Background and Business Description

12 Months Ended

Dec. 31, 2023

1. BACKGROUND AND BUSINESS DESCRIPTION

Ambac Financial Group, Inc. (“AFG”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, 1991. References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires. 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"). 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; see Note 3. Segment Information for further information.

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. 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 OCI (as defined below). Article XII contains substantial restrictions on the ability to transfer AFG’s common stock. In order to preserve certain tax benefits, subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons shall become a holder of 5% or more of AFG’s common stock or (ii) the percentage stock ownership interest in AFG of any holder of 5% or more of AFG’s common stock shall be increased (a “Prohibited Transfer”). These restrictions shall not apply to an attempted transfer if the transferor or the transferee obtains the written approval of AFG’s Board of Directors to such transfer. A purported transferee of a Prohibited Transfer shall not be recognized as a stockholder of AFG for any purpose whatsoever in respect of the securities which are the subject of the Prohibited Transfer (the “Excess Securities”). Until the Excess Securities are acquired by another person in a transfer that is not a Prohibited Transfer, the purported transferee of a Prohibited Transfer shall not be entitled with respect to such Excess Securities to any rights of stockholders of AFG, including, without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or otherwise, in respect thereof, if any. Once the Excess Securities have been acquired in a transfer that is not a Prohibited Transfer, the securities shall cease to be Excess Securities. If the Board determines that a transfer of securities constitutes a Prohibited Transfer then, upon written demand by AFG, the purported transferee shall transfer or cause to be transferred any certificate or other evidence of ownership of the Excess Securities within the purported transferee’s possession or control, together with any distributions paid by AFG with respect to such Excess Securities, to an agent designated by AFG. Such agent shall thereafter sell such Excess Securities and the proceeds of such sale shall be distributed as set forth in the Amended and Restated Certificate of Incorporation. 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

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.

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)	$	362

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.

Settlement of RMBS Litigation and Redemption of Secured Notes

Settlement of RMBS Litigations and Redemption of Secured Notes:

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)	$	362

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.

Strategies to Enhance Shareholder Vakye