Business and Basis of Presentation Background and Business Description (Notes)

6 Months Ended

Mar. 31, 2025

Jun. 30, 2024

1. BUSINESS AND BASIS OF PRESENTATION

Business

The following description provides an update of Note 1. Background and Business Description and Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and should be read in conjunction with the complete descriptions provided in the Form 10-K. Capitalized terms used, but not defined herein, and in the other footnotes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q shall have the meanings ascribed thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Ambac Financial Group, Inc. (“AFG”), headquartered in New York City, is a specialty insurance 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 principal businesses include:

•Specialty Property & Casualty Insurance — Ambac's Specialty Property & Casualty Insurance program business. Currently includes six carriers (collectively, “Everspan”). Everspan carriers have an A.M. Best rating of 'A-' (Excellent) that was affirmed on June 13, 2024.

•Insurance Distribution — Ambac's specialty property and casualty ("P&C") insurance distribution business, which could include Managing General Agents and Underwriters (collectively "MGAs"), insurance brokers, and other distribution businesses. At June 30, 2024 Ambac's insurance distribution platform includes five businesses that operate in the following lines of business: accident and health, specialty commercial automobile insurance for specific "for-hire" auto clauses, marine and international risk and professional liability.

•Legacy Financial Guarantee Insurance — Ambac's legacy 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 (the "Legacy Financial Guarantee Companies") 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. AFS' remaining derivative positions include a limited number of legacy customer swaps and their associated hedges.

The Company reports these three business operations as segments; see Note 2. Segment Information for further information.

Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block]

1. BUSINESS AND BASIS OF PRESENTATION

Business

The Company reports these three business operations as segments; see Note 2. Segment Information for further information.

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, a wholly-owned subsidiary of AFG, to Buyer for aggregate consideration of $420 in cash (the "Sale"). The terms of the Sale as contemplated by the Purchase Agreement provide that, at the closing of the 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 provides that AFG will seek the affirmative vote in favor of the 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 August 2, 2024, AFG filed a preliminary proxy statement with the SEC, which proxy statement includes the recommendation of the board of directors of AFG that the Sale be approved by shareholders of AFG.

The Purchase Agreement contains certain customary termination rights for each of AFG and Buyer, including (i) by mutual written agreement, (ii) if the Sale has not been consummated on or before April 4, 2025 (the “End Date”), subject to certain extensions for 90 days, (iii) 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, (iv) the Stockholder Approval is not received, or (v) 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. In addition, Buyer may terminate the Purchase Agreement if AFG changes its recommendation to AFG's stockholders regarding the Sale. AFG would pay Buyer an amount equal to $22 (the “Termination Fee”) if all of the following occur: (i) the Purchase Agreement is terminated as a result of (a) not closing the Sale and other transactions contemplated by the Purchase Agreement by the End Date, subject to certain conditional extension for 90 days, (b) failure to obtain the Stockholder Approval or (c) 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 breach of certain covenants that would cause closing conditions not to be satisfied, (y) failure to obtain the Stockholder Approval at a time when Buyer could have terminated the Purchase Agreement for an AFG breach of certain covenants that would cause closing conditions not to be satisfied, or (z) 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 as a reimbursement of Buyer’s reasonably documented out-of-pocket fees and expenses

incurred in connection with the Sale and other transactions contemplated by the Purchase Agreement if (i) the Purchase Agreement is terminated as a result of not closing the Sale and other transactions by the End Date and the Termination Fee is also payable, (ii) there is a failure to obtain the Stockholder Approval when the Buyer could have terminated the Purchase Agreement because there is an AFG breach of representations or covenants related to regulatory efforts, non-solicitation or the AFG stockholders meeting that would cause certain closing conditions not to be satisfied, (iii) the Purchase Agreement is terminated as a result of AFG changing its recommendation to the AFG stockholders regarding the Sale, or (iv) 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 and the Stockholder Approval.

In connection with and pursuant to the Purchase Agreement, AFG has agreed to issue to Buyer a warrant exercisable for a number of shares of common stock, par value $0.01, of AFG representing 9.9% of the fully diluted shares of AFG’s common stock as of March 31, 2024, pro forma for the issuance of the Warrant. The Warrant will have an exercise price per share of $18.50 with a 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.

While management and the Board have approved the Sale, the final commitment to sell AAC is subject to approval by our shareholders and regulators in both the US and UK. The Sale will have a major effect on AFG's operations and financial results and therefore at the date we meet the held-for-sale reporting requirements, we will report the pending sale as a discontinued operation.

At June 30, 2024, the carrying value of AFG's investment in AAC is approximately $939. Once the shareholders vote is obtained and regulatory approval is probable, a loss on the transaction will be reflected in the Statement of Comprehensive Income equal to the difference between the sales proceeds (net of the value of the Warrants to be issued) and AAC's carrying value. Additionally, net income will be adversely impacted by a reclassification from Accumulated Other Comprehensive Income relating to unrealized losses on available-for-sale investment securities, foreign currency translation losses and credit risk changes of fair value option liabilities, which at June 30, 2024 amounted to $168.

The Sale is expected to close in the fourth quarter of 2024 or the first quarter of 2025.

Acquisition of Beat Capital Partners Limited ("Beat")

On June 4, 2024, the Company, entered into a share purchase agreement (the “Beat Purchase Agreement”), by and among the Company, Cirrata V LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of AFG (the “Purchaser”), certain sellers set forth therein (the “Sellers”) and Beat, pursuant to which, effective July 31, 2024, the Purchaser purchased from the Sellers approximately 60% of the entire

issued share capital of Beat for total consideration, as of the closing date, of approximately $278, of which approximately $249 was paid in cash and the remainder of which was satisfied through the issuance of 2,216,023 shares of AFG common stock to certain Sellers (the "Beat Transaction"). Beat’s management team and Bain Capital Credit LP (“Bain” and, together with certain members of Beat’s management team, the “Rollover Shareholders”) each retained approximately 20% of Beat’s issued share capital immediately after closing. AFG guaranteed the Purchaser’s performance under the Beat Purchase Agreement and the Shareholders’ Agreement (as defined below).

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.

AFG funded the cash portion of the consideration with a combination of available cash, approximately $65 of funding from AAC, and $150 of new indebtedness (the "Credit Facility") that was issued in the third quarter of 2024. Funding received from AAC and the Credit Facility are required to be repaid upon closing of the sale of AAC. To reduce its exposure to appreciation of the British Pound Sterling ("GBP") relative to the U.S. Dollar ("USD"), AFG entered into a foreign exchange futures contract under which it agreed to purchase an amount of GBP sufficient to cover the cash portion of the purchase price of Beat along with estimated GBP denominated expenses at an exchange rate of 1.2662 per USD.

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.

Basis of Presentation

The Company has disclosed its significant accounting policies in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form 10-K.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year

ended December 31, 2023. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments necessary for the fair presentation of the Company’s consolidated financial position and results of operations. The results of operations for the three and six months ended June 30, 2024, may not be indicative of the results that may be expected for the year ending December 31, 2024. The December 31, 2023, consolidated balance sheet was derived from audited financial statements.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.

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. See Note 8. 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.

Foreign Currency

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 $(1) and $(3) for the six months ended June 30, 2024 and 2023, 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).

Redeemable Noncontrolling Interest

The Riverton, All Trans, Capacity Marine and Xchange acquisitions resulted in a majority ownership of the acquired entities by Ambac. Under the terms of all the acquisition agreements, Ambac has call options to purchase the remaining interests from the minority owners (i.e., noncontrolling interests) and the minority owners have put options to sell their 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:

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

ii.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. The impact of such differences on earnings per share are presented in Note 11. Net Income Per Share.

Following is a rollforward of redeemable noncontrolling interest.


Six Months Ended June 30,	2024		2023
Beginning balance	$	17	$	20
Fair value of redeemable noncontrolling interest at acquisition date	—		—
Net income attributable to redeemable noncontrolling interest (ASC 810)	1		1
Distributions	(1)		(1)
Adjustment to redemption value (ASC 480)	—		—
Ending balance	$	17	$	20


Supplemental Disclosure of Cash Flow Information	Six Months Ended June 30,
	2024		2023
Cash paid during the period for:
Income taxes	$	7	$	6
Interest on long-term debt	—		50
Non-cash investing and financing activities:





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



Securities acquired (transferred) in connection with financial guarantee commutations	(65)		—

	June 30,
	2024		2023
Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows:
Cash and cash equivalents	$	24	$	33
Restricted cash	11		10
Variable Interest Entity restricted cash	62		266
Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows	$	97	$	309

Restricted cash is cash that we do not have the right to use for general purposes and includes fiduciary cash held by Ambac's insurance distribution subsidiaries, consolidated variable interest entity cash to support the obligations of the consolidated VIEs and cash received as collateral under their derivatives agreements.

Reclassifications and Rounding

Reclassifications may have been made to prior years' amounts to conform to the current year's presentation. 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 2024.

Future Application of Accounting Standards and Required Disclosures

Segment Reporting

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) - Improvement to Reportable Segment Disclosures. The ASU requires disclosure of the following:

•Significant segment expenses regularly provided to the chief operating decision maker (CODM) and included within the reported measure(s) of a segment’s profit or loss.

•The amount and composition of "other segment items." This amount reconciles segment revenue, less significant expenses, to the reported measure(s) of a segment’s profit or loss.

•The CODM's title and position.

•How the CODM uses the reported measure(s) of a segment’s profit or loss to assess segment performance and decide how to allocate resources.

•All segment profit or loss and assets disclosures currently required annually by Topic 280, as well as those introduced by the ASU, to also be disclosed in interim periods.

The ASU also permits a public entity to report multiple measures of a segment’s profit or loss as long as: i) all the reported measures of a segment’s profit or loss are used by the CODM for

purposes of assessing performance and allocating resources and ii) the measure closest to GAAP is also provided. 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.

Income Taxes

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. The enhancements in the ASU include the following:

•Within the rate reconciliation table, disclosure of additional categories of information about federal, state and foreign income taxes and providing more details about the reconciling items in some categories if the items meet a quantitative threshold.

•Annual disclosure of income taxes paid (net of refunds received) disaggregated by federal (national), state and foreign taxes and disaggregation of the information by jurisdiction based on a quantitative threshold.

•Other disclosures include: i) income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and ii) income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign.

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.

Noncontrolling Interest Disclosure