 ) ( 3,576 )

Distributions to noncontrolling interest holders ( 2,391 ) ( 1,891 ) ( 1,442 )

Payments of consolidated VIE liabilities, net ( 315 ) ( 591 ) ( 170 )

Net cash used in financing activities ( 423 ) ( 2,163 ) ( 657 )

Effect of foreign exchange on cash and cash equivalents 1 ( 1 ) —

Net cash flow 213 38 ( 12 )

Cash, cash equivalents, and restricted cash at beginning of period 61 23 35

Cash, cash equivalents, and restricted cash at end of period $ 274 $ 61 $ 23

Net cash provided by (used in) financing activities from continuing operations 194,219 ( 10,986 ) ( 19,235 )

Effect of foreign exchange on cash and cash equivalents - continuing operations ( 558 ) — —

Net cash provided by (used in) continuing operations 28,052 ( 717 ) 9,971

Cash, cash equivalents, and restricted cash at beginning of period - continuing operations 19,223 19,940 9,969

Cash, cash equivalents, and restricted cash at end of period - continuing operations $ 47,275 $ 19,223 $ 19,940

Net cash provided by (used in) operating activities from discontinued operations 33,536 163,376 1,264,975

Net cash provided by (used in) investing activities from discontinued operations ( 7,911 ) 461,870 959,610

Net cash provided by (used in) financing activities from discontinued operations ( 214,606 ) ( 411,947 ) ( 2,195,992 )

Effect of foreign exchange on cash and cash equivalents - discontinued operations ( 126 ) 529 ( 670 )

Net cash provided by (used in) discontinued operations ( 189,107 ) 213,828 27,923

Cash, cash equivalents, and restricted cash at beginning of period - discontinued operations 255,183 41,355 13,432

Cash, cash equivalents, and restricted cash at end of period - discontinued operations $ 66,076 $ 255,183 $ 41,355

See accompanying Notes to Consolidated Financial Statements

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Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

(Dollar Amounts in Thousands, Except Share Amounts)

BACKGROUND AND BUSINESS DESCRIPTION

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Ambac's business operations include:

• Legacy Financial Guarantee Insurance — Ambac's financial guarantee business includes the activities of Ambac Assurance Corporation ("AAC") and its wholly owned subsidiaries, including Ambac Assurance UK Limited (“Ambac UK”) and Ambac Financial Services LLC ("AFS").

• Insurance Distribution — Ambac's specialty property and casualty ("P&C") insurance distribution business includes Managing General Agents and Underwriters (collectively "MGAs" or "MGA/Us"), an insurance broker, and other distribution and underwriting businesses.

Insurance Distribution includes Beat Capital Partners Limited ("Beat", which was acquired on July 31, 2024).

At December 31, 2024, Ambac's insurance distribution platform operates in the following lines of business:

accident & health, specialty auto, other professional, marine & energy, niche specialty risks, property, reinsurance, professional D&O and other specialty lines.

• Specialty Property and Casualty Insurance — Ambac's Specialty Property and Casualty Insurance program business includes four admitted carriers and an excess and surplus lines (“E&S” or “nonadmitted”) insurer (collectively, “Everspan”).

Everspan carriers have an A.M.

Best rating of 'A-' (Excellent) which was affirmed on June 13, 2024.

The Company reports these two business operations as segments;

Segment Information for further information.

Ambac's financial guarantee business, which is being reported as a discontinued operation due to its pending sale, includes the activities of Ambac Assurance Corporation ("AAC") and its wholly owned subsidiaries, including Ambac Assurance UK Limited (“Ambac UK”) and Ambac Financial Services LLC ("AFS").

Both AAC and Ambac UK have financial guarantee insurance portfolios that have been in runoff since 2008.

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

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

• Specialty Property and Casualty Insurance — Ambac's Specialty Property and Casualty Insurance program business includes five admitted carriers and an excess and surplus lines (“E&S” or “nonadmitted”) insurer (collectively, “Everspan”).

Everspan carriers have an AM Best rating of 'A-' (Excellent).

• Insurance Distribution — Ambac's specialty property and casualty ("P&C") insurance distribution business, which currently includes Managing General Agents and Underwriters (collectively "MGAs") and insurance brokers.

Currently includes (i) Xchange Benefits, LLC (“Xchange”), a P&C MGA specializing in accident and health products, (ii) All Trans Risk Solutions, LLC ("All Trans"), an MGA specializing in specialty commercial automobile insurance for specific "for-hire" auto classes, (iii) Capacity Marine Corporation ("Capacity Marine"), a wholesale and retail brokerage and reinsurance intermediary specializing in marine and international risk, and (iv) Riverton Insurance Agency, Corp.

("Riverton"), which was acquired on August 1, 2023, an insurance services business specializing in professional liability lines and consisting of an MGA and a retail agency.

Both All Trans and Capacity Marine Corporation were acquired in November 2022.

Beginning in 2022, the Company began reporting these three business operations as segments;

Segment Information for further information.

Discontinued Operation for information related to the pending sale of AAC.

Limitations on Voting and Transfer of Common Stock

AFG’s Amended and Restated Certificate of Incorporation limits voting and transfer rights of stockholders in significant ways.

associate of such person has any agreement, contract, arrangement or understanding with respect to acquiring, voting, holding or disposing of AFG’s common stock) shall not be entitled to cast votes in excess of one vote less than 10 % of the votes entitled to be cast by all common stock holders, except as otherwise approved by the OCI (as defined below).

Article IV contains voting restrictions applicable to any person owning at least 10 % of AFG's common stock so that such person (including any group consisting of such person and any other person with whom such person or any affiliate or associate of such person has any agreement, contract, arrangement or understanding with respect to acquiring, voting, holding or disposing of AFG’s common stock) shall not be entitled to cast votes in excess of one vote less than 10 % of the votes entitled to be cast by all common stock holders, except as

otherwise approved by the insurance commissioners of the states of domicile of the insurance companies controlled by AFG.

Article XII contains substantial restrictions on the ability to transfer AFG’s common stock.

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If the purported transferee of a Prohibited Transfer has resold the Excess Securities before receiving such demand, such person shall be deemed to have sold the Excess Securities for AFG’s agent and shall be required to transfer to such agent the proceeds of such sale, which shall be distributed as set forth in the Amended and Restated Certificate of Incorporation.

Strategies to Enhance Shareholder Value

The Company's primary goal is to maximize long-term shareholder value through the execution of targeted strategies for its (i) Specialty Property and Casualty Insurance and Insurance Distribution businesses and (ii) Legacy Financial Guarantee Insurance business.

Specialty Property and Casualty Insurance and Insurance Distribution strategic priorities include:

• Growing our Specialty Property and Casualty Insurance business to generate underwriting profits from a diversified

Ambac Financial Group, Inc 66

2023 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

portfolio of commercial and personal liability risks accessed primarily through program administrators.

• Expanding our Insurance Distribution business based on deep domain knowledge in specialty and niche classes of risk which generate attractive margins at scale.

This will be achieved through acquisitions, establishing new businesses “de-novo,” and organic growth and diversification supported by a centralized technology led shared services offering.

• Making opportunistic investments that are strategic to both the Specialty Property and Casualty Insurance and Insurance Distribution businesses.

Legacy Financial Guarantee Insurance strategic priorities include:

• Actively managing, de-risking and mitigating insured portfolio risk, and pursuing recoveries of previously paid losses.

• Improving operating efficiency and optimizing our asset and liability profile.

• Exploring strategic options to further maximize value for AFG.

The execution of Ambac’s strategy to increase the value of its investment in AAC is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010, as amended (the "Settlement Agreement"), by and among AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by AAC, as well as the Stipulation and Order among the OCI, AFG and AAC that became effective on February 22, 2024 (the “Stipulation and Order”), replacing the Stipulation and Order that became effective on February 12, 2018, as amended (the "2018 Stipulation and Order"), each of which requires OCI and, under certain circumstances contemplated by the Settlement Agreement, holders of surplus notes, to approve certain actions taken by or in respect of AAC.

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

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

engaging in mergers and similar transactions;

disposing of assets;

making restricted payments;

creating or permitting liens;

engaging in transactions with affiliates;

modifying or creating tax sharing agreements;

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

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

The Stipulation and Order requires AAC to maintain a level of surplus and contingency reserves as regards policyholders which provide reasonable security against contingencies affecting AAC’s financial position that are not otherwise fully covered by reserves or reinsurance;

discount loss reserves in a manner

approved by OCI;

maintain OCI’s Runoff Capital Framework according to parameters specified by OCI;

pay the costs of consultants and other experts retained by OCI;

limit affiliate transactions and the payment of any dividend or other distribution without the prior non-disapproval of OCI;

notify OCI of events that would or would be reasonably likely to cause a material adverse effect to AAC or its affiliates;

obtain OCI’s non-disapproval to exercise certain control rights with respect to certain policies that were previously allocated to the Segregated Account of AAC;

obtain OCI’s approval for non-ordinary course transactions involving consideration to be paid by AAC of $ 100 or more;

and obtain OCI’s approval of any changes to AAC’s investment policy or derivative use plan.

The Stipulation and Order also requires AFG to use its best efforts to preserve the use of NOLs for the benefit of AAC and its subsidiaries.

The Stipulation and Order differs from the 2018 Stipulation and Order in that the 2018 Stipulation and Order (i) did not refer to OCI’s Runoff Capital Framework;

(ii) included certain affirmative covenants concerning books and records, and reporting of information or events, that were not included in the Stipulation and Order;

and (iii) contained a more restrictive limitation on transactions with affiliates.

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

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

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

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

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

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

AAC’s ability to use capital for potential future deleveraging transactions or distributions will require AAC to sustain an excess of risk-adjusted assets over risk-adjusted insured liabilities according to OCI’s Runoff Capital Framework, and to obtain OCI’s approval, and there can be no assurance that OCI will approve any such use of capital.

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

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

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

Ambac Financial Group, Inc 67

2023 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Settlement of RMBS Litigations and Redemption of Secured Notes:

In October 2022, AAC entered into a Settlement Agreement and Release (the “BOA Settlement Agreement”) with Bank of America Corporation and certain affiliates thereof (together, the “BOA Parties”) pursuant to which the BOA Parties paid AAC the sum of $ 1,840 (the “BOA Settlement Payment”) following the dismissal of AAC’s lawsuits against the BOA Parties concerning certain residential mortgage-backed securities (“RMBS”) trusts, and the withdrawal by AAC of its objections, including any pending appeals, concerning the settlements that were the subject of certain trust instructional proceedings.

In exchange for the BOA Settlement Payment, AAC, on its own behalf and on behalf of its affiliates, agreed to release the BOA Parties and related parties (the “Released Parties”) from claims asserted or which could have been asserted in AAC’s pending litigations against the BOA Parties as well as claims that AAC and its affiliates ever had, may currently have or may have in the future against the Released Parties, subject to certain limited exceptions.

The BOA Settlement Agreement also requires AAC to dismiss other pending claims against the Released Parties, and to generally refrain from, and in certain situations hold the Released Parties harmless with respect to, certain actions taken by AAC with respect to RMBS trusts created prior to the date of the BOA Settlement Agreement involving the Released Parties.

The BOA Settlement Payment included recoveries from litigations for alleged breaches of contractual obligations and fraud by the BOA Parties.

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

The portion of the BOA Settlement Payment allocated to fraud litigation recoveries has been recorded as a litigation recovery in the Statement of Comprehensive Income (Loss).

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

(“Nomura”) to settle its litigation against Nomura concerning certain RMBS trusts (the “Trusts”).

Pursuant to the Nomura Settlement Agreement, Nomura made a cash payment to AAC of $ 140 (the "Nomura Settlement Payment"), and AAC and Nomura agreed to release each other and their respective affiliates and related persons from any claims relating to the Trusts, the financial guaranty policies issued by AAC in connection with Trusts (other than AAC’s obligations to pay insurance claims under such policies), the securities related to the Trusts, and the mortgage loans related to the Trusts.

The Nomura Settlement Payment received in January 2023 reduced the subrogation recoverable asset on the Consolidated Balance Sheet.

During 2022 and 2023, AAC wholly redeemed its secured debt, in accordance with the terms of such debt, utilizing the BOA Settlement Payment, the Nomura Settlement Payment and other resources as further discussed in Note 12.

Long-term Debt .

Impact to the Consolidated Statement of Comprehensive Income (Loss):

The total gain recognized in net income attributable to common stockholders related to entering into the BOA Settlement Agreement and the Nomura Settlement Agreement, including

the redemption of the Sitka AAC Note following receipt of the BOA Settlement Payment, was as follows:

Year Ended December 31, 2022

Losses and loss benefit (1)

Litigation recoveries 126

Net realized gains (losses) on extinguishment of debt ( 53 )

Net investment gains (losses), including impairments 5

Impact to net income attributable to common stockholders $ 440

(1) 2022 losses and loss benefit relating to R&W recoveries were $ 123 .

BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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Consolidation

The consolidated financial statements include the accounts of AFG and all other entities in which AFG (directly or through its subsidiaries) has a controlling financial interest, including variable interest entities (“VIEs”) for which AFG or an AFG subsidiary is deemed the primary beneficiary in accordance with the Consolidation Topic of the Accounting Standards Codification ("ASC").

All significant intercompany balances have been eliminated.

The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity.

However, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests.

A VIE is an entity:

a) that lacks enough equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties;

or b) where the group of equity holders does not have:

(1) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance;

(2) the obligation to absorb the entity’s expected losses;

or (3) the right to receive the entity’s expected residual returns.

The determination of whether a variable interest holder is the primary beneficiary involves performing a qualitative analysis of the VIE that includes, among other factors, its capital structure, contractual terms including the rights of each variable interest holder, the activities of the VIE, whether the variable interest holder has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, whether the variable interest holder has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, related party relationships and the design of the VIE.

An entity that is deemed the primary

The consolidated financial statements include the accounts of AFG and all other entities in which AFG (directly or through its

Ambac Financial Group, Inc.

3 unchanged sentences

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

beneficiary of a VIE is required to consolidate the VIE.

Variable Interest Entities , for a detailed discussion of Ambac’s involvement in VIEs, Ambac’s methodology for determining whether Ambac is required to consolidate a VIE and the effects of VIEs being consolidated and deconsolidated.

(Dollar Amounts in Thousands, Except Share Amounts)

subsidiaries) has a controlling financial interest.

All significant intercompany balances have been eliminated.

The usual condition for a controlling financial interest is ownership of a majority of the voting interests of an entity.

AFG Unconsolidated Financial Information

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Investments in subsidiaries are accounted for using the equity method of accounting in Schedule II.

Held for Sale and Discontinued Operations

The Company has separately classified the assets and liabilities of AAC as held for sale as a result of AAC's pending sale and meeting specified accounting criteria.

Assets and liabilities held for sale are presented separately within the Consolidated Balance Sheets with any adjustments necessary to measure the disposal group at the lower of its carrying value or fair value less costs to sell.

The stockholders' equity section of the Consolidated Balance Sheet continues to be reported on an aggregate basis;

equity components (including nonredeemable NCI) solely attributable to AAC are not presented separately.

The Company reports the results of operations of AAC as discontinued operations since the pending sale also represents a strategic shift that will have a major effect on the Company's operations and financial results.

The results of discontinued operations are reported separately as Net income (loss) from discontinued operations within the Consolidated Statements of Total Comprehensive Income for the current and prior periods.

AAC cash flows are reflected as Net cash provided by (used in) discontinued operations within the Consolidated Statements of Cash Flows for each period presented.

Refer to Note 5.

Discontinued Operation for further information.

Measurement of Credit Losses on Financial Instruments (CECL)

Ambac measures credit losses on financial assets that are not accounted for at fair value through net income in accordance with the Current Expected Credit Loss standard or "CECL".

• The CECL impact on available-for-sale debt securities is discussed in the Investments sub-section below.

• The CECL impact on amortized cost assets, including contract assets and receivables accounted for under the ASC 606 revenue recognition standard, is addressed in the Premiums, Reinsurance Recoverables, Loans and Revenue Recognition sub-sections below.

These amortized cost assets reflect management's current estimate of all expected lifetime credit losses.

The credit loss impairment evaluation process for available-for-sale debt securities is discussed in the Investments sub-section below.

CECL does not apply to equity method investments accounted for under ASC 323.

Credit loss impairment for amortized cost assets reflect management's current estimate of all expected lifetime credit losses.

The estimate of expected lifetime credit losses considers historical information, current information, as well as reasonable and supportable forecasts.

Expected lifetime credit losses for amortized cost assets are recorded as an allowance for credit losses, with subsequent increases or decreases in the allowance reflected in net income each period.

CECL does not apply to subrogation recoveries of previously paid and unpaid losses on insurance contracts accounted for under ASC 944 nor does it apply to equity method investments accounted for under ASC 323.

The credit loss impairment evaluation process for amortized cost assets are addressed in the applicable subsections below.

The total allowance for credit losses for amortized cost assets recorded under CECL related to continuing operations was $ 641 at December 31, 2024.

The Investments - Debt Securities Topic of the ASC requires that all debt instruments be classified in Ambac’s Consolidated Balance Sheets according to their purpose and, depending on that classification, be carried at either cost or fair market value.

Ambac’s non-VIE debt investment portfolio is accounted for on a trade-date basis and consists primarily of:

• Investments in fixed maturity securities are either classified as available-for-sale or trading as defined by the Investments - Debt Securities Topic of the ASC.

Ambac’s debt investment portfolio is accounted for on a trade-date basis and consists primarily of investments in fixed maturity securities are either classified as available-for-sale or trading as defined by the Investments - Debt Securities Topic of the ASC.

Available-for-sale debt securities are reported in the financial statements at fair value with unrealized gains and losses, net of deferred taxes, reflected in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity and computed using amortized cost as the basis.

For purposes of computing amortized cost, premiums and discounts are accounted for using the effective interest method over the

term of the security.

For purposes of computing amortized cost, premiums and discounts are accounted for using the effective interest method over the term of the security.

For structured debt securities with a large underlying pool of homogenous loans, such as mortgage-backed and asset-backed securities, premiums and discounts are adjusted for the effects of actual and anticipated prepayments.

For other fixed maturity securities, such as corporate and municipal bonds, discounts are amortized or accreted over the remaining term of the securities and premiums are amortized to the earliest call date.

Investments in fixed maturity securities classified at trading are reported in the financial statements at fair value with unrealized gains and losses included in Net investment income on the Statement of Total Comprehensive Income (Loss).

Short-term investments consist of investments in money market funds and fixed maturity investments having maturities of less than one year and greater than three months when purchased.

Other investments primarily consist of:

• Equity interests in pooled investment funds which are accounted for in accordance with the Investments - Equity Securities Topic of the ASC and reported as Other investments on the Consolidated Balance Sheet with income reported through Net investment income on the Statement of Total Comprehensive Income (Loss).

Equity interests in the form of common stock or in-substance common stock are classified as trading securities and reported at fair value while limited partner interests in such funds are reported using the equity method.

Equity interests in such funds consist of limited partner interests and are reported using the equity method.

• Preferred equity investments that do not have readily determinable fair values and are carried at cost, less any impairments as permitted under the Investments — Equity Securities Topic of the ASC.

VIE investments in fixed maturity securities are carried at fair value as they are classified as either available-for-sale or trading as defined by the Investments — Debt Securities Topic of the ASC, or accounted for under the fair value option election.

For additional information about VIE investments, including fair value by asset-type, see Note 11.

Variable Interest Entities .

Fair value is based primarily on quotes obtained from independent market sources.

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Refer to Note 7.

Fair Value Measurements for further description of the methodologies used to determine the fair value of investments, including model inputs and assumptions where applicable.

Ambac has a formal impairment review process for fixed maturity available-for-sale securities in its investment portfolio.

Ambac conducts a review each quarter to identify and evaluate investments that have indications of impairment in accordance with the Investments - Debt Securities Topic of the ASC.

If management either:

(i) has the intent to sell its investment in an impaired debt security or (ii) determines that the Company

Fair Value Measurements for further description of the

Ambac Financial Group, Inc.

3 unchanged sentences

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

more likely than not will be required to sell the debt security before its anticipated recovery of the amortized cost basis less any current period credit impairment, then an impairment charge is recognized in earnings, with the amortized cost of the security written-down to fair value.

(Dollar Amounts in Thousands, Except Share Amounts)

methodologies used to determine the fair value of investments, including model inputs and assumptions where applicable.

Ambac has a formal impairment review process for fixed maturity available-for-sale securities in its investment portfolio.

Ambac conducts a review each quarter to identify and evaluate investments that have indications of impairment in accordance with the Investments - Debt Securities Topic of the ASC.

If management either:

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

If management does not intend to sell, or will not be required to sell the debt security, the security is reviewed for credit impairment.

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The risks and uncertainties include changes in general economic conditions, the issuer’s or guarantor’s financial condition and/or future prospects, the impact of regulatory actions on the investment portfolio, the performance of the underlying collateral, the effects of changes in interest rates or credit spreads and the expected recovery period.

With respect to Ambac insured securities owned, future cash flows used to measure credit impairment represents the sum of (i) the bond’s intrinsic cash flows and (ii) the estimated AAC claim payments.

Ambac’s assessment about whether a decline in value is considered a credit impairment reflects management’s current judgment regarding facts and circumstances specific to a security and the factors noted above.

If that judgment changes, Ambac may ultimately record a charge for credit impairment in future periods.

Ambac has made certain accounting policy elections related to accrued interest receivable ("AIR") for available-for-sale investments under CECL.

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Investments for further credit impairment disclosures.

Legacy Financial Guarantee Insurance

Gross premiums were received either upfront or in installments.

For premiums received upfront, an unearned premium revenue (“UPR”) liability was established, which was initially recorded as the cash amount received.

For installment premium transactions, a premium receivable asset and offsetting UPR liability was initially established in an amount equal to:

(i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the underlying insured obligation is a homogenous pool of assets which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method).

An appropriate risk-free rate corresponding to the weighted average life of each policy and currency is used to discount the future premiums contractually due or expected to be collected.

For example, U.S.

dollar exposures are discounted using U.S.

Treasury rates while exposures denominated in a foreign currency are discounted using the appropriate risk-free rate for the respective currency.

The weighted average risk-free rate at December 31, 2023 and 2022, was 3.2 %.

and 3.0 %, respectively, and the weighted average period of future premiums used to estimate the premium receivable at December 31, 2023 and 2022, was 7.7 years and 8.0 years, respectively.

Insured obligations consisting of homogeneous pools for which Ambac uses expected future premiums to estimate the premium receivable include residential mortgage-backed securities ("RMBS").

As prepayment assumptions change for homogenous pool transactions, or if there is an actual prepayment for a “contractual” method installment transaction, the related premium receivable and UPR are adjusted in equal and offsetting amounts with no immediate effect on earnings using new premium cash flows and the then current risk-free rate corresponding to the initial weighted average life of the related policy.

For both upfront and installment premium policies, premium revenues are earned over the life of the financial guarantee contract in proportion to the insured principal amount outstanding at each reporting date (referred to as the level-yield method).

For installment paying policies, the premium receivable discount, equating to the difference between the undiscounted future installment premiums and the present value of future installment premiums, is accreted as premiums earned in proportion to the premium receivable balance at each reporting date.

When a bond issue insured by Ambac has been retired early, typically due to an issuer call, any remaining UPR is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue.

For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue.

Certain obligations insured by Ambac have been legally defeased whereby government securities are purchased by the issuer with the proceeds of a new bond

Ambac Financial Group, Inc 70

2023 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

issuance, or less frequently with other funds of the issuer, and held in escrow.

The principal and interest received from the escrowed securities are then used to retire the Ambac-insured obligations at a future date either to their maturity date (a refunding) or a specified call date (a pre-refunding).

Ambac has evaluated the provisions in policies issued on these obligations and determined those insurance policies have not been legally extinguished.

For policies with refunding securities, premium revenue recognition is not impacted as the escrowed maturity date is the same as the previous legal maturity date.

For policies with pre-refunding securities, the maturity date of the pre-refunded security has been shortened from its previous legal maturity.

Although premium revenue recognition has not been accelerated in the period of the pre-refunding, it results in an increase in the rate at which the policy's remaining UPR is to be recognized.

For financial guarantee contracts, the issuer's ability and willingness to pay its insured debt obligation impacts the payment of policy losses by Ambac as well as the receipt of premiums from the issuer.

As such, management leverages its existing loss reserve estimation process to evaluate credit impairment for premium receivables.

Key factors in assessing credit impairment include historical premium collection data, internal risk classifications, credit ratings and loss severities.

For structured finance transactions involving special purpose entities, we further evaluate the priority of premiums paid to Ambac within the contractual waterfall, as required by bond indentures.

Ambac has a formal quarterly credit impairment review process for premium receivables.

Management utilizes either a discounted cash flow ("DCF") or probability of default/loss given default ("PD/LGD") approach to estimate credit impairment on premium receivables.

The DCF approach utilizes expected cash flows developed by Ambac's Risk Management Group using the same (or similar) models used for estimating loss reserves where such models can identify shortfalls in premiums.

Credit impairment using the DCF approach is equal to the difference between amortized cost and the present value of expected cash flows.

Credit impairment under the PD/LGD approach is the product of (i) the premium receivable carrying value, (ii) internally developed default probability (considering internal ratings and average life), and (iii) internally developed loss severities.

Refer to Note 7.

Insurance Contracts for further credit impairment disclosures.

AAC has reinsurance in place pursuant to surplus share treaties and facultative reinsurance agreements.

Similar to gross premiums, premiums ceded to reinsurers were paid either upfront or in installments.

For premiums paid upfront, a deferred ceded premium asset was established which is initially recorded as the cash amount paid.

For installment premiums, a ceded premiums payable liability and offsetting deferred ceded premium asset were initially established in an amount equal to:

i) the present value of future contractual premiums due or ii) if the underlying insured obligation is a homogenous pool of assets, the present value of expected premiums to be paid over the life of the transaction.

An appropriate risk-free rate corresponding to the weighted average life of each policy and

exposure currency is used to discount the future premiums contractually due or expected to be collected.

Premiums ceded to reinsurers reduce the amount of premiums earned by Ambac from its financial guarantee insurance policies.

For both upfront and installment premiums, ceded premiums written are primarily recognized in earnings in proportion to and at the same time as the related gross premium revenue is recognized.

For premiums paid to reinsurers on an installment basis, Ambac records the present value of future ceding commissions as an offset to ceded premiums payable, using the same assumptions noted above for installment premiums.

Specialty Property and Casualty Insurance

Specialty Property and Casualty Insurance Premiums

Gross written premiums on insurance policies are recorded at the inception of the policy and can be received on an upfront or installment basis.

Certain gross written premiums are written as assumed reinsurance.

Assumed reinsurance can attach on a risk attaching or loss occurring basis.

On risk attaching, assumed written premiums are recorded at the inception of the policy and can be received on an upfront or installment basis.

On loss occurring, assumed written premium includes the transfer of unearned premiums for inforce policies at the effective date of the respective reinsurance agreements and ongoing premium written activity of policies inforce during the respective contract period.

At end of the contract period, the remaining unearned premiums of inforce policies are returned to the carrier.

Collections of loss occurring assumed written premiums are generally on an installment basis.

Ceded premiums written are based on contractual terms applied against related gross written premiums.

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Credit risk is partially mitigated by the managing general agent's ability to cancel the policy on behalf of Everspan if the policyholder does not pay the premium, thereby reducing the related policy's premium written and Everspan's premium receivable.

Loans are reported at either their outstanding principal balance less unamortized discount or at fair value.

• Loans not held by consolidated VIEs are reported at their outstanding principal balance less unamortized discount and are reported within Other assets on the Consolidated Balance Sheet.

Interest income is earned using the effective interest method based upon interest accrued on the unpaid principal balance adjusted for accretion of discounts.

A loan is considered impaired when, based on the financial condition of the borrower, it is probable that Ambac will be unable to collect all principal and interest due according to the contractual terms of the loan agreement.

Ambac has a formal quarterly credit impairment review process for these loans.

The key factors in assessing credit impairment are internal credit ratings and loss severities.

Management utilizes a PD/LGD approach, similar to the one described above for financial guarantee premium receivables, which is applied to the loan carrying value.

• Loans held by VIEs consolidated as required under the Consolidation Topic of the ASC are carried at fair value under the fair value option election with changes in fair value recorded in Income (loss) on variable interest entities

Ambac Financial Group, Inc 71

2023 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

on the Consolidated Statements of Total Comprehensive Income (Loss).

Such loans are reported as Loans, at fair value within the Variable interest entity assets section of the Consolidated Balance Sheet.

Derivative Contracts

The Company has entered into derivative contracts primarily to hedge certain economic risks inherent in its asset and liability portfolios.

The Company has used derivative contracts to hedge foreign exchange or other economic risks in connection with certain strategic investments.

None of Ambac’s derivative contracts were designated as hedges under the Derivatives and Hedging Topic of the ASC.

Ambac's derivatives have consisted primarily of interest rate swaps and futures contracts.

• Ambac's current derivatives portfolio consists of certain legacy interest rate swaps executed in connection with financial guarantee client financings.

In recent years, Ambac's interest rate derivatives portfolio consisted primarily of interest rate swaps and futures contracts to economically hedge interest rate risk in the financial guarantee and investment portfolios, managed on the basis of its net sensitivity to changes in interest rates.

The economic hedge positions of the portfolio were fully exited in early 2023.

Changes in the fair value of these interest rate derivatives are recorded, along with changes in fair value of other derivative contracts, within Net gains (losses) on derivative contracts on the Consolidated Statements of Total Comprehensive Income (Loss).

• VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within their securitization structure.

Changes in fair value of consolidated VIE derivatives are included within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).

All derivatives are recorded on the Consolidated Balance Sheets at fair value on a gross basis;

assets and liabilities are netted by counterparty only when a legal right of offset exists, and are included in Other assets and Other liabilities, respectively.

Variation payments on centrally cleared swaps and futures contracts are considered settlements of the associated derivative balances and are reflected as a reduction to derivative liabilities or assets on the Consolidated Balance Sheets.

For other derivatives, Ambac has determined that the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral may not be used to offset amounts due under the derivative instruments in the normal course of settlement.

Therefore, such amounts are not offset against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement and are included in Other assets on the Consolidated Balance Sheets.

All derivatives are recorded on the Consolidated Balance Sheets at fair value and are included in Other assets and Other liabilities, as appropriate.

Refer to Note 10.

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Refer to Note 7.

Fair Value Measurements for further description of the methodologies used to determine the fair value of derivative contracts, including model inputs and assumptions where applicable.

Fair Value Measurements for further description of the methodologies used to determine the fair value of derivative contracts.

Deferred Acquisition Costs, Ceding Commissions and Deferred Program Fees

The Specialty Property and Casualty Program business defers acquisition costs incurred that are related directly to the successful acquisition of new or renewal insurance contracts, including commissions paid to managing general agents for direct business, and paid to insurance carriers when acquired via assumed reinsurance.

Ceding commissions received from reinsurers represent a recovery of related acquisition costs.

Deferred acquisition costs, net of ceding commissions, are amortized over the related policy period, generally one year, and recognized in amortization of deferred acquisition costs.

Ceding commissions received in excess of the related direct acquisition costs are deferred and amortized over the related policy period, and recognized as program fees.

Ceding commissions received from

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

reinsurers represent a recovery of related acquisition costs.

Deferred acquisition costs, net of ceding commissions, are amortized over the related policy period, generally one year, and recognized in amortization of deferred acquisition costs on the Statement of Total Comprehensive Income (Loss).

Ceding commissions received in excess of the related direct acquisition costs are deferred and amortized over the related policy period, and recognized as program fees on the Statement of Total Comprehensive Income (Loss).

A legal right of offset exists for (i) premiums received and commissions paid to managing general agents on direct business, (ii) premiums received and ceding commission paid on assumed business and (iii) premiums paid and ceding commissions received on ceded business.

Goodwill is attributable to acquisitions in the Insurance Distribution segment and represents the acquisition cost in excess of the fair value of net assets acquired, including identifiable intangible assets.

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The annual test of goodwill impairment is as of October 1st of each year.

Depending on the reporting unit, management utilizes one of two approaches for impairment testing.

Under the first approach, qualitative factors are first assessed to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

If it is more likely than not, then a quantitative impairment evaluation is performed.

Under the second approach, management bypasses the qualitative evaluation and proceeds directly to the quantitative evaluation.

The quantitative evaluation under both of the above approaches compares the estimated fair value of the reporting unit with its carrying value (including goodwill and identifiable intangible assets).

An impairment is recognized for the excess of the carrying amount of the reporting unit over it estimated fair value.

If the reporting unit’s estimated fair value exceeds its carrying value, goodwill is not impaired.

There have been no accumulated impairment losses since this goodwill was established.

The impairment test for each reporting unit may first consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

Examples of qualitative factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events, events affecting reporting units and sustained changes in our stock price.

If results of the qualitative assessment indicate a more likely than not determination, or if we elect not to perform a qualitative assessment, then a quantitative impairment evaluation is performed as described below.

The quantitative evaluation compares the estimated fair value using an income approach or market approach for each reporting unit with its respective carrying value (including goodwill and identifiable intangible assets).

The income approach uses discounted cash flows which are dependent on subjective factors including the timing of future cash flows, the underlying margin projection assumptions, future growth rates and the discount rate.

The market approach uses valuation multiples and is dependent on subjective factors including the determination of industry market multiples and EBITDA forecasts.

Additionally, to corroborate our estimated fair value, we perform a market capitalization reconciliation to determine if the implied control premium is reasonable.

If our assumptions or estimates in our fair value calculations change or if any of the above subjective factors vary from what was expected, this may impact our impairment analysis and result in a decline in fair value that may trigger future impairment charges.

Intangible Assets

Financial Guarantee Insurance intangible:

Upon Ambac's emergence from bankruptcy in 2013, an insurance intangible asset was recorded which represented the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities.

The carrying values of financial guarantee insurance and reinsurance contracts continue to be reported and measured in accordance with their existing accounting policies.

Pursuant to the Financial Services-Insurance Topic of the ASC, the insurance intangible is to be measured on a basis consistent with the related financial guarantee insurance and reinsurance contracts.

The initial insurance intangible asset was assigned to groups of insurance and reinsurance contracts with similar

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characteristics and has been amortized using a level-yield method based on par exposure of the related groups.

Finite-lived intangibles

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The intangible assets primarily relate to distribution relationships, non-compete agreements and trade names, all of which have finite lives and are amortized over their estimated useful lives using the straight-line method.

The acquisition date valuation method used to determine the fair value of customer relationships, which were the most significant intangible assets acquired, was the multi period excess earnings method "(MPEEM"), which quantifies the residual (or excess) cash flows generated by the intangible asset and discounts those cash flows to their present value.

The significant assumptions used in determining the fair value of customer relationships include estimated revenue growth, customer attrition rates, operating margins, and discount rate.

The Company tests finite-lived acquired intangible assets for impairment if certain events occur or circumstances change indicating that the carrying amount of the intangible asset may not be recoverable.

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Indefinite-lived intangibles

Ambac acquired identifiable intangible assets attributable to its acquisitions of carriers in both 2021 and 2022, which were accounted for as asset acquisitions (Specialty Property and Casualty Insurance segment).

Ambac acquired identifiable intangible assets attributable to its acquisitions of licensed insurance carriers in both 2021 and 2022, which were accounted for as asset acquisitions (Specialty Property and Casualty Insurance segment).

The intangible assets relate to insurance licenses which have indefinite lives and therefore are not amortized.

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There have been no accumulated impairment losses since these indefinite-lived intangible assets were established.

Restricted Cash

Cash that we do not have the right to use for general purposes is recorded as restricted cash in our consolidated balance sheets.

Restricted cash includes (i) consolidated variable interest entity cash restricted to support the obligations of the consolidated VIEs and (ii) fiduciary cash held by Ambac's insurance distribution subsidiaries as described below.

Fiduciary Funds

As an intermediary, we hold funds, generally in a fiduciary capacity, for the account of third parties, typically as the result of premiums received from retail brokers or insureds that are in transit to insurers and claims due that are in transit from

Since fiduciary assets are not available for corporate use, they are shown in the consolidated balance sheets as restricted cash and we present an equal and corresponding fiduciary liability relating to these funds representing amounts or claims or premiums due on our consolidated balance sheets (included in Other liabilities).

Fiduciary funds are generally required to be kept in bank accounts subject to guidelines which emphasize capital preservation and liquidity.

The Company is entitled to retain investment income earned on certain of these fiduciary funds in accordance with industry custom and practice and, in some cases, as supported by agreements with insureds.

Restricted cash for net uncollected premiums and claims and the related fiduciary liabilities were $ 12 and $ 14 at December 31, 2023 and 2022, respectively.

Loss and Loss Adjustment Expenses

Legacy Financial Guarantee

The loss and loss adjustment expense reserve (“loss reserve”) policy relates only to Ambac’s non-derivative financial guarantee insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.

Losses and loss expenses are based upon estimates of the ultimate aggregate losses inherent in the insured portfolio as of the reporting date.

The policy for derivative contracts is discussed in the “Derivative Contracts” section above.

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

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

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

• Net claim cash outflow policies represent contracts where the PV of expected cash outflows are greater than the PV of expected recovery cash inflows.

For such policies, a “loss and loss adjustment expense reserves” liability is recorded for the excess of the PV of expected net claim cash outflows over the unearned premium revenue.

• Net recovery cash inflow policies represent contracts where the PV of expected recovery cash inflows are greater than the PV of expected claim cash outflows.

For such policies, a “Subrogation recoverable” asset is recorded.

The evaluation process for determining expected losses is subject to certain judgments based on our assumptions regarding the probability of default by the issuer of the insured security, probability of settlement outcomes (which may include commutation settlements, refinancing and/or other settlement outcomes) and expected severity of credits for each insurance contract.

Ambac’s loss reserves are based on management’s ongoing review of the financial guarantee credit portfolio.

Active surveillance of the insured portfolio enables Ambac’s Risk Management Group ("RMG") to track credit migration of

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insured obligations from period to period and update internal classifications and credit ratings for each transaction.

Non-adversely classified credits are assigned a Class I rating while adversely classified credits are assigned a rating of Class IA through Class V.

The criteria for an exposure to be assigned an adversely classified credit rating includes the deterioration of an issuer’s financial condition, underperformance of the underlying collateral (for collateral dependent transactions such as mortgage-backed or student loan securitizations), poor performance by the servicer of the underlying collateral and other adverse economic events or trends.

The servicer of the underlying collateral of an insured securitization transaction is a consideration in assessing credit quality because the servicer’s performance can directly impact the performance of the related issue.

All credits are assigned risk classifications by RMG using the following guidelines:

CLASS I – “Fully Performing - Meets Ambac Criteria with Remote Probability of Claim” - Credits that demonstrate adequate security and structural protection with a strong capacity to pay interest, repay principal and perform as underwritten.

Factors supporting debt service payment and performance are considered unlikely to change and any such change would not have a negative impact upon the fundamental credit quality.

Through ongoing surveillance, Ambac may also designate Class I credits into one or more of the following categories:

• Survey List - credits that may lack information or demonstrate a weakness but further deterioration is not expected.

• Watch List - credits that demonstrate the potential for future material adverse development due to such factors as long-term uncertainty about a particular sector, a certain structural element, large exposure concentration or concern related to the issuer or transaction or the overall financial and economic sustainability.

CLASS IA – “Potential Problem with Risks to be Dimensioned” - Credits that are fully current and monetary default or claims-payment are not anticipated.

The issuer’s financial condition may be deteriorating or the credits may lack adequate collateral.

A structured financing may also evidence weakness in its fundamental credit quality as evidenced by its under-performance relative to its modeled projections at underwriting, issues related to the servicer’s ability to perform or questions about the structural integrity of the transaction.

While certain of these credits may still retain an investment grade rating, they usually have experienced or are vulnerable to a ratings downgrade.

Further investigation is required to dimension and correct any deficiencies.

A complete legal review of documents may be required.

An action plan should be developed with triggers for future classification changes upward or downward.

CLASS II – “Substandard Requiring Intervention” - Credits whose fundamental credit quality has deteriorated to the point that timely payment of debt service may be jeopardized by adversely developing trends of a financial, economic, structural, managerial or political nature.

No claim payment is currently

foreseen but the probability of loss or claim payment over the life of the transaction is now existent (generally 10% or greater probability).

Class II credits may be border-line or below investment grade (BBB- to B).

Prompt and sustained action must be taken to execute a comprehensive loss mitigation plan and correct deficiencies.

CLASS III – “Doubtful with Clear Potential for Loss” - Credits whose fundamental credit quality has deteriorated to the point that timely payment of debt service has been or will be jeopardized by adverse trends of a financial, economic, structural, managerial or political nature which, in the absence of positive change or corrective action, are likely to result in a loss.

The probability of monetary default or claims paying over the life of the transaction is generally 50% or greater.

Full exercise of all available remedial actions is required to avert or minimize losses.

Class III credits will generally be rated below investment grade (B to CCC).

CLASS IV – “Imminent Default or Defaulted” - Monetary default or claim payments have occurred or are expected imminently.

Class IV credits are generally rated D.

CLASS V – “Fully Reserved” - The credit has defaulted and payments have occurred.

The claim payments are scheduled and known, reserves have been established to fully cover such claims, and no claim volatility is expected.

The population of credits evaluated in Ambac’s loss reserve process are:

(i) all adversely classified credits and ii) non-adversely classified credits which had an internal Ambac rating downgrade since the transaction’s inception.

One of two approaches is then utilized to estimate losses to ultimately determine if a loss reserve should be established.

• The first approach is a statistical expected loss approach, which considers the likelihood of all possible outcomes.

The “base case” statistical expected loss is the product of:

(i) the par outstanding on the credit;

(ii) internally developed default information (taking into consideration internal ratings and average life of an obligation);

(iii) internally developed loss severities;

and (iv) a discount factor.

The loss severities and default information are based on rating agency information, are specific to each bond type and are established and approved by senior RMG officers.

For certain credit exposures, Ambac’s additional monitoring, loss remediation efforts and probabilities of potential settlement outcomes may provide information relevant to adjust this estimate of “base case” statistical expected losses.

RMG may accept the “base case” statistical expected loss as the best estimate of expected loss or assign multiple probability weighted scenarios to determine an adjusted statistical expected loss that better reflects management’s view of a given transaction’s expected losses, as well as the potential for additional remediation activities (e.g., commutations).

• The second approach entails the use of cash-flow based models to estimate expected losses (future claims, net of potential recoveries, expected to be paid to the holder of the insured financial obligation).

Ambac’s RMG group will consider the likelihood of all possible outcomes and

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develop appropriate cash flow scenarios.

This approach can include the utilization of internal or third party models and tools to project future losses and resultant claim payment estimates.

We utilize cash flow models for RMBS, student loans and other exposures.

RMBS and student loan models use historical performance of the collateral pools in order to then derive future performance characteristics, such as default and voluntary prepayment rates, which in turn determine projected future claim payments.

In other cases, such as many public finance exposures we do not specifically forecast resources available to pay debt service in the cash flow model itself.

Rather, we consider the issuers’ overall ability and willingness to pay, including the fiscal, economic, legal and political framework to develop projected future claim payment estimates.

In this approach, a probability-weighted expected loss estimate is developed based on assigning probabilities to multiple claim payment scenarios and applying an appropriate discount factor.

Additionally, we consider the issuer’s ability to refinance an insured issue, Ambac’s ability to execute a potential settlement (i.e., commutation) of the insurance policy, including the impact on future installment premiums, and/or other restructuring possibilities in our scenarios.

The commutation scenarios and the related probabilities of occurrence vary by transaction, depending on our view of the likelihood of negotiating such a transaction with issuers and/or investors.

The discount factor applied to the statistical expected loss approach is based on a risk-free discount rate corresponding to the remaining expected weighted-average life of the exposure and the exposure currency.

For the cash flow scenario approach, discount factors are applied based on a risk-free discount rate term structure and correspond to the date of each respective cash flow payment or recovery and the exposure currency.

Discount factors are updated for the current risk-free rate each reporting period.

Ambac establishes loss expense reserves based on our estimate of expected net cash outflows for loss expenses, such as legal and consulting costs.

Below we provide further details of our loss reserve models for both RMBS and student loan exposures:

RMBS Expected Loss Estimate

Ambac insures RMBS transactions collateralized by (i) first-lien mortgages;

and (ii) second-lien mortgage loans such as closed-end seconds and home equity lines of credit.

If the borrower defaults on the payments due under these loans and the property is subsequently liquidated, the liquidation proceeds are first utilized to pay off the first-lien loan (as well as other costs) and any remaining funds are applied to pay off the second-lien loan.

As a result of this subordinate position to the first-lien loan, second-lien loans may carry a significantly higher severity in the event of a loss.

Ambac primarily utilizes a cash flow model (“RMBS cash flow model”) to develop estimates of projected losses for both our first and second lien transactions.

The RMBS cash flow model projects collateral performance utilizing a combination of

historical performance along with the most recent loan status information to project future collateral performance.

In addition to the base case, we analyze historical volatility of performance to develop stress and upside cases.

The highest probability is assigned to the base case, with lower probabilities to the stress and upside cases.

For the liabilities of the transaction which we insure, we generally utilize waterfall projections generated from a tool provided by a market accepted vendor.

This waterfall tool allows us to capture the impact of each transaction’s specific structure (e.g., the waterfall priority of payments, triggers, redemption priority) to generate our specific projected claims profile in the base, upside and downside scenarios.

On a monthly basis, we compare monthly claims submitted against the trustees’ reports, waterfall projections and our understanding of the transactions’ structures to identify and resolve discrepancies.

In our experience, market performance and model characteristics change and therefore need to be updated and reflected in our models through time.

As such, we conduct regular reviews of current models, alternative models and the overall approach to loss estimation.

Student Loan Expected Loss Estimate

The student loan insured portfolio consists of credits collateralized by private student loans.

The calculation of loss reserves for our student loan portfolio involves evaluating numerous factors that can impact ultimate losses.

Since our policies cover timely interest and ultimate principal payment, our loss projections must make assumptions for many factors covering a long horizon.

Key assumptions that will impact ultimate losses include, but are not limited to, the following:

collateral performance (which is highly correlated to the economic environment);

interest rates;

operating risks associated with the issuer, servicers, special servicers, and administrators;

investor appetite for tendering or commuting insured obligations;

and as applicable, Ambac’s ability and willingness to commute policies.

In addition, we consider in our student loan loss projections the potential impact, if any, of proposed or final regulatory actions or orders, including by the Consumer Financial Protection Bureau ("CFPB"), affecting our insured transactions.

We develop and assign probabilities to multiple cash flow scenarios based on each transaction’s unique characteristics.

Probabilities assigned are based on available data related to the credit, information from contact with the issuer (if applicable), and any economic or market information that may impact the outcomes of the various scenarios being evaluated.

Our base case usually projects deal performance out to maturity using expected loss assumptions.

As appropriate, we also develop other cases that incorporate various upside and downside scenarios that may include changes to defaults and recoveries.

Cash and Cash Equivalents

Cash and cash equivalents principally consist of demand deposits with financial institutions and highly liquid fixed maturity investments having maturities of three months or less when purchased.

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Specialty Property and Casualty

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Restricted Cash including Fiduciary Funds

Cash that we do not have the right to use for general purposes is recorded as restricted cash in our consolidated balance sheets.

Restricted cash includes fiduciary cash held by Ambac's insurance distribution subsidiaries as described below.

Fiduciary funds are generally required to be kept in bank accounts subject to guidelines which emphasize capital preservation and liquidity.

Restricted cash for net uncollected premiums and claims and the related fiduciary liabilities were $ 17,669 and $ 11,881 at December 31, 2024 and 2023, respectively.

Specialty Property and Casualty Loss and Loss Adjustment Expenses

Loss and loss adjustment expense reserves for Specialty Property and Casualty policies represent management's estimate of the ultimate liability for unpaid losses and loss expenses for claims that have been reported and claims that have been incurred but not yet reported ("IBNR") as of the balance sheet date.

Loss and loss adjustment expense reserves do not represent an exact calculation of the liability, but instead represent management estimates, primarily utilizing actuarial expertise and projection methods that develop estimates for the ultimate cost of claims and claim adjustment expenses.

Loss and loss adjustment expense reserves represent management estimates, primarily utilizing actuarial expertise and projection methods that develop estimates for the ultimate cost of claims and claim adjustment expenses.

The reserves are estimated based upon experience and using a variety of actuarial methods.

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The projected loss ratio is determined by analyzing prior period experience, and adjusting for loss cost trends, rate level differences, mix of business changes and other known or observed factors influencing the accident year relative to prior accident years.

For prior accident years, the following estimation and analysis methods are principally used by the Company’s actuaries to estimate the ultimate cost of claims and claim adjustment expenses.

The following estimation and analysis methods are principally used by the Company’s actuaries to estimate the ultimate cost of claims and claim adjustment expenses.

These estimation and analysis methods are typically referred to as conventional actuarial methods.

• The paid loss development method assumes that the future change (positive or negative) in cumulative paid losses for

a given cohort of claims will occur in a stable, predictable pattern from year-to-year, consistent with the pattern observed in past cohorts.

• The paid loss development method assumes that the future change (positive or negative) in cumulative paid losses for a given cohort of claims will occur in a stable, predictable pattern from year-to-year, consistent with the pattern observed in past cohorts.

• The case incurred development method is the same as the paid loss development method, but is based on cumulative case-incurred losses rather than paid losses.

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Since the reserves are based on estimates, the ultimate liability may be more or less than such reserves.

Reinsurance Recoverable

The Company uses ceded reinsurance to transfer certain insurance risk, along with premiums written and earned, to other insurance carriers that agree to share in such risks.

The primary purpose of the reinsurance is to (i) protect the Company, at a cost, from losses in excess of amounts it is willing to accept, (ii) protect the Company's capital, and (iii) within the Specialty Property and Casualty Insurance operations, to manage the Company's net retention on individual risks and overall exposure to losses while providing the Company the ability to offer policies with sufficient limits to meet policyholder needs.

• Within its Specialty Property and Casualty Insurance segment, the Company generally enters into quota share reinsurance agreements whereby the Company cedes to the capacity providers (reinsurers) a substantial amount (generally 70 % or more) of its gross liability under all policies issued by and on behalf of the Company by the MGA/U.

Ambac is exposed to the credit risk of the reinsurer, or the risk that one of its reinsurers becomes insolvent or otherwise unable or unwilling to pay policyholder claims.

This credit risk is generally mitigated by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post collateral to secure the reinsured risks, which in some instances, exceeds the related reinsurance recoverable.

In this context, in the fourth quarter of 2024, management determined for runoff programs that it would

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select the high end of its actuarial estimate as it's loss selection pick given the greater volatility that runoff programs may experience.

Reinsurance Recoverable

The Company uses ceded reinsurance to transfer certain insurance risk, along with premiums written and earned, to other insurance carriers that agree to share in such risks.

The primary purpose of the reinsurance is to (i) protect the Company, at a cost, from losses in excess of amounts it is willing to accept, (ii) protect the Company's capital, and (iii) to manage the Company's net retention on individual risks and overall exposure to losses while providing the Company the ability to offer policies with sufficient limits to meet policyholder needs.

The Company generally enters into quota share reinsurance agreements whereby it cedes to the capacity providers (reinsurers) a substantial amount (generally 70 % or more) of its gross liability under all policies issued by and on behalf of the Company by the MGA/U.

Everspan is exposed to the credit risk of the reinsurer, or the risk that one of its reinsurers becomes insolvent or otherwise unable or unwilling to pay policyholder claims.

Amounts recoverable from reinsurers are estimated in a manner consistent with the associated loss and loss adjustment expense reserves.

The Company reports its reinsurance recoverables net of an allowance for amounts that are estimated to be uncollectible.

The reinsurance of risk does not legally relieve Ambac of its original liability to its policyholders.

In the event that any of Ambac’s reinsurers are unable to meet their obligations under reinsurance contracts, Ambac would, nonetheless, be liable to its policyholders for the full amount of its policy.

To minimize its credit exposure to losses from reinsurer insolvencies, Ambac (i) is entitled to receive collateral from certain reinsurance counterparties pursuant to the terms of the relevant reinsurance contracts and (ii) has certain cancellation rights that can be exercised by Ambac in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

For those reinsurance counterparties that do not currently post collateral, Ambac’s reinsurers are well capitalized, highly rated, authorized capacity providers.

Ambac has a formal quarterly credit impairment review process whereby Ambac has elected to use the practical expedient of considering the fair value of collateral posted by reinsurers when evaluating credit impairment.

To determine the total unsecured recoverable to be evaluated for credit impairment, Ambac nets the reinsurance recoverable amount by ceded premiums payable and the fair value of collateral posted, if any.

The Company reports reinsurance recoverables net of an allowance for amounts that are estimated to be uncollectible.

The reinsurance of risk does not legally relieve Everspan of its original liability to its policyholders.

In the event that any of Everspan’s reinsurers are unable to meet their obligations under reinsurance contracts, Everspan would, nonetheless, be liable to its policyholders for the full amount of its policy.

To minimize credit exposure to losses from reinsurer insolvencies, Everspan (i) is entitled to receive collateral from certain reinsurance counterparties pursuant to the terms of the relevant reinsurance contracts and (ii) has certain cancellation rights that can be exercised by Everspan in the event of rating agency downgrades of a reinsurer (among other events and circumstances).

For those reinsurance counterparties that do not currently post collateral, Everspan’s reinsurers are well capitalized, highly rated, authorized capacity providers.

Everspan has a formal quarterly credit impairment review process whereby it has elected to use the practical expedient of considering the fair value of collateral posted by reinsurers when evaluating credit impairment.

To determine the total unsecured recoverable to be evaluated for credit impairment, we net the reinsurance recoverable amount by ceded premiums payable and the fair value of collateral posted, if any.

The key factors in assessing credit impairment for reinsurance recoverables are independent rating agency credit ratings and loss severities.

Management utilizes a probability of default/loss given default ("PD/LGD") approach, which is applied to the net unsecured reinsurance recoverable amount.

Management utilizes a probability of default/loss given default ("PD/LGD") approach, which is applied to the net

unsecured reinsurance recoverable amount.

Refer to Note 8.

Insurance Contracts for credit impairment disclosures.

Long-term Debt

Long-term debt issued by Ambac is carried at par value less unamortized discount.

Accrued interest and discount accretion on long-term debt is reported as Interest expense on the Consolidated Statements of Total Comprehensive Income (Loss).

To the extent Ambac repurchases or redeems its long-term debt, such repurchases or redemptions may be settled for an amount different than the carrying value of the obligation.

Any difference between the payment and carrying value of the obligation is reported in Net realized gains (losses) on extinguishment of debt on the Consolidated Statements of Total Comprehensive Income (Loss).

For surplus note repurchases, the pro-rata purchase price related to principal and accrued interest is reported as a financing and operating activity, respectively, on the Statement of Cash Flows.

For long-term debt issued by consolidated VIEs in which Ambac's variable interest arises from financial guarantees written by Ambac's subsidiaries ("LFG VIEs"), we may elect to use the fair value option on an instrument by instrument basis.

When the fair value option is elected, changes in the fair value of the LFG VIEs' long-term debt is reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of

the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

In cases where the fair value option has not been elected, the LFG VIEs' long-term debt is carried at par less unamortized discount, with interest expense reported within Income (loss) on variable interest entities in the Consolidated Statements of Total Comprehensive Income (Loss).

Noncontrolling Interests

Nonredeemable noncontrolling interests

At December 31, 2023 and 2022, AAC had 4,596 shares of issued and outstanding Auction Market Preferred Shares ("AMPS") with a liquidation preference of $ 115 (reported as nonredeemable noncontrolling interest of $ 51 on Ambac's balance sheet).

In 2022, Ambac purchased 905 shares of AMPS for $ 8 .

The difference between this amount paid to AMPS holders and the carrying amount was reflected as an increase to Net income attributable to common shareholders for approximately $ 1 .

The auction occurs every 28 days and the dividend rate has continuously been reset at the maximum, equal to the Reference Rate plus 200 basis points.

Beginning July 1, 2023, the Reference Rate for the AMPS is one-month CME Term SOFR plus 0.11448 percent.

Prior to July 1, 2023, the Reference Rate was one-month LIBOR.

Under the terms of the AMPS, dividends may not be paid on the common stock of AAC unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling AFG (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses.

If dividends are paid on the common stock as provided in the prior sentence, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS.

AAC has not paid dividends on its AMPS since 2010.

Short-term Debt

Short-term debt is carried at par value less unamortized discount.

Accrued interest and discount accretion on short-term debt is reported as Interest expense on the Consolidated Statements of Total Comprehensive Income (Loss).

Noncontrolling Interests ("NCI")

Nonredeemable NCI interests

Nonredeemable NCI of $ 146,837 includes the aggregate NCI share in certain operating units which are minority owned by the units' respective management teams.

As of December 31, 2024, there are no put or call options associated with these minority interests and as such, the aggregate amount is classified as nonredeemable NCI on the balance sheet.

The acquisition date valuation method to determine the fair value of nonredeemable NCI was the discounted cash flow approach.

The significant fair value assumptions used in the model include estimated long term revenue and expense forecasts and the discount rate.

At December 31, 2024 and 2023, AAC had 4,596 shares of issued and outstanding Auction Market Preferred Shares ("AMPS") with a liquidation preference of $ 114,900 relative to Ambac common shareholders (reported as nonredeemable noncontrolling interest of $ 50,918 on Ambac's balance sheet).

Discontinued Operation for further discussion of the AMPS.

Redeemable noncontrolling interests

The Xchange, All Trans, Capacity Marine and Riverton acquisitions resulted in 80 %, 85 %, 80 % and 80 %, respectively, ownership of the acquired entities by Ambac.

The Xchange, All Trans, Capacity Marine, Riverton and Beat acquisitions resulted in the ownership percentages of the acquired entities by Ambac as shown in the following table

Company Ownership Percentage

All Trans 85 %

Capacity Marine 80 %

Riverton 80 %

(1) Beat's majority interests in its underlying MGAs ranges from 60 % to 100 % at December 31, 2024, resulting in Ambac's interest ranging from 36 % to 60 % % in each underlying MGA/U.

Under the terms of all the acquisition agreements, Ambac has call options to purchase the remaining interest from the minority owners (i.e., noncontrolling interests) and the minority owners have put options to sell their remaining interests to Ambac.

Because the exercise of the put options are outside the control of Ambac, in accordance with the Distinguishing Liabilities from Equity Topic of the ASC, Ambac reports redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheet.

The redeemable noncontrolling interest is remeasured each period as the greater of:

the carrying value under ASC 810, which attributes a portion of consolidated net income (loss) to the redeemable noncontrolling interest, and

Because the exercise of the put options are outside the control of Ambac, in accordance with the Distinguishing Liabilities from Equity Topic of the ASC, Ambac reports redeemable NCI in the mezzanine section of its consolidated balance sheets.

The acquisition date valuation method to determine the fair value of redeemable NCI and related put and call options was Monte Carlo Simulation.

The significant fair value assumptions used in the simulation include the exercise thresholds, EBITDA forecasts, discount rate and long-term growth rates.

The redeemable NCI is remeasured each period as the greater of:

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the carrying value under ASC 810, which attributes a portion of consolidated net income (loss) to the redeemable NCI, and

the redemption value of the put option under ASC 480 as if it were exercisable at the end of the reporting period.

Any increase (decrease) in the carrying amount of the redeemable noncontrolling interest as a result of adjusting to the redemption value of the put option is recorded as an offset to retained earnings.

Any increase (decrease) in the carrying amount of the redeemable NCI as a result of adjusting to the redemption value of the put option is recorded as an offset to retained earnings.

The impact of such differences on earnings per share are presented in Note 15.

Net Income Per Share.

Following is a rollforward of redeemable noncontrolling interest.

Following is a rollforward of redeemable NCI.

Years ended December 31, 2024 2023

Beginning balance $ 17,079 $ 19,983

Fair value of redeemable noncontrolling interest at acquisition date 2 5

Net income attributable to redeemable noncontrolling interest (ASC 810) 1 1

Fair value of redeemable NCI at acquisition date 185,469 2,450

Net income attributable to redeemable NCI (ASC 810) ( 1,282 ) 1,318

Distributions ( 2,391 ) ( 1,880 )

Adjustment to redemption value (ASC 480 ) ( 53,210 ) ( 4,792 )

Foreign exchange ( 4,805 ) —

Ending Balance $ 140,860 $ 17,079

Revenue Recognition

Revenues for the Insurance Distribution business operations and certain revenues of a consolidated VIE are recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC.

Revenues for the Insurance Distribution business operations are recognized in accordance with the Revenue from Contracts with Customers Topic of the ASC.

The following steps are applied to recognize revenue:

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A performance obligation is satisfied either at a point in time or over time depending on the nature of the product or service provided, and the specific terms of the contract with customers.

Insurance Distribution

Insurance Distribution performance obligations consist of underwriting and placing policies with insurers and, for certain products, providing claims servicing.

Performance obligations consist of underwriting and placing policies with insurers and, for certain products, providing claims servicing.

Revenue from employer stop loss policies ("ESL") is apportioned to policy placement and claims servicing based on the relative stand-alone selling price of the respective performance obligations with policy placement revenue recognized upfront while claims servicing revenue is recognized over the claim adjustment period.

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Once the right to consideration becomes unconditional, it is reported as a receivable.

Contract assets are evaluated for credit loss under CECL.

Management utilizes a PD/LGD approach, similar to the one described above for financial guarantee premium receivables and loans.

Contract assets are evaluated for credit loss under CECL using a probability of default / loss given default (“PD/LGD”) method which measures credit impairment as the product of the carrying value, default probability and loss given default, considering the asset’s credit rating and average life.

Contract liabilities represent the Company's obligation to transfer services for which it has already received consideration from the customer.

2 unchanged sentences

As these costs relate to the Company’s policy placement performance obligation to its customers, they are expensed as incurred.

These costs are reported in Commission expenses on the Consolidated Statement of Total Comprehensive Income.

Consolidated VIE

Refer to Note 11.

Variable Interest Entities for further discussion on Ambac's involvement with VIEs and triggering events resulting in consolidation.

Ambac consolidated a VIE on December 31, 2023 which has a contract with a governmental entity to provide construction and facilities management services in return for periodic concession payments.

These services have been identified as the VIE's performance obligations.

Revenue is apportioned to these performance obligations based on their respective stand-alone selling prices.

Revenue is estimated based on regularly updated cash flow projections.

This is a long-term contract that contains a significant financing component related to construction.

As the construction services have already been completed, revenue recognized for this performance obligation will solely consist of interest income.

Facilities management services are provided, and thus recognized, over time and will consist of services revenue.

Costs to fulfill the customer contract primarily relate to fees paid to vendors to provide the facilities management services and will be expensed as incurred.

All revenue and expense items will be reported within Income (loss) from variable interest entities.

Contract assets are evaluated for credit losses under CECL.

Management utilizes a PD/LGD approach, similar to the one described above for financial guarantee premium receivables and loans.

Contract assets are reported within Derivative and other assets in the Variable interest entity asset section of the Consolidated Balance Sheet.

Ambac Financial Group, Inc 78

2023 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Employee Benefits

Postretirement and Postemployment Benefits

Ambac provides postretirement and postemployment benefits, including health and life benefits covering employees who meet certain age and service requirements.

Ambac accounts for these benefits under the accrual method of accounting.

Amounts related to the postretirement health benefits liability are established and charged to expense based on actuarial determinations.

These costs are reported in Commission expenses on the Consolidated Statement of Total Comprehensive Income (Loss).

Incentive Compensation

9 unchanged sentences

Ambac recognizes compensation costs for all equity classified awards granted at fair value, which is measured on the grant date, and records forfeitures for unvested shares only when they occur.

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

For awards that only include service and performance conditions, the fair value is the market price of Ambac stock on the grant date.

3 unchanged sentences

• Performance stock units — require both future service and achieving specified performance targets to vest.

Performance stock unit grants also include a market condition TSR modifier that will cause the total payout at the end the performance period to increase or decrease depending on Ambac's stock performance relative to a peer

Compensation costs for all performance stock units are only recognized when the achievement of the performance conditions are considered probable.

2 unchanged sentences

Changes in the estimated or actual outcome of a performance condition are recognized by reflecting a retrospective adjustment to compensation cost in the current period.

In 2020, the Ambac UK Board of Directors adopted a long term incentive plan for Ambac UK employees, which includes both performance and time based awards.

Compensation costs for all performance based awards are based on the probable outcome of the performance conditions and adjusted for subsequent changes in the estimated or actual outcome each reporting period as necessary.

Compensation costs for time-based awards are recognized evenly over the service period.

Operating Leases

9 unchanged sentences

For those leases that qualify for that exemption, we will not recognize ROU assets or lease liabilities.

For all contracts where Ambac is the lessee and lessor we have also elected the practical expedient to not separate lease and non-lease components.

Depreciation and Amortization

Depreciation of furniture and fixtures, certain information technology development costs and electronic data processing equipment is charged over the estimated useful lives of the respective assets, ranging from three to five years, using the

Ambac Financial Group, Inc 79

2023 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

straight-line method.

For all contracts where Ambac is the lessee and lessor we have also elected the

practical expedient to not separate lease and non-lease components.

Depreciation and Amortization of Fixed Assets

Amortization of leasehold improvements is charged over the remaining term of the respective operating lease using the straight-line method.

Changes to estimated useful lives are accounted for prospectively from the period of change.

Fixed assets are evaluated for impairment whenever events or changes in circumstances indicate their carrying value may not be recoverable.

Foreign Currency

8 unchanged sentences

The impact of non-functional currency transactions and the remeasurement of non-functional currency assets and liabilities into the respective subsidiaries' functional currency (collectively "foreign currency transactions gains/(losses)") are $ 101 , $ 0 and $ 0 for the years ended December 31, 2024, 2023 and 2022, respectively.

Foreign currency transactions gains/(losses) are primarily the result of remeasuring Ambac UK's assets and liabilities denominated in currencies (primarily the U.S.

dollar and the Euro) other than its functional currency (the British Pound Sterling).

Foreign currency transactions gains/(losses) are primarily the result of Beat's transactions in currencies (primarily the U.S.

dollar) other than its functional currency (the British Pound Sterling).

Commitments and Contingencies

4 unchanged sentences

As a legal contingency develops, the Company, in conjunction with outside counsel, evaluates what level of accrual and/or disclosure is required under the guidance.

See the Litigation Against Ambac section of Note 19.

Commitments and Contingencies for additional information about our legal contingencies and related accounting evaluation.

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

Ambac files a consolidated U.S.

Federal income tax return with its subsidiaries.

Federal income tax return with its subsidiaries, except for Beat which files a separate tax return.

Ambac and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions.

4 unchanged sentences

The Income Taxes Topic of the ASC requires that companies assess whether valuation allowances should be established against their deferred tax assets based on management's assessment and consideration of all available evidence using a ‘more likely than not' standard.

In making such judgments, significant weight is given to evidence that can be objectively verified.

In making such judgments,

significant weight is given to evidence that can be objectively verified.

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

Net Income Per Share

Basic net income per share is computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable noncontrolling interest, by the weighted-average number of common shares outstanding and vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").

Basic net income per share is computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable NCI, by the weighted-average number of common shares outstanding and vested restricted stock units (together, "Basic Weighted Average Shares Outstanding").

Diluted net income per share is computed by dividing net income attributable to common stockholders, including the adjustment to redemption value of the redeemable controlling interest, by the Basic Weighted-Average Shares Outstanding plus all potentially dilutive common shares outstanding during the period.

All potentially dilutive common shares outstanding consider common stock deliverable pursuant to warrants, unvested restricted stock units and performance stock units granted under existing compensation plans.

Ambac Financial Group, Inc 80

2023 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Supplemental Disclosure of Cash Flow Information

2 unchanged sentences

Income taxes $ 526 $ 381 $ 347

Interest on long-term debt 50 283 80

Interest on debt 3,821 — —

Non-cash investing and financing activities:

Exchange of investments in Puerto Rico bonds for new securities issued in the restructuring transactions — 185 —

Decrease in long-term debt as a result of surplus notes exchanges — — 71

Securities acquired (transferred) in transactions related to Puerto Rico restructurings ( 1 ) 508 —

Loans acquired through financial guarantee subrogation — 20 —

VIE long-term debt issued related to Puerto Rico restructurings — 583 —

Decrease in VIE loans as a result of de-consolidations 133 — —

Decrease in VIE long-term debt as a result of de-consolidations 133 — —

Increase in VIE long-term debt as a result of consolidations 89 — —

Ambac common stock issued as partial consideration to acquire Beat 29,229 — —

December 31, 2024 2023 2022

2 unchanged sentences

Restricted cash 17,669 11,881 13,612

Variable Interest Entity Restricted cash 246 17 2

Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows 47,275 19,223 19,941

Reclassifications and Rounding

Reclassifications may have been made to prior years' amounts to conform to the current year's presentation.

Reclassifications have been made to prior years' amounts to conform to the current year's presentation.

This includes reclassifying held-for-sale assets and liabilities of Ambac's financial guarantee business which is being reported as a discontinued operation.

Certain amounts and tables in the consolidated financial statements and associated notes may not add due to rounding.

Adopted Accounting Standards

There have been no new accounting standards adopted during 2023.

Future Application of Accounting Standards

The Company adopted the following accounting standard in 2024:

Segment Reporting:

9 unchanged sentences

i) all the reported measures of a segment’s profit or loss are used by the

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

CODM for purposes of assessing performance and allocating resources;

1 unchanged sentence

The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

Ambac will adopt this ASU for the annual reporting period ending December 31, 2024 and we are evaluating its impact on Ambac's financial statements.

Ambac adopted this ASU for the annual reporting period ending December 31, 2024.

Segment Information for the required disclosures.

Future Application of Accounting Standards

Income Taxes:

6 unchanged sentences

The ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

Ambac will adopt this ASU on January 1, 2025 and we are evaluating its impact on Ambac's financial statements.

adopt this ASU on January 1, 2025 and do not expect it to have a consequential impact on Ambac's financial statements.

Expense Disaggregation Disclosures:

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40).

The enhanced disclosures requirements include the following:

• Disclose the amounts of certain expense categories included in each relevant expense caption.

Those categories applicable to Ambac include employee compensation, depreciation, and intangible asset amortization.

A relevant expense caption is an expense caption presented on the face of the income statement within continuing operations that contains any of the expense categories listed above.

• Include certain amounts that are already required to be disclosed under current GAAP in the same disclosure as the other disaggregation requirements.

• Disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively.

• Disclose the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses.

The ASU is effective for annual periods beginning after December 15, 2026 and for interim reporting periods after December 15, 2027 with early adoption permitted.

Ambac has not determined if it will early adopt this ASU and is evaluating the impact on Ambac's financial statements.

SEGMENT INFORMATION

The Company reports its results of continuing operations in two segments:

Specialty Property and Casualty Insurance and Insurance Distribution.

These reportable segments offer distinct products and services as further described in Note 1.

Background and Business Description.

The operating entities within each segment are wholly or majority owned by separate intermediate holding companies:

Everspan Holdings, LLC for Specialty Property and Casualty Insurance and Cirrata Group, LLC for Insurance Distribution.

The Company's segments have separate management teams with incentive compensation structures based on segment level performance.

Financial reporting for each segment is regularly provided to the Company's Chief Executive Officer, who is the chief operating decision maker ("CODM"), for purposes of monitoring the businesses, assessing performance and allocating resources.

The following tables summarize the components of the Company’s total revenues and expenses, and pretax income (loss) by reportable business segment.

Information provided below for “Corporate and Other” primarily relates to the operations of AFG, which will include investment income on its investment portfolio and costs to maintain the operations of AFG, including public company reporting, capital management and business development costs for the acquisition and development of new business initiatives.

As a result of the Company reporting the results of operations of AAC as discontinued operations, certain corporate costs charged to AAC totaling $ 14,919 , $ 19,367 and $ 20,189 for the years ended December 31, 2024, 2023 and 2022, respectively, have been reported in Net income from continuing operations on the Consolidated Statements of Total Comprehensive Income and included in Corporate and Other in the tables below.

Ambac Financial Group, Inc.

3 unchanged sentences

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

SEGMENT INFORMATION

The Company reports its results of operations in three segments:

Legacy Financial Guarantee Insurance, Specialty Property and Casualty Insurance and Insurance Distribution, separate from Corporate and Other, which is consistent with the manner in which the Company's chief operating decision maker ("CODM") reviews the business to assess performance and allocate resources.

Background and Business Description for a description of each of the Company's business segments.

The following tables summarize the components of the Company’s total revenues and expenses, pretax income (loss) and total assets by reportable business segment.

Year Ended December 31, 2023 Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated

(Dollar Amounts in Thousands, Except Share Amounts)

Year Ended December 31, 2024 Year Ended December 31, 2023

Reportable Segments Reportable Segments

Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Total Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Total

Net premiums earned $ 99,005 $ 99,005 $ 51,911 $ 51,911

1 unchanged sentence

Program fees 13,506 13,506 8,437 8,437

Net investment income 127 4 — $ 9 140

Net investment gains (losses), including impairments ( 23 ) — — ( 22 )

Net investment income, net investment gains (losses), including impairments 6,400 787 $ 6,764 13,951 3,759 64 $ 9,353 13,176

Net gains (losses) on derivative contracts — 106 3,910 4,016 — — ( 279 ) ( 279 )

Other income (expense), including VIEs 15 — — — 15

Total revenues (1)

Other income (expense) 7,409 6,320 ( 415 ) 13,314 ( 6 ) 200 6 200

Total revenues from Continuing Operations (1)

126,320 99,236 10,259 235,815 64,101 51,546 9,080 124,728

Loss and loss adjustment expenses (benefit) 72,626 72,626 36,712 36,712

Amortization of deferred acquisition costs, net — 11 11

Policy acquisition costs 23,666 23,666 10,557 10,557

Commission expenses 40,876 40,876 29,465 29,465

General and administrative expenses (2)

106 16 11 21 155

Depreciation expense — 481 1,864 2,345 — 42 1,036 1,078

1 unchanged sentence

Interest expense 9,379 9,379 —

Total expenses 127 64 44 22 257

Pretax income (loss) 17 — 7 ( 13 ) 12

Income tax expense (benefit) 8 — — ( 1 ) 7

Net income (loss) $ 9 $ — $ 7 $ ( 11 ) $ 5

Compensation expense 10,201 28,353 25,791 64,346 10,853 7,951 29,664 48,468

Non Compensation expense 7,605 10,354 46,861 64,820 5,596 2,647 10,274 18,517

Total expenses from Continuing Operations 114,098 107,045 74,516 295,660 63,718 44,257 40,974 148,949

Segment pretax income (loss) 12,222 ( 7,809 ) ( 64,257 ) ( 59,845 ) 383 7,289 ( 31,894 ) ( 24,221 )

Segment income tax expense (benefit) 1,753 ( 928 ) ( 1,748 ) ( 924 ) 48 156 ( 1,193 ) ( 989 )

Segment net income (loss) 10,469 ( 6,881 ) ( 62,509 ) ( 58,921 ) 335 7,133 ( 30,701 ) ( 23,232 )

Segment net (income) loss attributable to NCI 2 ( 363 ) ( 361 ) ( 1 ) ( 1,318 ) ( 1,319 )

Segment net income (loss) attributable to Ambac shareholders $ 10,471 $ ( 7,244 ) $ ( 62,509 ) $ ( 59,282 ) $ 334 5,815 ( 30,701 ) $ ( 24,551 )

Reconciliation to consolidated net income (loss) attributable to Ambac stockholders

Discontinued operations ( 497,167 ) 28,183

Net income (loss) attributable to Ambac stockholders $ ( 556,449 ) $ 3,632

Reconciliation of segment assets to consolidated total assets

Total assets $ 751,272 $ 900,222 $ 139,684 $ 1,791,178 $ 523,179 $ 154,846 $ 233,839 $ 911,864

Discontinued operations $ 6,267,200 $ 7,516,456

Total consolidated assets $ 8,058,378 $ 8,428,320

EBITDA Reconciliation

Segment net income (loss) $ 10,469 $ ( 6,881 ) $ ( 62,509 ) $ ( 58,921 ) $ 335 $ 7,133 $ ( 30,701 ) $ ( 23,232 )

Interest expense 9,379 9,379 — —

Income taxes 1,753 ( 928 ) ( 1,748 ) ( 924 ) 48 156 ( 1,193 ) ( 989 )

Depreciation — 481 1,864 2,345 — 42 1,036 1,078

Intangible amortization 17,602 17,602 4,152 4,152

EBITDA 12,222 19,653 ( 62,393 ) ( 30,518 ) $ 383 $ 11,483 $ ( 30,858 ) $ ( 18,991 )

Impact of noncontrolling interests ( 6,448 ) ( 6,448 ) ( 2,102 ) ( 2,102 )

Ambac EBITDA $ 12,222 $ 13,208 $ ( 62,396 ) $ ( 36,966 ) 383 9,381 ( 30,858 ) ( 21,093 )

(1) Inter-segment revenues and inter-segment pre-tax income (loss) amounts are insignificant and are not presented separately.

Ambac Financial Group, Inc.

3 unchanged sentences

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Year Ended December 31, 2022 Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated

(Dollar Amounts in Thousands, Except Share Amounts)

Year Ended December 31, 2022

Reportable Segments

Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Total

Net premiums earned $ 13,869 $ 13,869

1 unchanged sentence

Program fees 3,095 3,095

Net investment income 12 2 $ 3 17

Net investment gains (losses), including impairments 32 — — 31

Net investment income, net investment gains (losses), including impairments 1,559 — $ 2,883 4,442

Net gains (losses) on derivative contracts 935 935

Net realized gains (losses) on extinguishment of debt 81 81

Other income (expense), including VIEs 30 — 1 — 31

Litigation recoveries 126 126

Total revenues and other income (1)

451 18 31 4 505

Other income (expense) ( 58 ) 715 ( 81 ) 576

Total revenues from Continuing Operations 18,465 31,410 3,737 53,612

Loss and loss adjustment expenses (benefit) 9,071 9,071

Amortization of deferred acquisition costs, net — 3 3

Policy acquisition costs 2,535 2,535

Commission expenses 17,641 17,641

General and administrative expenses (2)

102 13 6 17 139

Depreciation expense — 31 841 872

1 unchanged sentence

Interest expense — — —

Total expenses ( 89 ) 25 27 17 ( 20 )

Pretax income (loss) $ 540 $ ( 6 ) $ 5 $ ( 14 ) $ 525

Income tax expense (benefit) 3 — — — 2

Net income (loss) $ 537 $ ( 6 ) $ 5 $ ( 13 ) $ 522

Compensation expense 7,799 4,518 26,842 39,159

Non Compensation expense 5,406 1,775 9,938 17,119

Total expenses from Continuing Operations (1)

24,811 26,886 37,621 89,318

Segment pretax income (loss) ( 6,346 ) 4,524 ( 33,884 ) ( 35,706 )

Segment income tax expense (benefit) ( 1 ) — ( 462 ) ( 462 )

Segment net income (loss) ( 6,345 ) 4,524 ( 33,422 ) ( 35,244 )

Segment net (income) loss attributable to NCI 15 ( 886 ) ( 871 )

Segment net income (loss) attributable to Ambac shareholders $ ( 6,330 ) $ 3,638 $ ( 33,422 ) $ ( 36,115 )

Reconciliation to consolidated net income (loss) attributable to Ambac stockholders

Discontinued operations 557,364

gain on purchase of auction market preferred shares 1,131

Net income (loss) attributable to Ambac stockholders $ 522,380

Reconciliation of segment assets to consolidated total assets

Total assets 316,327 138,068 226,386 $ 680,781

Year Ended December 31, 2021 Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consolidated (1)

Discontinued operations 7,291,949

Total consolidated assets $ 7,972,730

Segment net income (loss) $ ( 6,345 ) $ 4,524 $ ( 33,422 ) $ ( 35,244 )

Interest expense — — —

Income taxes ( 1 ) — ( 462 ) ( 462 )

Depreciation — 31 841 872

Intangible amortization 2,921 2,921

EBITDA ( 6,346 ) 7,476 ( 33,043 ) ( 31,913 )

Impact of noncontrolling interests ( 1,463 ) ( 1,463 )

Ambac EBITDA $ ( 6,347 ) $ 6,013 $ ( 33,043 ) $ ( 33,377 )

(1) Inter-segment revenues and inter-segment pre-tax income (loss) amounts are insignificant and are not presented separately.

Geographic Information

Revenue is primarily recognized based on the country in which the services are performed.

The following table shows the geographic breakdown of revenue:

Year Ended December 31, 2024 2023 2022

United States $ 212,605 $ 124,728 $ 53,612

United Kingdom 23,210 — —

Total revenues and other income $ 235,815 $ 124,728 $ 53,612

BUSINESS COMBINATION

On July 31, 2024, Ambac completed the acquisition of 60 % of Beat for a purchase price of $ 281,278 of which approximately $ 252,048 was paid in cash and the remainder was satisfied through the issuance of 2,216,023 shares of Company Common Stock to certain Sellers (the "Beat Transaction").

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.

Many of Beat's operating units are minority owned by their respective management teams and accordingly, Ambac's economic interests in those units is less than 60 % despite our ownership of 60 % of Beat.

AFG funded the cash portion of the consideration with a combination of available cash, approximately $ 62,000 of funding from AAC in the form of an investment in Cirrata V LLC, and $ 147,000 from new indebtedness (the "Credit Facility") that was issued in the third quarter of 2024.

Debt for the terms of the Credit Facility.

AFG issued the common stock free and clear of any liens or restrictions (other than those arising under state and federal securities laws of the United States) and bearing a restrictive legend.

The common stock has not been registered under the Securities Act in reliance upon an exemption from registration pursuant to Section 4(a)(2) of the Securities Act.

At the closing of the Beat Transaction, AFG entered into a Shareholders’ Agreement by and among AFG, the Purchaser, the Rollover Shareholders and Beat (the “Shareholders’ Agreement”).

The Shareholders’ Agreement provides for, among other things, the granting of (i) put options to each Rollover Shareholder to require the Purchaser to purchase from such Rollover Shareholder, the Relevant Shares (as defined in the Shareholders’ Agreement), and (ii) call options to the Purchaser to purchase from each Rollover Shareholder, the Relevant Shares.

The acquisition was accounted for as a business combination using the acquisition method of accounting.

The Company has finalized its fair value estimates of the acquired assets, assumed liabilities and NCI as of December 31, 2024, and no subsequent adjustments will be made within the permitted measurement period as defined by ASC 805.

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

The following table summarizes the consideration transferred to acquire Beat and the estimated fair values of the identified assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the NCI, at the acquisition date:

Fair value of consideration transferred:

Cash $ 252,048

Common shares 29,229

Total consideration $ 281,278

Recognized amounts of assets acquired, liabilities assumed and NCI:

Cash and equivalents $ 8,272

Short-term investments 28,919

Commission receivables and contract assets 47,696

Other assets 10,972

Intangible assets 311,557

Goodwill 357,317

Advanced commissions ( 49,299 )

Premium payable ( 5,722 )

Deferred tax liability ( 74,300 )

Other liabilities ( 19,570 )

Redeemable NCI ( 185,469 )

Nonredeemable NCI ( 149,095 )

Total $ 281,278

Goodwill was recorded to reflect the excess purchase consideration over net assets acquired and primarily consists of the future economic benefits that we expect to receive as a result of the acquisition, driven by the value of Beat's potential future distribution and carrier relationships, and synergies with other Ambac business operations.

All of the $ 357,317 of goodwill was assigned to the Insurance Distribution segment.

The goodwill is not deductible for tax purposes.

The fair value of the redeemable non-controlling interest of $ 185,469 on the acquisition date was estimated based on the non-controlling interest’s respective share of Beat's enterprise value, adjusted for the value of Ambac's call option to purchase, and the minority owners' put option to sell to Ambac, respectively, the remaining 40 % membership interest in Beat.

Please refer to the Redeemable Noncontrolling Interest section of Note 2.

Basis of Presentation and Significant Accounting Policies, for further information regarding the terms of the call and put option, as well as the redeemable NCI balance sheet classification.

The fair value of the nonredeemable NCI of $ 149,095 represents the aggregate NCI share in certain Beat operating units which are minority owned by the units' respective management teams.

At December 31, 2024, there are no put or call options associated with these minority interests and as such, the aggregate amount is classified as nonredeemable NCI on the balance sheet.

The following table sets forth the estimated fair values of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:

Customer relationships $ 303,331 10.0

Trademarks 8,226 10.0

Total $ 311,557

The customer relationships intangible represents existing relationships Beat maintains with a variety of brokers and distributors across its product lines.

It excludes the value of potential future distribution relationships that may be developed, which is included in goodwill.

The trade name intangible represents the rights to the Beat Capital Partners brand name which is well known in the marketplace in which Beat competes.

The overall weighted average useful life of the identified amortizable intangible assets acquired is 5.1 years.

The acquired business contributed revenues of $ 40,343 and net income of $ 4,551 to Ambac for the period from August 1, 2024, to December 31, 2024.

The following unaudited pro forma summary presents consolidated information of Ambac as if the business combination had occurred on January 1, 2023.

Year Ended December 31,

Pro forma (unaudited) 2024 2023

Revenues $ 276,800 $ 182,482

Net income (loss) from continuing operations $ ( 51,782 ) $ ( 93,021 )

Ambac did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and net income.

These pro forma amounts have been calculated after applying Ambac's accounting policies and adjusting the results of Beat to reflect amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from January 1, 2023, with the consequential tax effects.

In 2024, Ambac incurred $ 27,388 of acquisition-related costs.

These expenses are included in general and administrative expense on Ambac's consolidated statement of comprehensive income (loss) for the year ended December 31, 2024.

In the table above, these expenses are reflected in the pro forma net income for the year ended December 31, 2023.

DISCONTINUED OPERATION

Sale of Ambac Assurance Corporation ("AAC")

On June 4, 2024, AFG entered into a stock purchase agreement (the "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 owned by AFG to the Buyer for aggregate consideration of $ 420,000 in cash, and will issue to the Buyer a warrant to

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

purchase AFG common stock as further described below (the "AAC Sale").

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

The Purchase Agreement required AFG to seek the affirmative vote in favor of the AAC Sale by the holders of a majority of the issued and outstanding shares of AFG common stock entitled to vote thereon (the “Stockholder Approval”).

On October 16, 2024, Stockholder Approval was obtained at a special meeting of stockholders duly convened for that purpose.

The Purchase Agreement contains certain customary termination rights for each of AFG and Buyer, including (i) by mutual written agreement;

(ii) if the AAC Sale has not been consummated on or before April 4, 2025 (the “End Date”), subject to extension by 90 days in certain circumstances;

(iii) if the other party is in breach of the Purchase Agreement in a manner that would result in a failure of an applicable closing condition and such breach cannot be cured or, if curable, has not been cured within 60 days after written notice to the other party of such breach;

or (iv) if any applicable law makes the consummation of the Closing illegal or otherwise prohibited, or any judgment, order or decree of any governmental authority enjoins Buyer and AFG from consummating the Closing.

AFG would pay the Buyer an amount equal to $ 22,000 (the “Termination Fee”) if all of the following occur:

(i) the Purchase Agreement is terminated as a result of (a) not closing the AAC Sale and other transactions contemplated by the Purchase Agreement by the End Date, as it may be extended, or (b) an AFG breach of representations or covenants that would cause certain closing conditions not to be satisfied;

(ii) AFG has received an alternative acquisition proposal prior to a valid termination of the Purchase Agreement;

and (iii) within 12 months after termination of the Purchase Agreement, AFG enters into a definitive agreement for an alternative acquisition.

AFG would also pay Buyer the Termination Fee if the Purchase Agreement is terminated for (x) AFG's breach of certain covenants that would cause closing conditions not to be satisfied, or (y) AFG changing its recommendation to the Company’s stockholders regarding the sale.

In addition to the Termination Fee, AFG would pay Buyer up to $ 6,000 as a reimbursement of Buyer’s reasonably documented out-of-pocket fees and expenses incurred in connection with the AAC Sale and other transactions contemplated by the Purchase Agreement if (i) the Purchase Agreement is terminated as a result of not closing the AAC Sale and other transactions by the End Date and the Termination Fee is also payable;

(ii) the Purchase Agreement is terminated as a result of AFG changing its recommendation to the AFG stockholders regarding the AAC Sale;

or (iii) there is an AFG breach of representations or covenants that would cause certain closing conditions not to be satisfied.

The Closing is subject to customary closing conditions, including the receipt of specified regulatory approvals.

In connection with and pursuant to the Purchase Agreement, AFG has agreed to issue to the 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 6.5 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.

Also pursuant to the Purchase Agreement, concurrent with the AAC Sale, AFG will purchase AAC's co-investment in the holding company established to purchase Beat, for an amount equal to AAC's $ 62,000 investment plus 7.5 % per annum thereon.

While management, the Board and AFG's stockholders have approved the AAC Sale, the AAC Sale is also subject to approval by our regulators in both the US and UK.

Buyer received approval from the U.K.

Prudential Regulation Authority ("PRA") for the change in control of Ambac UK on October 24, 2024 (which remains effective only if the AAC Sale is completed by April 30, 2025, which deadline may be extended by the PRA on upon Buyer's request).

Approval from the Wisconsin Office of the Commissioner of Insurance ("OCI") remains outstanding.

Management believes the OCI approval of the sale of AAC is ordinary and customary and it is probable that the deal will close in the first half of 2025.

The AAC Sale will have a major effect on AFG's operations and financial results and, as of December 31, 2024, meets the held-for-sale reporting requirements.

Accordingly, AAC's assets and liabilities that will be transferred in the AAC Sale are classified as held-for-sale, and its results and cash flows presented as discontinued operations.

At December 31, 2024, the carrying value of AAC's net assets held-for-sale is $ 962,637 , before the valuation allowance for the expected loss on disposal, inclusive of the accrued value of AAC's co-investment with AFG described above, and net of the carrying value of AAC's Auction Market Preferred Shares ("AMPS").

• At December 31, 2024 and 2023, AAC had 4,596 shares of issued and outstanding AMPS with a liquidation preference of $ 114,900 relative to Ambac common shareholders (reported as nonredeemable noncontrolling interest of $ 50,918 on Ambac's balance sheet).

In 2022, AAC purchased 905 shares of AMPS for $7,919.

The difference between this amount paid to AMPS holders and the carrying amount was reflected as an increase to Net income attributable to common shareholders for approximately $ 1,131 .

The auction occurs every 28 days and the dividend rate has continuously been reset at the maximum, equal to the Reference Rate plus 200 basis points.

Beginning July 1, 2023, the Reference Rate for the AMPS is one-month CME Term SOFR plus 0.11448 percent.

Prior to July 1, 2023, the Reference Rate was one-month LIBOR.

• Under the terms of the AMPS, dividends may not be paid on the common stock of AAC unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided, that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for, enabling AFG (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

AAC has not paid dividends on its AMPS since 2010.

The expected loss on sale reported in the Statement of Comprehensive Income (Loss) for the year ended December 31, 2024 of $( 570,145 ) is equal to the difference between the sale proceeds (net of the value of the Warrants to be issued) and the carrying value of AAC's net assets held-for-sale, less expected closing costs.

The carrying value of held-for-sale assets and liabilities, and consequently the expected loss on disposal, are subject to variability through the closing date of the AAC Sale.

Changes to the carrying value of held-for-sale assets and liabilities could arise from changes in estimates of financial guarantee losses and loss adjustment expense reserves, including subrogation recoverable;

changes in the valuation of invested assets and other financial instruments carried at fair value;

adverse or favorable litigation outcomes;

and other operating results of AAC and its subsidiaries, including consolidated variable interest entities (“VIEs”).

Additionally, at closing, net income will be impacted by reclassification from Accumulated Other Comprehensive Income (Loss) of net unrealized gains (losses) on available-for-sale investment securities, cumulative foreign currency translation adjustments and cumulative credit risk changes of fair value option liabilities attributable to AAC and subsidiaries, which at December 31, 2024, amounted to $( 175,278 ).

The components of anticipated loss on sale included within Net income (loss) from discontinued operations before tax on the Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2024, are summarized below:

Fair value of net consideration to be received $ 399,727

estimated closing costs ( 7,235 )

Carrying amount of net assets held-for-sale 962,637

Loss on disposal $ ( 570,145 )

The following table summarizes the major classes of assets and liabilities held-for-sale on the Consolidated Balance Sheets after elimination of intercompany balances:

Total investments $ 2,226,505 $ 2,309,967

Cash and equivalents 8,322 9,152

Premiums receivable 217,096 243,710

Reinsurance recoverable on paid and unpaid losses 25,274 29,518

Deferred ceded premiums 79,074 93,264

Subrogation recoverable 113,962 137,219

Intangible assets 213,457 245,133

Other assets, net 49,396 54,091

VIE assets (including restricted cash of $ 57,754 and $ 246,031 )

3,904,259 4,394,402

Valuation allowance on assets held-for-sale ( 570,145 ) —

Total assets held-for-sale $ 6,267,200 $ 7,516,456

Unearned premiums $ 228,177 $ 266,727

Loss and loss adjustment reserves 577,167 695,859

Ceded premiums payable 56,404 60,627

Long-term debt and accrued interest 1,046,658 983,069

Other liabilities, net 105,772 131,294

VIE liabilities 3,873,507 4,404,290

Total liabilities held-for-sale $ 5,887,685 $ 6,541,866

The following table summarizes the major line items constituting net income (loss) from discontinued operations reconciled to net income (loss) from discontinued operations presented in the Consolidated Statement of Comprehensive Income (Loss):

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

Year ended December 31,

2024 2023 2022

Net premiums earned $ 23,879 $ 26,040 $ 42,383

Commission income $ 26 26

Program fees — —

Net investment income 133,933 126,957 12,324

1 unchanged sentence

Net gains (losses) on derivative contracts 3,958 ( 699 ) 127,630

Net realized gains (losses) on extinguishment of debt 33 33

Other income (expense), including VIEs 8 — — — 8

Net realized gain on extinguishment of debt — — 81,272

Litigation recoveries — — 125,869

Total revenue (1)

250 2 26 5 282

Other revenues 31,096 14,533 30,266

Total revenues 197,282 144,324 451,282

Loss and loss adjustment expenses (benefit) ( 45,767 ) ( 69,320 ) ( 405,534 )

Amortization of deferred acquisition costs, net — — 1

Commission expenses 15 15

General and administrative expenses (2)

77 9 5 19 110

Depreciation expense (2)

Intangible amortization 30,508 24,736 43,925

General & administrative and other expenses 57,491 88,306 84,455

Interest expense 63,587 64,025 168,158

Total expenses 105,819 107,747 ( 108,996 )

Pretax income (loss) $ 20 $ ( 8 ) $ 4 $ ( 15 ) $ 2

Income tax expense (benefit) 16 — — 2 18

Net income (loss) $ 4 $ ( 8 ) $ 4 $ ( 17 ) $ ( 16 )

Total Assets (1)

$ 11,871 $ 156 $ 93 $ 182 $ 12,303

Pretax income 91,463 36,577 560,278

Provision for income taxes 18,485 8,394 2,914

Loss on disposal ( 570,145 ) — —

Net income (loss) from discontinued operations ( 497,167 ) $ 28,183 557,364

Gain on purchase of AMPS — $ — 1,131

Net income (loss) attributable to Ambac common shareholders $ ( 497,167 ) $ 28,183 $ 558,495

Significant Accounting Policies

The held-for-sale assets and liabilities and results of operations are subject to certain additional significant accounting policies to those described in Note 2.

Basis of Presentation and Significant Accounting Policies.

Fair value of assets held-for-sale:

Total assets held-for-sale are carried at fair value as of December 31, 2024.

The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable.

Measurement of fair value of assets held-for-sale is based on information from the purchase agreement and other unobservable information and is considered by management to be a Level 3 valuation under the Fair Value Measurement Topic of the ASC.

Equity interests in pooled investment funds which are accounted for in accordance with the Investments - Equity Securities Topic of the ASC include equity interests in the form of common stock or in-substance common stock are classified as trading securities and reported at fair value with changes in fair value reported through income.

Investments in fixed maturity securities classified at trading are reported within Assets held-for-sale at fair value with unrealized gains and losses reported through income.

Consolidation of Variable Interest Entities:

The consolidated financial statements include the accounts of VIEs for which AAC or Ambac UK is deemed the primary beneficiary in accordance with the Consolidation Topic of the ASC.

A VIE is an entity:

a) that lacks enough equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties;

or b) where the group of equity holders does not have:

(1) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance;

(2) the obligation to absorb the entity’s expected losses;

or (3) the right to receive the entity’s expected residual returns.

An entity that is deemed the primary beneficiary of a VIE is required to consolidate the VIE.

We determined that AAC or Ambac UK generally have the obligation to absorb a LFG VIE's expected losses given that they have issued financial guarantees supporting certain liabilities (and in some cases certain assets).

Ambac consolidates certain LFG VIEs in cases where we also have the power to direct the activities that most significantly impact the VIE’s economic performance.

A VIE is generally deconsolidated in the period that AAC or Ambac UK no longer has such control rights.

The impact of consolidating such LFG VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated LFG VIEs and AAC or Ambac UK and the inclusion of the LFG VIE’s third party assets and liabilities.

For a financial guarantee insurance policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under the Financial Services — Insurance Topic of the ASC.

Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets, including premium receivables, unearned premiums, loss and loss expense reserves, and insurance intangible assets.

For investment securities owned by AAC or Ambac UK that are debt instruments issued by the VIE, the associated debt and investment balances are eliminated upon consolidation.

Generally, Ambac has elected the fair value option for consolidated LFG VIE financial assets and financial liabilities, except in cases where AAC or Ambac UK was involved in the

Ambac Financial Group, Inc.

3 unchanged sentences

Notes to Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

(1) Inter-segment revenues and inter-segment pre-tax income (loss) amounts are insignificant and are not presented separately.

Total assets noted in the Corporate and Other Column is net of AFG's investment in surplus notes issued by the Legacy Financial Guarantee Segment with fair values of $ 90 at December 31, 2021.

(2) The Consolidated Statements of Comprehensive Income (Loss) presents the sum of these items as General & Administrative Expenses.

Ambac’s non-VIE invested assets are primarily comprised of (i) fixed maturity securities classified as either available-for-sale or trading securities, (ii) interests in pooled investment funds which are reported within Other investments on the Consolidated Balance Sheets and (iii) preferred equity investments which are reported within Other investments on the Consolidated Balance

Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method.

Fixed maturity securities classified as trading are unrated municipal bond and other obligations of Puerto Rico issuing entities received in connection with the 2022 restructuring of AAC-insured Puerto Rico obligations.

(Dollar Amounts in Thousands, Except Share Amounts)

design of the VIE and was granted control rights at its inception or when the financial liabilities are primarily supported by non-financial assets.

The election to use the fair value option is made on an instrument by instrument basis.

In cases where the fair value option has not been elected, the LFG VIE's invested assets are fixed maturity securities and are classified as either available-for-sale or trading as defined by the Investments - Debt Securities Topic of the ASC.

When the fair value option is elected for LFG VIE long-term debt, changes in the fair value of the long-term debt is reported in income on the Consolidated Statements of Total Comprehensive Income (Loss), except for the portion of the total change in fair value of financial liabilities caused by changes in the instrument-specific credit risk which is presented separately in Other comprehensive income (loss).

In cases where the fair value option has not been elected, the LFG VIEs' long-term debt is carried at par less unamortized discount, with interest expense reported in income on the Consolidated Statements of Total Comprehensive Income (Loss).

Consolidated VIE assets and liabilities are presented in VIE assets and VIE liabilities in the above table.

Results of consolidated VIEs are included in other revenues above.

Financial Guarantee Insurance Intangible:

The carrying values of financial guarantee insurance and reinsurance contracts continue to be reported and measured in accordance with their existing accounting policies.

The initial insurance intangible asset was assigned to groups of insurance and reinsurance contracts with similar characteristics and has been amortized using a level-yield method based on par exposure of the related groups.

Legacy Financial Guarantee Loss and Loss Adjustment Expenses:

Losses and loss expenses are based upon estimates of the ultimate aggregate losses inherent in the insured portfolio as of the reporting date.

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

This estimate also considers future recoveries

related to remediation strategies and other contractual or subrogation-related cash flows.

▪ Net claim cash outflow policies represent contracts where the PV of expected cash outflows are greater than the PV of expected recovery cash inflows.

For such policies, a “loss and loss adjustment expense reserves” liability is recorded for the excess of the PV of expected net claim cash outflows over the unearned premium revenue.

▪ Net recovery cash inflow policies represent contracts where the PV of expected recovery cash inflows are greater than the PV of expected claim cash outflows.

For such policies, a “Subrogation recoverable” asset is recorded.

Ambac’s loss reserves are based on management’s ongoing review of the financial guarantee credit portfolio.

Active surveillance of the insured portfolio enables Ambac’s Risk Management Group ("RMG") to track credit migration of insured obligations from period to period and update internal classifications and credit ratings for each transaction.

Non-adversely classified credits are assigned a Class I rating while adversely classified credits are assigned a rating ranging from Class IA (" Potential Problem with Risks to be Dimensioned") through Class V ( “Fully Reserved”) .

All credits are assigned risk classifications by RMG using established guidelines

The population of credits evaluated in Ambac’s loss reserve process are:

(i) all adversely classified credits and ii) non-adversely classified credits which had an internal Ambac rating downgrade since the transaction’s inception.

One of two approaches is then utilized to estimate losses to ultimately determine if a loss reserve should be established.

▪ The first approach is a statistical expected loss approach, which considers the likelihood of all possible outcomes.

The “base case” statistical expected loss is the product of:

(i) the par outstanding on the credit;

(ii) internally developed default information (taking into consideration internal ratings and average life of an obligation);

(iii) internally developed loss severities;

and (iv) a discount factor.

The loss severities and default information are based on rating agency information, are specific to each bond type and are established and approved by senior RMG officers.

For certain credit exposures, Ambac’s additional monitoring, loss remediation efforts and probabilities of

Ambac Financial Group, Inc.

2024 Form 10-K

AMBAC FINANCIAL GROUP, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar Amounts in Thousands, Except Share Amounts)

potential settlement outcomes may provide information relevant to adjust this estimate of “base case” statistical expected losses.

▪ The second approach entails the use of cash-flow based models to estimate expected losses (future claims, net of potential recoveries, expected to be paid to the holder of the insured financial obligation).

Ambac’s RMG group will consider the likelihood of all possible outcomes and develop appropriate cash flow scenarios.