# Octave Specialty Group Inc: Form 10-Q for the period ended Jun 30, 2024

- Company: [Octave Specialty Group Inc](/companies/osg.md) (CIK 874501)
- Form: 10-Q
- Filed: 2024-08-05
- Accepted by EDGAR: Aug 5, 2024, 16:24 ET
- Period: 2024-06-30
- Accession: 0000874501-24-000172
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/874501/000087450124000172/ambc-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/874501/000087450124000172/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $13.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $31.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $16.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $32.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $7.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | −$1.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | $19.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.41 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.42 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 46,209,250 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 46,568,862 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $32.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2024-06-30 | $24.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-06-30 | $8.18bn | us-gaap:Assets |
| Total liabilities | at 2024-06-30 | $6.75bn | us-gaap:Liabilities |
| Long-term debt | at 2024-06-30 | $515.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-06-30 | $1.37bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 105,313 characters.

### ($ and £ in millions)

The objectives of our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are to provide users of our consolidated financial statements with the following:

- A narrative explanation from the perspective of management of our financial condition, results of operations, cash flows, liquidity and certain other factors that may affect future results;
- Context to the unaudited consolidated financial statements; and
- Information that allows assessment of the likelihood that past performance is indicative of future performance.

The following discussion should be read in conjunction with our consolidated financial statements in Part I, Item 1 and the matters described under Part II, Item 1A Risk Factors in this Quarterly Report and under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023. Refer to Item 1. Business and Note 1. Business and Basis of Presentation for a description of our business and our key strategies to achieve our primary goal to maximize shareholder value.

### Organization of Information

MD&A includes the following sections:

|  | Page |
| --- | ---: |
| Overview | 37 |
| Critical Accounting Estimates | 40 |
| Financial Guarantees in Force | 40 |
| Results of Operations | 42 |
| Liquidity and Capital Resources | 48 |
| Balance Sheet | 50 |
| Variable Interest Entities | 54 |
| Accounting Standards | 54 |
| U.S. Insurance Statutory Basis Financial Results | 55 |
| Ambac UK Financial Results under UK Accounting Principles | 55 |
| Non-GAAP Financial Measures | 55 |

### OVERVIEW

### AFG Net Assets

AFG has the following net assets to support its goals and strategies, including the development and growth of its Specialty Property and Casualty Insurance and Insurance Distribution businesses, acquisitions and capital management. AFG does not have any commitment or other obligation to provide capital or liquidity to AAC, whose financial guarantee business has been in run-off since 2008. As of June 30, 2024, and December 31, 2023, AFG's stand alone net assets, excluding its equity investments in subsidiaries are shown in the following table:

|  | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Cash and short-term investments | **$171** | $153 |
| Other investments (1) | **32** | 33 |
| Other net (liabilities) assets | **(1)** | 23 |
| **Total** | **$202** | **$209** |

(1) Includes strategic minority investments in insurance services businesses of $26.

The decrease in AFG net assets, excluding its equity investments in subsidiaries, during 2024 was driven by diligence and other costs associated with the purchase of Beat and sale of AAC and other operating expenses, partially offset by net realized gains on strategic investments, interest income and distributions received from subsidiaries.

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

*($ in millions)*

|  | Three Months Ended June 30, 2024 Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consoli-dated | Three Months Ended June 30, 2023 Legacy Financial Guarantee Insurance Specialty Property & Casualty Insurance Insurance Distribution Corporate & Other Consoli-dated |
| --- | ---: | ---: |
| Premiums placed | $53 $53 | $41 $41 |
| Gross premiums written | $2 $111 113 | $1 $53 55 |
| Net premiums written | 2 32 34 | (54) 9 (45) |
| Total revenues | 53 32 13 $6 105 | 39 11 10 $2 62 |
| Total expenses | 40 33 12 17 103 | 47 11 9 6 73 |
| Pretax income (loss) | 13 (1) 1 (11) 2 | (8) — 1 (4) (11) |
| EBITDA | 36 (1) 2 (11) 27 | 14 — 2 (4) 12 |
| Ambac Stockholders’ Equity (1) | 939 122 105 202 1,368 | 823 112 92 223 1,250 |
| Non-redeemable noncontrolling interest | 51 — 51 | 51 2 53 |
| Total stockholders’ equity | 990 122 105 202 1,419 | 874 114 92 223 1,303 |
| Redeemable noncontrolling interest | 17 17 | 20 20 |
|  | **Six Months Ended June 30, 2024** | **Six Months Ended June 30, 2023** |
|  | **Legacy Financial Guarantee Insurance** **Specialty Property & Casualty Insurance** **Insurance Distribution** **Corporate & Other** **Consoli-dated** | **Legacy Financial Guarantee Insurance** **Specialty Property & Casualty Insurance** **Insurance Distribution** **Corporate & Other** **Consoli-dated** |
| Premiums placed | $144 $144 | $118 $118 |
| Gross premiums written | $4 $208 $211 | $10 $105 $115 |
| Net premiums written | $3 $59 $62 | $(45) $18 $(27) |
| Total revenues | $107 $61 $31 $8 $207 | $71 $20 $25 $4 $120 |
| Total expenses | $69 $61 $26 $24 $180 | $111 $21 $20 $8 $160 |
| Pretax income (loss) | $38 $1 $5 $(16) $27 | $(40) $(1) $4 $(3) $(40) |
| EBITDA(1) | $89 $1 $7 $(16) $81 | $5 $(1) $6 $(3) $7 |

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

### Sale of Consolidated National Insurance Company

On January 12, 2024, Everspan Insurance Company entered into a Stock Purchase Agreement with Hagerty Insurance Holdings, Inc., to sell its ownership interests in Consolidated National Insurance Company which is one of Everspan's admitted carriers. The closing of this transaction is subject to customary closing conditions, including obtaining regulatory approval from the Colorado Division of Insurance (such request for approval having been filed on February 12, 2024). Subject to the satisfactory completion of closing conditions, the closing is expected to occur in the third quarter of 2024.

### Sale of AAC

On June 4, 2024, AFG entered into a stock purchase agreement with American Acorn Corporation (the “Buyer”), a Delaware corporation owned by funds managed by Oaktree Capital Management, L.P., pursuant to which and subject to the conditions set forth therein, AFG will sell all of the issued and outstanding shares of common stock of AAC, a wholly-owned subsidiary of AFG, to Buyer for aggregate consideration of $420 in cash (the "Sale"). The terms of the Sale as contemplated by the stock purchase agreement provide that, at the closing of the Sale (the “Closing”), Buyer will acquire complete common equity ownership of AAC and all of its wholly owned subsidiaries, including Ambac UK. In connection with and pursuant to the stock purchase agreement, AFG has agreed to issue to Buyer a warrant exercisable for a number of shares of common stock, par

value $0.01, of AFG representing 9.9% of the fully diluted shares of AFG’s common stock as of March 31, 2024, pro forma for the issuance of the warrant The warrant will have an exercise price per share of $18.50 with a six and a half-year term from the date of issuance and will be immediately exercisable. Payment of the exercise price may be settled, at AFG’s option, by way of a cash exercise or by net share settlement. Refer to Note 1. Business and Basis of Presentation for further details on the pending sale of AAC.

This pending transaction has had no impact on the financial statements at June 30, 2024, other than incurred transaction expenses of approximately $5 and $7 for the three and six months ended June 30, 2024.

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

|  |  |
| --- | ---: |
| Fair value of consideration received (cash less estimated value of warrants issued) | $404 |
| Carrying value of noncontrolling interest | 51 |
|  | 455 |
| Less: carrying amount of AACs net assets | 987 |
| Less: estimated incremental transaction expenses | 15 |
|  | $(547) |
| Reclassification of Accumulated Other Comprehensive Income to earnings | $(168) |
| Total gain (loss on disposal) recognized in net income | $(715) |

If the transaction was completed on June 30, 2024, the impact of the sale of AAC on stockholders' equity would have been a reduction of $547.

### Purchase of Beat

On June 4, 2024, AFG entered into a share purchase agreement (the “Beat Purchase Agreement”), by and among AFG, Cirrata V LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of AFG (the “Purchaser”), certain sellers set forth therein (the “Sellers”) and Beat, pursuant to which the Purchaser purchased from the Sellers approximately 60% of the entire issued share capital of Beat, for total consideration, as of the closing date, of approximately $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. The acquisition closed with an effective date of July 31, 2024. Beat’s management team and Bain Capital Credit LP (“Bain” and, together with certain members of Beat’s management team, the “Rollover Shareholders”) each retained approximately 20% of Beat’s issued share capital immediately after closing. Refer to Note 1. Business and Basis of Presentation for further details on the acquisition of Beat.

### Banking Sector Crisis of 2023

The collapse of several banks in early 2023 and extending into 2024 precipitated a sudden loss of confidence in the banking system, prompting bank runs and the U.S. government to provide direct support to failed banks and, through an expansive emergency lending program, the system more broadly. In the U.S., this crisis was in part a consequence of rising interest rates, resulting in large declines in the market value of U.S. Treasury and government-backed debt held by banking institutions. The risk of additional bank financial stress and/or failures due to asset-liability mismatches or other risks, such as outsized exposure to commercial real estate, remains. Despite actions by government agencies and regulators to mitigate the consequences of these bank failures by providing liquidity and guaranteeing uninsured deposits, there is no guarantee that they will provide similar support in the event of additional bank failures. In Europe, regulators stepped in to facilitate mergers of stressed banks into more stable institutions. The ability or willingness of healthy banks to merge with stressed banks in the future is also subject to significant uncertainty.

Ambac's cash balances held at banks was $35 as of June 30, 2024 and $27 as of December 31, 2023. Substantially all of these cash balances were uninsured as of June 30, 2024 and December 31,

2023 because they either (i) exceeded the two hundred and fifty thousand FDIC insurance limit or (ii) were held in foreign banks. These cash balances were held primarily with Ambac's main operating banks which are large money center and/or global banks. Ambac actively manages its cash balances to reduce bank risk and to enhance yield by transferring most of its funds to government and prime money market funds. Included in the cash balances above are $14 and $16 as of June 30, 2024 and December 31, 2023, respectively, of cash from companies Ambac has acquired within its insurance distribution businesses that are held in regional banks. The management of these balances and the associated bank exposure is under consideration as part of Ambac's ongoing integration of these acquired businesses. In addition, cash balances held by variable interest entities ("VIEs") that are consolidated in Ambac's financial statements as a result of Ambac's financial guarantees totaled $62 and $246 as of June 30, 2024 and December 31, 2023, respectively. These amounts relate primarily to cash collateral posted against derivative assets and reserve balances maintained under the VIEs' governing documents and are not directly managed by Ambac.

Ambac also has exposure to banks through its fixed maturity investment portfolio totaling $156 and $169 as of June 30, 2024 and December 31, 2023, respectively. All of these investments are managed by third-party asset management firms which follow single and sector risk limits established by Ambac. The average rating of our fixed income investment in banks was BBB+ as of June 30, 2024.

### Financial Statement Impact of Foreign Currency:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the six months ended June 30, 2024 and 2023, included the following:

| Six Months Ended June 30, | 2024 | 2023 |
| --- | ---: | ---: |
| Net income (1) | **$(1)** | **$(3)** |
| Gain (losses) on foreign currency translation (net of tax) | **(7)** | **37** |
| Unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax) | **1** | **(4)** |
| **Impact on total comprehensive income (loss)** | **$(7)** | **$30** |

(1) A portion of Ambac UK's, and to a lesser extent AAC's, assets and liabilities are denominated in currencies other than its functional currency. Other than the foreign currency impact on unrealized gains (losses) on available-for-sale securities, which is included in Other comprehensive income, foreign currency transaction gains/(losses) as a result of changes to foreign currency rates are reported through Net income in the Unaudited Consolidated Statement of Total Comprehensive Income (Loss).

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

### SEC Final Rules on Climate Related Information

On March 6, 2024, the U.S. Securities and Exchange Commission (“SEC”) adopted *The Enhancement and Standardization of Climate-Related Disclosures for Investors* ("Final Rule"), which will require registrants to disclose extensive climate-related information in their Form 10-K annual reports and registration statements. The Final Rule was scheduled to become effective May 28, 2024; however, the SEC has voluntarily stayed the rule’s effective date pending judicial review of legal challenges.

The compliance dates for accelerated filers for annual reports or registration statements that include financial statements for the year ending December 31 are phased in from 2026 through 2031. Depending on when the legal challenges are resolved, the compliance dates may be retained or delayed.

Ambac is reviewing the Final Rule and is currently assessing our related compliance obligations and other effects on our operations.

### CRITICAL ACCOUNTING ESTIMATES

Ambac’s Unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the use of material estimates and assumptions. For a discussion of Ambac’s critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2023.

### FINANCIAL GUARANTEES IN FORCE

Financial guarantee products were sold in three principal markets: U.S. public finance, U.S. structured finance and international finance. Net par exposures within the U.S. public finance market include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bonds. Guaranteed net par

outstanding includes the exposures of policies insuring variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC. Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded, pre-refunded or synthetically commuted.

The following table provides a comparison of total, adversely classified credits ("ACC") and watch list credit net par outstanding in the insured portfolio at June 30, 2024 and December 31, 2023.

*($ in billions)*

|  | June 30, 2024 | December 31, 2023 | Variance |  |
| --- | ---: | ---: | ---: | ---: |
| Total | $18,668 | $19,541 | $(873) | (4)% |
| ACC | $2,708 | $3,504 | $(796) | (23)% |
| Watch List | $2,620 | $2,181 | $439 | 20% |

The decrease in total and ACC net par outstanding resulted from active de-risking, scheduled maturities, amortizations, refundings and calls and a strengthening of the USD versus the GBP of $93 on the total net par outstanding. Additionally, we upgraded (from ACC to Watch List) one credit that has net par outstanding of $542 at June 30, 2024.

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

|  | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Public Finance (1) | **$7,197** | $7,562 |
| Structured Finance | **2,922** | 3,315 |
| International Finance | **8,549** | 8,664 |
| **Total net par outstanding** | **$18,668** | **$19,541** |

(1) Includes $3,338 and $3,371 of Military Housing net par outstanding at June 30, 2024 and December 31, 2023, respectively.

The table below shows Ambac’s ten largest insured exposures, by repayment source, as a percentage of total financial guarantee net par outstanding at June 30, 2024:

| Sector Co. Bond Kind Country-Bond Type | Ambac Ratings (1) | Ultimate Maturity Year | Net Par Outstanding | % of Total Net Par Outstanding |
| --- | --- | --- | ---: | ---: |
| **IF** **AUK** Investor Owned Utility Gas - unsecured UK-Utility | BBB+ | 2037 | **$910** | **4.9%** |
| **IF** **AUK** PFI - Hospitals UK-Infrastructure | BBB+ | 2046 | **740** | **4.0%** |
| **IF** **AUK** PFI - Accommodation UK-Infrastructure | A- | 2040 | **721** | **3.9%** |
| **IF** **AUK** Investor Owned Utility Other - unsecured UK-Utility | A- | 2035 | **702** | **3.8%** |
| **IF** **AUK** Other Asset Securitizations UK-Asset Securitizations | BBB+ | 2033 | **651** | **3.5%** |
| **IF** **AUK** Investor Owned Utility Electric - unsecured UK-Utility | BBB+ | 2036 | **629** | **3.4%** |
| **IF** **AUK** Sub-Sovereign Italy-Sub-Sovereign | BBB- | 2035 | **542** | **2.9%** |
| **IF** **AUK** PFI - Accommodation UK-Infrastructure | A- | 2038 | **463** | **2.5%** |
| **PF** **AAC** US State Lease/Appropriation US-Lease and Tax-backed Revenue | BBB | 2036 | **357** | **1.9%** |
| **IF** **AUK** PFI - Hospitals UK-Infrastructure | BBB- | 2040 | **308** | **1.6%** |
| **Total** |  |  | **$6,023** | **32.4%** |
| **PF = Public Finance, SF = Structured Finance, IF = International Finance AAC = Ambac Assurance, AUK = Ambac UK** |  |  |  |  |

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice. BIG denotes credits deemed below investment grade.

Net par related to the top ten exposures decreased $68 from December 31, 2023. Exposures are impacted by changes in foreign exchange rates ($59 decrease during the six months ended June 30, 2024), certain indexation rates linked to inflation measures in the United Kingdom (RPI) and scheduled and unscheduled paydowns. As a result of recent increases in inflation, such indexation-linked exposures have increased at a faster pace than they have historically.

The concentration of net par amongst the top ten (as a percentage of net par outstanding) was 32% at June 30, 2024, and 31% at December 31, 2023. Excluding the top ten exposures, the remaining insured portfolio of financial guarantees has an average net par outstanding of $28 per single risk, with insured exposures ranging up to $292 and a median net par outstanding of $5.

### Exposure Currency

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

| Currency | Net Par Amount Outstanding in Base Currency | Net Par Amount Outstanding in U.S. Dollars |
| --- | ---: | ---: |
| U.S. Dollars | **$10,264** | **$10,264** |
| British Pounds | **£5,775** | **7,300** |
| Euros | **€779** | **834** |
| Australian Dollars | **A$** **405** | **270** |
| **Total** |  | **$18,668** |

### Ratings Distribution

The following charts provide a rating distribution of net par outstanding based upon internal Ambac credit ratings(1) and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at June 30, 2024 and December 31, 2023. BIG is defined as those exposures with an Ambac internal credit rating below BBB-:

**Note:** AAA is less than 1% in both periods.

(1) Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at any time and do not constitute investment advice.

### Summary of Below Investment Grade Exposure:

| Bond Type Public Finance: | Net Par Outstanding June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Military Housing | **$359** | $361 |
| Lease and tax-backed revenue | **78** | 80 |
| General Obligations | **77** | 85 |
| Other | **36** | 37 |
| Total Public Finance | **550** | 563 |
| **Structured Finance:** |  |  |
| RMBS | **1,560** | 1,642 |
| Student Loans | **169** | 264 |
| Total Structured Finance | **1,729** | 1,906 |
| **International Finance:** |  |  |
| Transportation | **292** | 307 |
| Sovereign/sub-sovereign | **116** | 693 |
| Other | **1** | 1 |
| Total International Finance | **409** | 1,001 |
| **Total** | **$2,688** | **$3,470** |

The net decline in below investment grade exposures is primarily due to de-risking activities and an upgrade of a sub-sovereign exposure.

Below investment grade exposures could increase as a relative proportion of the guarantee portfolio given that Ambac hasn't written any new financial guarantee business since 2008 and stressed borrowers generally have less ability to prepay or refinance their debt. Accordingly, due to these and other factors, it is not unreasonable to expect the proportion of below investment grade exposure in the guarantee portfolio to increase in the future.

### Results of Operations

### Consolidated Results

A summary of our financial results is shown below:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| **Gross premiums written** | **$113** | $55 | **$211** | $115 |
| **Net premiums written** | **34** | (45) | **62** | (27) |
| **Revenues:** |  |  |  |  |
| Net premiums earned | **$33** | $15 | **$66** | $29 |
| Commission income | **13** | 10 | **31** | 25 |
| Program fees | **3** | 2 | 6 | 4 |
| Net investment income | **36** | 35 | **78** | 69 |
| Net investment gains (losses), including impairments | **4** | (3) | 4 | (8) |
| Net gains (losses) on derivative contracts | **—** | — | **2** | (3) |
| Income (loss) on variable interest entities | **—** | — | **2** | (1) |
| Other income | **16** | 2 | **18** | 5 |
| **Expenses:** |  |  |  |  |
| Losses and loss adjustment expenses (benefit) | **18** | 7 | **16** | 25 |
| Amortization of deferred acquisition costs, net | **5** | 1 | **10** | 3 |
| Commission expense | **8** | 6 | **18** | 14 |
| General and administrative expenses | **47** | 36 | **83** | 72 |
| Intangible amortization | **8** | 7 | **21** | 13 |
| Interest expense | **16** | 16 | **32** | 32 |
| Provision for income taxes | **2** | 2 | **7** | 6 |
| Net income (loss) | **(1)** | (13) | **20** | (46) |
| Less: net (gain) attributable to noncontrolling interest | **—** | — | **(1)** | (1) |
| **Net income (loss) attributable to common stockholders** | **$(1)** | **$(13)** | **$19** | **$(47)** |

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

**Gross Premiums Written.** Gross premiums written increased $58 and $96 for the three and six months ended June 30, 2024, compared to the same period in the prior year, as shown by segment below.

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Legacy Financial Guaranty Insurance | $2 | $1 | $4 | $10 |
| Specialty Property & Casualty Insurance | 111 | 53 | 208 | 105 |
| Total | $113 | $55 | $211 | $115 |

Legacy Financial Guarantee Insurance gross written premiums relate to changes in expected and contractual premium cash flows for existing financial guarantees in force.

Specialty Property & Casualty Insurance growth in gross premiums written was driven by new programs, including assumed premium written with Everspan as a reinsurer, and growth in existing programs.

**Net Premiums Written.** Net premiums written increased $79 and $89 for the three and six months ended June 30, 2024, compared to the same period in the prior year, as shown by segment below:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Legacy Financial Guaranty Insurance | $2 | $(54) | $3 | $(45) |
| Specialty Property & Casualty Insurance | 32 | 9 | 59 | 18 |
| **Total** | **$34** | **$(45)** | **$62** | **$(27)** |

Legacy Financial Guarantee Insurance net premiums written in the three and six months ended June 30, 2023 were impacted by a significant reinsurance cession as part of its de-risking activities.

Specialty P&C growth was driven by new programs, including assumed premium written by Everspan as a reinsurer, and growth in existing programs.

**Net Premiums Earned.** Net premiums earned increased $17 and $36 for the three and six months ended June 30, 2024, compared to the same period in the prior year as shown by segment below.

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Legacy Financial Guaranty Insurance | **$6** | $8 | **$13** | $14 |
| Specialty Property & Casualty Insurance | **27** | 8 | **53** | 15 |
| **Total** | **$33** | **$15** | **$66** | **$29** |

The increase in Specialty Property & Casualty Insurance was driven by new programs, including premiums earned via assumed reinsurance, and growth in existing programs.

**Net Investment Income.** Net investment income primarily consists of interest and net discount accretion on fixed maturity securities classified as available-for-sale, interest and changes in fair value of fixed maturity securities classified as trading and net gains (losses) on pooled investment funds which include changes in fair value of the funds' net assets. Fixed maturity securities include investments in Ambac-insured securities that are made opportunistically based on their risk/reward and asset-liability management characteristics. Investments in pooled investment funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method. These funds and other investments are reported in Other investments on the Unaudited Consolidated Balance Sheets, which consists primarily of pooled fund investments in diversified asset classes. For further information about investment funds held, refer to Note 3. Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q. Net investment income for the periods presented were driven by the Legacy

Financial Guarantee segment; other segments' results were not significant.

Net investment income from Ambac-insured securities; available-for-sale and short-term securities, other than Ambac-insured; and Other investments is summarized in the table below:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Securities available-for-sale and short-term other than Ambac-insured | **$20** | $16 | **40** | 32 |
| Other investments (includes trading securities) | **10** | 14 | **26** | 27 |
| Securities available-for-sale: Ambac-insured (including secured notes) | **6** | 6 | **$12** | $11 |
| **Net investment income (loss)** | **$36** | **$35** | **$78** | **$69** |

Net investment income (loss) increased $1 and $9 for the three and six months ended June 30, 2024 compared to the prior year period.

- Net investment income from available-for-sale and short-term securities, other than Ambac-insured increased $4 and $8 for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year due primarily to higher portfolio yields.
- Other investments income (loss) decreased $3 and $1 for the three and six months ended June 30, 2024, respectively, compared to the same periods in the prior year due primarily to a smaller increase in fair value of securities received in the Puerto Rico restructurings and classified as trading. Income from pooled fund investments for the three and six months ended June 30, 2024, was also lower compared to the prior year periods, which benefited from above average equity market returns.
- Net investment income from Ambac-insured securities for the three and six months ended June 30, 2024, increased less than $1 and $2 compared to prior year periods due to additional purchases of AAC-insured student loan securities during 2023. A significant majority of these student loan securities were transferred to a non-consolidated trust in March 2024 in connection with the commutation of the associated AAC financial guarantees.

**Net Investment Gains (Losses), including Impairments.** The following table provides a breakdown of net investment gains (losses) for the periods presented:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net gains (losses) on securities sold or called | $6 | $(1) | $6 | $(3) |
| Net foreign exchange gains (losses) | (1) | (2) | (1) | (4) |
| Credit impairments | (2) | — | (1) | (1) |
| Intent / requirement to sell impairments | — | — | — | — |
| Net investment gains (losses), including impairments | $4 | $(3) | $4 | $(8) |

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

Credit impairments on available-for-sale fixed maturity investments are recorded as an allowance for credit losses with changes in the allowance recorded through earnings. When credit impairments are recorded, any non-credit related impairment amounts on the securities are recorded in other comprehensive income. If management either: (i) has the intent to sell its investment in a debt security or (ii) determines that the Company is more likely than not will be required to sell the debt security before its anticipated recovery, then the amortized cost of the security is written-down to fair value with a corresponding impairment charge recognized in earnings. Credit impairments for the three and six months ended June 30, 2024 also included a write-down in carrying value of $1 on an investment in preferred securities that do not have a readily determinable fair value and are carried at cost less impairments.

**Net Gains (Losses) on Derivative Contracts.** Net gains (losses) on derivative contracts are driven primarily by results from the Company's legacy interest rate derivatives portfolio. Through the first quarter of 2023, the interest rate derivatives portfolio was positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee insurance and investment portfolios. This economic hedge was fully removed during the second quarter of 2023. Net gains (losses) on interest rate derivatives reflect mark-to-market gains (losses) in the portfolio caused by increases (declines) in forward interest rates during the periods, the carrying cost of the portfolio, and the impact of counterparty credit adjustments as discussed below. The removal of the economic hedge does not change the exposure of future results to counterparty credit adjustments. Results from other derivatives were not significant to the periods presented.

Net gains (losses) on interest rate derivatives for the three and six months ended June 30, 2024, were $0 and $2, respectively, compared to $0 and $(3) for the three and six months ended June 30, 2023. Results for the three and six months ended June 30, 2024 and 2023 include the effect of changes to counterparty credit adjustments as described below. Additionally, the three and

six months ended June 30, 2023, included losses of $(1) and $(3), respectively related to declines in interest rates during the period.

Counterparty credit adjustments are generally applicable for uncollateralized derivative assets that may not be offset by derivative liabilities under a master netting agreement. In periods when credit spreads are stable, counterparty credit adjustments will generally have a proportionate offsetting impact to gains or losses on derivative assets, relative to fully collateralized assets. In addition to the impact of interest rates on the underlying derivative asset values, the changes in counterparty credit adjustments are driven by movement of credit spreads. Generally, narrowing (widening) of credit spreads will increase (decrease) derivative gains relative to a period of stable credit spreads. Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $1 and $2 for the three and six months ended June 30, 2024, respectively and $1 and $0 for the three and six months ended June 30, 2023, respectively. The counterparty credit adjustments for both periods were driven primarily by changes to the underlying asset values.

**Commission Income and Commission Expense.** Commission income for the three and six months ended June 30, 2024, was $13 and $31 compared to $10 and $25, for the three and six months ended June 30, 2023. Commissions include both base and profit sharing commissions of the Insurance Distribution segment. The increase was primarily driven by commissions earned by Riverton Insurance Agency, which was purchased in August 2023, and organic growth. Gross commission income has an accompanying expense, commission expense, which will largely track changes in gross commission. For the three and six months ended June 30, 2024, commission expense of $8 and $18 compared to $6 and $14 in three and six months ended June 30, 2023, driven primarily by the same factors as commission income.

**Income (Loss) on Variable Interest Entities.** Included within Income (loss) on variable interest entities are income statement amounts relating to LFG-VIEs, consolidated under the Consolidation Topic of the ASC as a result of Ambac's variable interest arising from financial guarantees written by Ambac's subsidiaries, including gains or losses attributable to consolidating or deconsolidating LFG-VIEs during the periods reported. Generally, the Company’s consolidated LFG-VIEs are entities for which Ambac has provided financial guarantees on all of or a portion of its assets or liabilities.

Income (loss) on variable interest entities was $0 and $2 for the three and six months ended June 30, 2024, compared to $0 and $(1) for the three and six months ended June 30, 2023. Results for the six months ended June 30, 2024 increased from the prior year period due lower net interest expense on Puerto Rico VIEs and inclusion of contract revenues from a LFG-VIE initially consolidated in the fourth quarter 2023, partially offset by lower fair value gains on the net assets of other LFG-VIEs.

Refer to *Note 8. Variable Interest Entities* to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further information on the accounting for LFG- VIEs.

**Losses and Loss Adjustment Expenses (Benefit).** Loss and loss expenses incurred increased $10 and decreased $9 for the three and six months ended June 30, 2024, compared to the same period in the prior year. The below provides the breakout of loss and loss expenses by segment:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Legacy financial guarantee | **$(5)** | $2 | **$(26)** | 15 |
| Specialty property and casualty insurance | **23** | 6 | **42** | 10 |
| **Total** | **$18** | $7 | **16** | 25 |

The variance within legacy financial guarantee was driven by activities in the RMBS portfolio in both years. The primary driver was largely the positive impact of discount rates in 2024 compared to the negative impact of discount rates in 2023.

The higher loss and loss adjustment expenses in Specialty P&C is primarily due to an increase business production from new and existing programs as well as adverse development on its commercial auto program and the addition of personal nonstandard auto.

**General and Administrative Expenses (G&A).** The following table provides a summary of G&A expenses for the periods presented:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Compensation | **$17** | $18 | **$34** | $34 |
| Non-compensation | **30** | 18 | **49** | 38 |
| Total G&A expenses | **$47** | $36 | **83** | 72 |

The decrease in Compensation G&A expenses during the three and six months ended June 30, 2024, was due to lower current year period expenses for severance costs and incentive compensation expense, including the impact of performance factor adjustments on stock-based compensation; offset by higher compensation costs from a net increase in staffing from the development and growth, both organic and via acquisitions, of the Specialty Property & Casualty Insurance and Insurance Distribution segments.

The increase in Non-Compensation G&A expenses during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, was due to expenses associated with the strategic review of the Legacy Financial Guarantee Insurance segment and growth of the Specialty Property & Casualty Insurance and Insurance Distribution segments; offset by lower Legacy Financial Guarantee Insurance segment's legal defense costs. For the three and six months ended June 30, 2024, expenses attributable to the sale of AAC and the acquisition of Beat aggregated $16 and $18 compared to $0 and $1 for the three and six months ended June 30, 2023, respectively.

**Intangible Amortization.** Insurance intangible amortization for the three and six months ended June 30, 2024, was $7 and $18 an increase of $1 and $7 as compared to the the three and six months ended June 30, 2023. The increase for the three and six

months ended June 30, 2024, was driven primarily by de-risking activities. Other intangible amortization for the three and six months ended June 30, 2024, was $1, and $1 and $1 and $2 for the three and six months ended June 30, 2023, respectively.

**Interest Expense.** All interest expense relates to the Legacy Financial Guarantee Insurance segment and includes accrued interest on the Tier 2 Notes (fully redeemed during the first quarter of 2023), surplus notes and other debt obligations. Additionally, interest expense includes discount accretion when the debt instrument carrying value is at a discount to par. The following table provides details by type of obligation for the periods presented:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Surplus notes | **$16** | $16 | **$31** | $31 |
| Tier 2 Notes | **—** | — | **—** | 1 |
| Other (principally Ambac UK) | **—** | — | **1** | 1 |
| **Total interest expense** | **$16** | **$16** | **$32** | **$32** |

Interest expense for the six months ended June 30, 2024 decreased compared to the six months ended June 30, 2023, due to the final redemption of Tier 2 secured notes in the first quarter of 2023.

As required by the terms of surplus notes and/or otherwise, AAC will continue to seek OCI’s approval to make payments of principal and interest on its surplus notes. AAC intends to make these requests at least four times a year with respect to payment of a partial amount, as well as the full amount, of the principal and interest then due, unless otherwise directed by OCI. OCI’s approval of AAC’s requests for surplus note payments may be granted or denied in OCI’s sole discretion. Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments. Ambac can provide no assurance as to when or if surplus note principal and interest payments will be made. If OCI does not approve payments on or the acquisition of surplus notes over time, the ongoing accretion of interest on the notes may impair AAC's ability to extinguish the notes in full. Surplus notes are subordinated in right of payment to policyholder and other claims.

AAC's recent request to pay principal of, and interest on, surplus notes on the scheduled payment date of June 7, 2024, was denied by OCI. As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, has been extended until OCI grants approval to make such payment. Interest will accrue, compounded on each anniversary of the original scheduled payment date or scheduled maturity date, on any unpaid principal or interest through the actual date of payment, at 5.1% per annum. Holders of surplus notes have no rights to enforce the payment of the principal of, or interest on, surplus notes in the absence of OCI approval to pay such amount. Interest on the outstanding surplus notes was accrued for and AAC is accruing interest on the interest amounts following each scheduled payment date. Total accrued and unpaid interest for surplus notes outstanding was $500 at June 30, 2024.

**Provision for Income Taxes.** The provision for income taxes primarily relates to international operations and was $2 and $7 for the three and six months ended June 30, 2024, compared to $2 and $6 for the three and six months ended June 30, 2023, an increase of $1 for the quarter.

### Results of Operations by Segment

*Legacy Financial Guarantee Insurance*

| Revenues: | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net premiums earned | **$6** | $8 | **$13** | $14 |
| Net investment income | **32** | 32 | **70** | 63 |
| Net investment gains (losses), including impairments | **(1)** | (3) | **—** | (8) |
| Net gains (losses) on derivative contracts | **1** | 1 | **2** | (3) |
| Other income | **16** | 2 | **21** | 4 |
| Total | **53** | 39 | **107** | 71 |
| **Expenses:** |  |  |  |  |
| Loss and loss expenses (benefit) | **(5)** | 2 | **(26)** | 15 |
| General and administrative expenses | **22** | 23 | **44** | 52 |
| Total | **17** | 25 | **18** | 66 |
| **Earnings before interest, taxes, depreciation and amortization (1)** | **36** | 14 | **89** | 5 |
| Interest expense | **16** | 16 | **32** | 32 |
| Depreciation | **—** | — | **—** | 1 |
| Intangible amortization | **7** | 6 | **18** | 11 |
| **Pretax income (loss)** | **$13** | $(8) | **$38** | $(40) |
| **Stockholders equity (2)** | **$939** | $823 |  |  |

(1) Abbreviated as "EBITDA" in future references

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

The Legacy Financial Guarantee Insurance segment is in active runoff. This will generally result in declining premiums earned, investment income, G&A expenses and intangible amortization. The variability in the segment financial results is primarily driven by (i) change in loss and loss expenses resulting from, among other items, credit developments, interest rates and de-risking transactions (may also impact intangible amortization) and (ii) volatility from Other investments income (loss) resulting from changes in market conditions and other performance factors. Key variances not discussed above in the Consolidated Results section are as follows:

**Net premiums earned.** Net premiums earned decreased $2 and $1 for the three and six months ended June 30, 2024, compared to the same period in the prior year. Net premiums earned were impacted by the organic and active runoff of the financial guarantee insured portfolio, resulting in a reduction to current and future net premiums earned.

### Other Revenue Items.

Net investment income increased $0 and $7 for the three and six months ended June 30, 2024, compared to the prior year period, driven by higher yields in fixed income, offset by lower fair value gains on other investments, including fixed maturity securities classified as trading.

Net investment gains (losses), including impairments improved $2 and $8 for the three and six months ended June 30, 2024, compared to the prior year periods, primarily as a result of lower foreign exchange losses on US dollar denominated securities held by Ambac UK and net losses on sales in the prior year periods.

Net gains (losses) on derivatives for the three and six months ended June 30, 2024 declined $1 and improved $4, respectively, compared to the prior year periods mostly driven by the impact of counterparty credit adjustments on certain derivative assets. Additionally, the six months ended June 30, 2023 included losses on positions held as partial hedges against interest rate risk elsewhere in the Legacy Financial Guarantee segment. Ambac has exited the derivative positions that led to the first half 2023 losses. See Consolidated Results above for further information about investment and derivative results.

Other income increased $13 and $17 for the three and six months ended June 30, 2024, respectively, primarily related to the termination of a postretirement plan. The gain represents the amount of the accrued and deferred liabilities in excess of the final payment made under the plan.

**Losses and Loss Adjustment Expenses (Benefit).** The following provides details for losses and loss adjustment expenses (benefit) incurred for the periods presented:

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Structured Finance | **$(5)** | $1 | **$(21)** | $21 |
| Domestic Public Finance | **4** | (2) | **1** | 1 |
| Other, including International Finance | **(4)** | 2 | **(6)** | (7) |
| **Totals** | **$(5)** | **$2** | **$(26)** | **$15** |

Loss and loss adjustment expenses (benefit) for the three and six months ended June 30, 2024, were largely driven by the positive impact of discount rates on the structured insurance portfolio, and assumption changes in the international portfolio, partially offset by adverse development in the public finance portfolio.

Loss and loss expenses (benefit) for the the six months ended June 30, 2023, were largely driven by the RMBS portfolio resulting from a first quarter 2023 decline in discount rates, partially offset by assumption changes in the international portfolio.

**G&A Expenses.** Segment G&A expenses decreased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, primarily due to lower legal defense costs and compensation costs than the prior year period, partially offset by the timing of the reimbursement of $4 of expenses paid to the Corporate segment (2023 was paid in in the first quarter of 2023 and 2024 was paid in the second quarter of 2024). These relative reductions in expenses were also partially offset by expenses incurred in the first quarter of 2024 related to the strategic review of the Legacy Financial Guarantee segment.

*Specialty Property and Casualty Insurance*

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Gross premiums written | **$111** | $53 | **$208** | $105 |
| Net premiums written | **32** | 9 | **59** | 18 |
| **Revenues:** |  |  |  |  |
| Net premiums earned | **$27** | $8 | **$53** | $15 |
| Program fees | **3** | 2 | **6** | 4 |
| Investment income | **1** | 1 | **3** | 2 |
| Net investment gains (losses), including impairments | **—** | — | **—** | — |
| Total | **32** | 11 | **61** | 20 |
| **Expenses:** |  |  |  |  |
| Losses and loss expenses incurred | **23** | 6 | **42** | 10 |
| Amortization of deferred acquisition costs, net | **5** | 1 | **10** | 3 |
| General and administrative expenses | **5** | 4 | **8** | 8 |
| Total | **33** | 11 | **61** | 21 |
| **EBITDA** | **(1)** | $— | **1** | $(1) |
| **Pretax income (loss)** | **$(1)** | $— | **$1** | $(1) |
| **Retention Ratio (1)** | **29.0%** | 17.1% | **28.2%** | 17.4% |
| **Loss and LAE Ratio (2)** | **85.1%** | 73.7% | **80.5%** | 70.4% |
| **Expense Ratio (3)** | **24.3%** | 39.0% | **23.5%** | 46.7% |
| **Combined Ratio (4)** | **109.4%** | 112.7% | **104.0%** | 117.1% |
| **Ambac's stockholders equity (5)** | **$122** | $112 |  |  |

(1) Retention ratio is defined as net premiums written divided by gross premiums written

(2) Loss and LAE ratio is defined as losses and loss expenses incurred divided by net premiums earned

(3) Expense Ratio is defined as acquisition costs and general and administrative expenses, reduced by program fees divided by net premiums earned

(4) Combined ratio is defined as Loss and LAE ratio plus Expense Ratio

(5) Represents Ambac stockholders equity in the Specialty Property and Casualty Insurance segment, including intercompany eliminations.

The Specialty Property and Casualty Insurance segment has grown significantly since underwriting its first program in May 2021. Twenty-three programs were authorized to issue policies as of June 30, 2024, including Everspan participating on two programs as a reinsurer. The growth in both the number and size of these programs has contributed to the increase in gross and net premiums written, net premiums earned and net loss and loss expenses incurred.

Consistent with its strategy to generate sustainable and profitable, long-term specialty property and casualty program insurance business with a focus on diverse classes of risks, Everspan may source programs as a reinsurer. Accessing programs as a reinsurer provides Everspan the ability to diversify its risk profile, efficiently manage its exposure limits and underwrite programs in a cost efficient manner, amongst other benefits. Everspan may participate as a reinsurer on up to 30% of a program, which is in line with its strategy to generally retain up to 30% per program. Participation as a reinsurer will affect the retention ratio as Everspan's portion of assumed premiums is reflected fully in both Gross and Net Premiums Written.

Loss and loss expenses incurred increased for the three and six months ended June 30, 2024, relative to the three and six months ended June 30, 2023. Everspan's loss ratio (including ULAE) was 85.1% at June 30, 2024, versus 73.7% at June 30, 2023, inclusive of prior accident years development of 6.9% and 4.2%, respectively and the impact of reserve strengthening in the current accident year of 4.2% for the three months ended June 30, 2024 primarily related to commercial auto. The shift in the loss ratio was driven by commercial auto losses, the addition of personal nonstandard auto (through assumed reinsurance), excess auto claims and other liability claims. Everspan's loss ratio may fluctuate as the still nascent inforce book of business scales and seeks to achieve benefits from diversification. The increase in the Loss and LAE ratio for the three months ended June 30, 2024, compared to June 30, 2023, was partially offset by a benefit to acquisition costs as a result of sliding scale commission arrangements with program partners. Such benefit reduced the Specialty Property and Casualty Insurance segments expense ratio by 5.6% and 4.2% for the three months ended June 30, 2024 and 2023, respectively. Certain Everspan programs were structured to include sliding scale commission arrangements within a loss ratio range. These sliding scale arrangements help mitigate losses, protect underwriting results and limit earnings volatility. In June 2024, one of Everspan's commercial auto program partners agreed with Everspan to temporarily suspend underwriting new business in order for the parties and Everspan's reinsurers to review pricing and loss controls in advance of considering the program's renewal.

Loss and loss expenses incurred may be adversely impacted by economic and social inflation. The impact of inflation on ultimate loss reserves is difficult to estimate, particularly in light of recent disruptions to the judicial system, supply chains and labor markets. In addition, going forward, we may not be able to offset the impact of inflation on our loss costs with sufficient price increases. The estimation of loss reserves may also be more difficult during extreme events, such as a pandemic, or during the persistence of volatile or uncertain economic conditions, due to, amongst other reasons, unexpected changes in behavior of judicial decisions, claimants and policyholders, including fraudulent reporting of exposures and/or losses. Due to the inherent uncertainty underlying loss reserve estimates, the final resolution of the estimated liability for loss and loss adjustment expenses will likely be higher or lower than the related loss reserves at the reporting date. In addition, our estimate of losses and loss expenses may change. These additional liabilities or increases in estimates, or a range of either, could vary significantly from period to period.

General and administrative costs were flat for the three and six months ended June 30, 2024, relative to the three and six months ended June 30, 2023, as increases from the ramp up in Everspan's staffing and operations was mostly offset by the timing of incentive compensation accruals.

*Insurance Distribution*

|  | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Premiums placed | **$53** | $41 | $144 | $118 |
| Commission income | **$13** | $10 | $31 | $25 |
| Commission expense | **8** | 6 | 18 | 14 |
| Net commissions | **5** | 4 | 13 | 11 |
| **Expenses:** |  |  |  |  |
| General and administrative expenses (1) | **3** | 2 | 6 | 5 |
| **EBITDA** | **2** | **2** | **7** | **6** |
| Depreciation (1) | **—** | — | — | — |
| Intangible amortization | **1** | 1 | 2 | 2 |
| **Pretax income (loss)** | **$1** | $1 | $5 | $4 |
| **Ambac's stockholders equity (2)** | **$105** | $92 |  |  |

(1) The Consolidated Statements of Comprehensive Income presents the sum of these items as General and Administrative Expenses.

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

Ambac's Insurance Distribution businesses are compensated for their services primarily by commissions paid by insurance carriers for underwriting, structuring and/or administering polices. Commission revenues are usually based on a percentage of the premiums placed. In addition, we are eligible to receive profit sharing contingent commissions on certain programs based on the underwriting results of the policies placed with carriers, which may cause some variability in revenue and earnings.

The Insurance Distribution segment placed premiums for its carriers of approximately $53 and $144 for the three and six months ended June 30, 2024, up $12 and $25 or 31% and 21%, respectively, as compared to the three and six months ended June 30, 2023. Higher premiums placed were driven by the acquisition of Riverton Insurance Agency and organic growth. The increase in premiums placed and changes to the mix of business written led to the growth in commission income and commission expense of 32% and 31%, respectively.

Employer Stop Loss business underwritten by Xchange has seasonality in January and July, which results in revenue and earnings concentrations in the first and third quarters each calendar year. Other lines of business placed by our Insurance Distribution business may also experience seasonality that may cause some volatility of results from period to period.

**G&A Expenses.** G&A expenses for the three and six months ended June 30, 2024, increased compared to the three and six months ended June 30, 2023, primarily as a result of the Riverton acquisition.

### LIQUIDITY AND CAPITAL RESOURCES

### Holding Company Liquidity

AFG is organized as a legal entity separate and distinct from its operating subsidiaries. AFG is a holding company with no outstanding debt at June 30, 2024. AFG's liquidity is primarily dependent on its net assets, excluding the operating subsidiaries that it owns, totaling $202 as of June 30, 2024, and secondarily on distributions, expense sharing payments from its operating subsidiaries and third party capital (credit facilities, equity issuance, etc.).

- Effective July 31, 2024, AFG closed the acquisition of a controlling 60% interest in Beat. In connection with the acquisition, Cirrata incurred $150 of debt maturing in 364 days funded by a global bank (the "Credit Facility"). Repayment of debt under the Credit Facility is guaranteed by AFG. It is AFG's intent to repay this debt upon the closing of the sale of AAC or otherwise refinance such short-term debt with longer-term debt.
- Under an inter-company cost allocation agreement, AFG is reimbursed by AAC for a portion of certain operating costs and expenses and, if approved by OCI, entitled to an additional payment of up to $4 per year to cover expenses not otherwise reimbursed. The $4 reimbursement was approved by OCI and was paid to AFG during the second quarter of 2024. As further described in Note 1. Business and Basis of Presentation, AFG entered into a stock purchase agreement, pursuant to which and subject to the conditions set forth therein, AFG will sell all of the issued and outstanding shares of common stock of AAC. The sale of AAC is expected to close in the fourth quarter of 2024 or the first quarter of 2025 and, accordingly, it is unlikely for AFG to receive this reimbursement in the future.
- If AFG were to not sell AAC, its ability to receive dividends from AAC and the timing of any such potential dividends would depend on the results of the OCI Capital Model, regulatory approval and the satisfaction of certain obligations senior to AFG's equity interest (e.g. surplus notes).
- Subject to the approvals required for the sale of AAC as described in Note 1. Business and Basis of Presentation, AFG will receive $420 of proceeds at closing less applicable legal, advisory and other expenses incurred in connection with the sale.
- Everspan's ability to make future dividend payments will mostly depend on its future profitability relative to its capital needs to support growth. Everspan is not expected to pay dividends in the near term.
- Cirrata does not have any regulatory restrictions on its ability to make distributions. AFG received distributions from Cirrata of $4.7 and $3.6 during the six months ended June 30, 2024 and 2023.

AFG's principal uses of liquidity are: (i) the payment of G&A expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which are generally illiquid and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses, including through the acquisition of noncontrolling interests as a result of the exercise of outstanding puts and/or calls. Including the acquisition of Beat, funding these puts, calls and other commitments could require payments from AFG, depending on the performance of the underlying businesses and other considerations, of approximately $350 through 2030. AFG may also provide short-term financial support, primarily in the form of loans, to its operating subsidiaries to support their operating requirements.

In the opinion of the Company’s management the net assets and expected funding sources of AFG are currently sufficient to meet AFG’s current liquidity requirements. However, events, opportunities, acquisitions, the exercise of puts and calls, the need to refinance outstanding debt, or other circumstances could require AFG to seek additional capital (e.g. through the issuance of debt, equity or hybrid securities).

The Credit Facility includes covenants that restrict our ability to manage capital resources by limiting, among other actions, the issuance of debt or capital stock; the creation of liens; the disposition of assets; engaging in transactions with affiliates; making restricted payments, including dividends and the purchase or redemption of capital stock; and making acquisitions and other investments. The Credit Facility also requires the prepayment of the borrowings thereunder with proceeds of certain debt or equity issuances and certain asset sales. These requirements will impact our financial and operational flexibility while the Credit Facility remains in place.

### Operating Companies' Liquidity

### Insurance

Sources of liquidity for the Company’s insurance subsidiaries are through funds generated from premiums; recoveries on claim payments; reinsurance recoveries; fees; investment income and maturities and sales of investments.

- See Note 5. Insurance Contracts to the Consolidated Financial Statements included in Part I, Item 1., in this Form 10-Q for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK. Termination of financial guarantee policies on an accelerated basis may adversely impact AAC’s liquidity.

Cash provided from these sources is used primarily for claim payments and commutations, loss expenses and acquisition costs (Specialty Property & Casualty Insurance segment only), debt service on outstanding debt (Legacy Financial Guarantee segment only), G&A expenses, reinsurance payments and purchases of securities and other investments, some of which may not be immediately convertible into cash.

- As required by the terms of surplus notes and/or otherwise, AAC will continue to seek OCI’s approval to make payments of principal and interest on its surplus notes. AAC

intends to make these requests at least four times a year with respect to payment of a partial amount, as well as the full amount, of the principal and interest then due, unless otherwise directed by OCI. OCI’s approval of AAC’s requests for surplus note payments may be granted or denied in OCI’s sole discretion. Since the issuance of the surplus notes in 2010, OCI has declined to approve regular payments of interest on surplus notes, although the OCI has permitted two exceptional payments. Ambac can provide no assurance as to when or if surplus note principal and interest payments will be made. If OCI does not approve payments on or the acquisition of surplus notes over time, the ongoing accretion of interest on the notes may impair AAC's ability to extinguish the notes in full. Surplus notes are subordinated in right of payment to policyholder and other claims.

- As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, AAC requested approval from OCI to pay principal of, and interest on, the surplus notes on June 7, 2024, but such request was declined. Current principal outstanding on AAC's long-term debt consisted of $519 of surplus notes. AAC's future interest obligations on long-term debt include $500 of accrued and unpaid interest all or a portion of which would be payable on surplus notes if approved by OCI on or before the next scheduled payment date of June 7, 2025.
- AFS's remaining derivatives include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings. AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and G&A expenses. Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI.

Insurance subsidiaries manage their liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times. It is the opinion of the Company’s management that the insurance subsidiaries’ near term liquidity needs will be adequately met from the sources described above.

### Insurance Distribution:

The liquidity requirements of our Insurance Distribution subsidiaries are met primarily by funds generated from commission receipts (both base and profit commissions). Base commissions are generally received monthly, whereas profit commissions are received only if the business underwritten is profitable. Cash provided from these sources is used primarily for commissions paid to sub-producers, G&A expenses and distributions to AFG and other members.

### Consolidated Cash Flow Statement Discussion

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

| Six Months Ended June 30, Cash provided by (used in): | 2024 | 2023 |
| --- | ---: | ---: |
| Operating activities | **$32** | $101 |
| Investing activities | **(120)** | 489 |
| Financing activities (1) | **(89)** | (343) |
| Foreign exchange impact on cash and cash equivalents | **—** | 1 |
| **Net cash flow** | **$(178)** | **$248** |

(1) Because the trusts established under the Puerto Rico restructurings are consolidated VIEs, certain payments made by AAC to accelerate AAC-insured bonds that were deposited into trusts are reflected as payments of VIE liabilities within financing activities. Cash used in financing activities includes $0 and $108 from such AAC payments, for the six months ended June 30, 2024 and 2023, respectively.

### Operating activities

Net cash provided by operating activities during the six months ended June 30, 2024 and 2023 was $32 and $101, respectively. During the six months ended June 30, 2023, Ambac received proceeds from a R&W settlement and repaid the remaining secured debt outstanding (net operating cash inflows of $90). Operating cash flows in the six months ended June 30, 2024 were positively impacted by the growth in the Specialty P&C Insurance business and higher investment portfolio inflows, partially offset by transaction related costs for the acquisition of Beat and the sale of AAC.

Future operating flows will primarily be impacted by net premium collections and investment coupon receipts, G&A expenses, net claim and loss expense payments and interest payments on outstanding debt.

### Financing Activities

Financing activities for the six months ended June 30, 2024, included paydowns and maturities of VIE debt obligations of $87.

Financing activities for the six months ended June 30, 2023, included payments for redemption of Tier 2 Notes of $97 and paydowns and maturities of VIE debt obligations of $235 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

### Collateral

AFS hedged a portion of the interest rate risk in the Legacy Financial Guarantee Insurance segment financial guarantee and

investment portfolios, along with legacy customer interest rate swaps, with standardized derivative contracts, which contain collateral or margin requirements. Since the second quarter of 2023, AFS's only remaining derivative positions include a limited number of legacy customer swaps and their associated hedges. Under these hedge agreements, AFS is required to post collateral in excess of the derivative unrealized loss amount. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral posting or a termination have been triggered. All collateral obligations are currently met. Collateral posted by AFS totaled a net amount of $44 (cash and securities collateral of $25 and $18, respectively), including independent amounts, under these contracts at June 30, 2024.

### BALANCE SHEET

Total assets decreased by $244 from December 31, 2023, to $8,184 at June 30, 2024, primarily due to lower VIE assets partially offset by increases in premium receivables, reinsurance recoverables and deferred ceded premiums as a result of growth in the specialty P&C businesses.

Total liabilities decreased by approximately $248 from December 31, 2023, to $6,748 as of June 30, 2024, primarily due to decreases in VIE liabilities; partially offset by higher unearned premiums, deferred program fees and ceded premium payables from the specialty P&C businesses.

As of June 30, 2024, total stockholders’ equity was $1,419, compared with total stockholders’ equity of $1,415 at December 31, 2023.

### Investment Portfolio

Ambac's investment portfolio is managed under established guidelines designed to meet the investment objectives of AAC, Everspan Group, Ambac UK and AFG. Refer to "Description of the Business – Investments and Investment Policy" located in Part I. Item 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for further description of Ambac's investment policies and applicable regulations.

Ambac's investment policies and objectives do not apply to the assets of VIEs consolidated as a result of financial guarantees written by its insurance subsidiaries.

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

|  | June 30, 2024 Legacy Financial Guarantee Insurance | Specialty Property & Casualty Insurance | Insurance Distribution | Corporate & Other | Consolidated | December 31, 2023 Legacy Financial Guarantee Insurance | Specialty Property & Casualty Insurance | Insurance Distribution | Corporate & Other | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed maturity securities | **$1,567** | **$137** | **$—** | **$—** | **$1,703** | $1,575 | $121 | $— | $14 | $1,710 |
| Fixed maturity securities - trading | **31** | **—** | **—** | **—** | **31** | 27 | — | — | — | 27 |
| Short-term | **105** | **43** | **5** | **161** | **314** | 225 | 41 | 4 | 156 | 426 |
| Other investments | **526** | **—** | **—** | **32** | **558** | 457 | — | — | 18 | 475 |
| Fixed maturity securities pledged as collateral | **25** | **—** | **—** | **—** | **25** | 27 | — | — | — | 27 |
| **Total investments (1)** | **$2,254** | **$180** | **$5** | **$193** | **$2,632** | **$2,310** | **$162** | **$4** | **$188** | **$2,664** |

(1) Includes investments denominated in non-US dollar currencies with a fair value of £344 ($435) and €21 ($23) as of June 30, 2024 and £342 ($436) and €25 ($27) as of December 31, 2023.

Ambac invests in various asset classes in its fixed maturity securities portfolio. Other investments primarily consist of diversified interests in pooled funds. Refer to Note 3. Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for information about fixed maturity securities and pooled funds by asset class.

The following charts provide the ratings(1) distribution of the fixed maturity investment portfolio based on fair value at June 30, 2024 and December 31, 2023:

(1) Ratings are based on the lower of Moody’s or S&P ratings. If ratings are unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

(2) Below investment grade and not rated bonds insured by Ambac represent 17% and 21% of the June 30, 2024, and December 31, 2023, combined fixed maturity portfolio, respectively.

### Premium Receivables

Ambac's premium receivables increased to $317 at June 30, 2024, from $290 at December 31, 2023. The increase is primarily due to growth in the Specialty P&C Insurance Segment, including receivables related to the programs where Everspan participates as a reinsurer. At June 30, 2024, Legacy Financial Guarantee Insurance and Specialty P&C premiums receivables were $232 and $85, respectively.

Premium receivables by payment currency were as follows:

| Currency | Premium Receivable in Payment Currency | Premium Receivable in U.S. Dollars |
| --- | ---: | ---: |
| U.S. Dollars | **$235** | **$235** |
| British Pounds | **£55** | **70** |
| Euros | **€11** | **12** |
| **Total** |  | **$317** |

### Reinsurance Recoverable on Paid and Unpaid Losses

Ambac has reinsurance in place pursuant to surplus share treaty and facultative agreements. To minimize its exposure to losses from reinsurers, Ambac (i) monitors the financial condition of its reinsurers; (ii) is entitled to receive collateral from its reinsurance counterparties under certain reinsurance contracts; and (iii) has certain cancellation rights that can be exercised in the event of rating agency downgrades of a reinsurer (among other events and circumstances). Those reinsurance counterparties that do not currently post collateral are well capitalized, highly rated, authorized capacity providers. Ambac benefited from letters of credit and collateral amounting to approximately $66 from its reinsurers at June 30, 2024. Additionally, while legacy liabilities from the recent Specialty P&C acquisitions were fully ceded to certain reinsurers, Everspan also benefits from an unlimited, uncapped indemnity from the respective sellers to mitigate any residual risk to these reinsurers. As of June 30, 2024 and December 31, 2023, reinsurance recoverable on paid and unpaid losses were $277 and $195, respectively primarily due to growth in the Specialty P&C Insurance Segment.

### Intangible Assets

Intangible assets primarily include (i) an insurance intangible asset that was established at AFG's emergence from bankruptcy (Legacy Financial Guarantee Insurance Segment) in 2013, representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities of $226 at June 30, 2024, (ii) intangible assets established as part of acquisitions in the Insurance Distribution business of $45 at June 30, 2024, (iii) indefinite-lived intangible assets in the Specialty P&C business as part of its acquisitions of $14 at June 30, 2024.

As of June 30, 2024 and December 31, 2023, intangible assets were $285 and $307, respectively. The decline is primarily driven by amortization during the six months ended June 30, 2024.

### Loss and Loss Expense Reserves and Subrogation Recoverable

Loss and loss expense reserves are based upon estimates of the ultimate aggregate losses inherent in insurance policies issued to beneficiaries, excluding consolidated VIEs.

The evaluation process for determining the level of reserves is subject to certain estimates and judgments. Refer to the "Critical Accounting Policies and Estimates" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of Presentation and Significant Accounting Policies and Loss Reserves sections included in Note 2. Basis of Presentation and Significant Accounting Policies and Note 8. Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for further information on loss and loss expenses.

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

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

| Balance Sheet Line Item | June 30, 2024: Specialty Property and Casualty Gross Loss and Loss Expense Reserves | Legacy Financial Guarantee Present Value of Expected Net Cash Flows Claims and Loss Expenses | Unearned Premium Revenue Recoveries | Gross Loss and Loss Expense Reserves | Gross Loss and Loss Expense Reserves | December 31, 2023: Specialty Property and Casualty Present Value of Expected Net Cash Flows Claims and Loss Expenses | Legacy Financial Guarantee Recoveries | Unearned Premium Revenue | Gross Loss and Loss Expense Reserves |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loss and loss expense reserves | **$286** | **$669** | **$(51)** | **$(14)** | **$890** | $197 | $779 | $(55) | $(28) | $893 |
| Subrogation recoverable | **—** | **7** | **(136)** | **—** | **(128)** | — | 1 | (139) | — | (137) |
| **Totals** | **$286** | **$676** | **$(186)** | **$(14)** | **$762** | **$197** | **$780** | **$(194)** | **$(28)** | **$756** |

### Ambac Financial Group, Inc. 52 Second Quarter 2024 Form 10-Q

### Legacy Financial Guarantee Insurance:

Ambac has exposure to various bond types issued in the debt capital markets. The bond types that have experienced significant claims, including through commutations, are residential mortgage-backed securities (“RMBS”), student loan securities and public finance securities. These bond types represent 91% of our ever-to-date insurance claims recorded, with RMBS comprising 60%. The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s gross loss and loss expense reserves at June 30, 2024 and December 31, 2023:

|  | June 30, 2024: Gross Par Outstanding (1) Claims and Loss Expenses | Present Value of Expected Net Cash Flows Recoveries |  | Unearned Premium Revenue | Gross Loss and Loss Expense Reserves (1)(2) Claims and Loss Expenses | December 31, 2023: Gross Par Outstanding (1) Recoveries | Present Value of Expected Net Cash Flows |  | Unearned Premium Revenue | Gross Loss and Loss Expense Reserves (1)(2) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Structured Finance | **$1,711** | **$596** | **$(166)** | **$(7)** | **$424** | $1,860 | $679 | $(172) | $(10) | $497 |
| Domestic Public Finance | **726** | **76** | **(8)** | **(7)** | **61** | 834 | 82 | (8) | (8) | 66 |
| Other, including International finance | **144** | **1** | **(13)** | **—** | **(12)** | 1,144 | 15 | (13) | (10) | (8) |
| Loss expenses | **—** | **3** | **—** | **—** | **3** | — | 4 | — | — | 4 |
| **Totals** | **$2,581** | **$676** | **$(186)** | **$(14)** | **$476** | $3,838 | $780 | $(194) | $(28) | $559 |

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves were $279 and $26 respectively, at June 30, 2024, and $362 and $30, respectively at December 31, 2023. Recoverable ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses on the balance sheet.

(2) Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

### Variability of Expected Losses and Recoveries

Ambac’s management believes that the estimated future loss component of loss reserves (present value of expected net cash flows) are adequate to cover future claims presented, but there can be no assurance that the ultimate liability will not be higher than such estimates.

While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted uncertainty that adversely affects market conditions. Accordingly, it is possible that our estimated loss reserves, gross of reinsurance, for financial guarantee insurance policies could be understated. We have attempted to identify possible cash flows related to losses and recoveries using more stressful assumptions than the probability-weighted outcome recorded. The possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at June 30, 2024, and assumes an inability to execute any commutation transactions with issuers and/or investors. Such stress scenarios are developed based on management’s view about all possible outcomes relating to losses and recoveries. In arriving at such view, management makes considerable judgments about the possibility of various future events. Although we do not believe it is possible to have stressed outcomes in all cases, it is possible that we could have stress case outcomes in some or even many cases. See “Risk Factors” in Part I, Item 1A as well as the descriptions of "Variability of Expected Losses and Recoveries" in Part II, Item 7 of the Company's 2023 Annual Report on Form 10-K, and Part II, Item 1A "Risk Factors" of this Quarterly Report, for further discussion of the risks relating to future losses and recoveries that could result in more highly stressed outcomes.

The occurrence of these stressed outcomes individually or collectively would have a material adverse effect on our results of

operations and financial condition and may result in materially adverse consequence for Ambac, including (without limitation) impairing the ability of AAC to honor its financial obligations, particularly its outstanding surplus note and preferred stock obligations; the initiation of rehabilitation proceedings against AAC; decreased likelihood of AAC delivering value to AFG, through dividends or otherwise; and a significant drop in the value of securities issued or insured by AFG or AAC.

### Structured Finance Variability

#### RMBS:

Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, government intervention into the functioning of the mortgage market and the general effect of a weakened economy characterized by growing unemployment and wage pressures. Projected losses in our RMBS exposures and related loss reserves, may increase or decrease in the future. Possible stress case losses assume higher default rates, loss severities and lower prepayments.

### Student Loans:

Changes to assumptions that could make our reserves under-estimated include, but are not limited to, increases in interest rates, default rates and loss severities on the collateral due to economic or other factors, including the economic impact from public health crises and/or natural or other catastrophic events. Such factors may also include lower recoveries on defaulted loans or additional losses on collateral or trust assets, including as a result of any enforcement actions by the Consumer Finance Protection Bureau.

#### Structured Finance Variability:

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

### Domestic Public Finance Variability:

Ambac’s U.S. public finance portfolio consists of municipal bonds such as general and revenue obligations and lease and tax-backed obligations of state and local government entities; however, the portfolio also includes a wide array of non-municipal types of bonds, including transactions with public and private elements, which generally finance infrastructure, housing and other public purpose facilities and interests, the largest sector of which is U.S. military housing.

It is possible our loss reserves for public finance credits may be under-estimated if issuers are faced with prolonged exposure to adverse political, judicial, economic, fiscal or socioeconomic events or trends. Additionally, our loss reserves may be under-estimated because of the local, regional or national economic impact from public health crises and/or natural or other catastrophic events.

Our experience with the city of Detroit's bankruptcy and Commonwealth of Puerto Rico's Title III proceedings as well as other municipal bankruptcies demonstrates the preferential treatment of certain creditor classes, especially public pensions. The cost of pensions and the need to address frequently sizable unfunded or underfunded pensions is often a key driver of stress for many municipalities and their related authorities, including entities to whom we have exposure, such as Chicago's school district, the State of New Jersey and others. Less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors.

Variability of outcomes applies to even what are generally considered more secure municipal financings, such as dedicated sales tax revenue bonds that capture sales tax revenues for debt service ahead of any amounts being deposited into the general fund of an issuer. In the case of the Puerto Rico COFINA sales tax bonds that were part of the Commonwealth of Puerto Rico's Title III proceedings, AAC and other creditors agreed to settle at a recovery rate equal to about 93% of pre-petition amounts owed on the Ambac insured senior COFINA bonds. In the COFINA case, the senior bonds still received a reduction or "haircut" despite the existence of junior COFINA bonds, which received a recovery rate equal to about 56% of pre-petition amounts owed.

In addition, municipal entities may be more inclined to use bankruptcy to resolve their financial stresses if they believe preferred outcomes for various creditor groups can be achieved. We expect municipal bankruptcies and defaults to continue to be challenging to project given the unique political, economic, fiscal, legal, governance and public policy differences among municipalities as well as the complexity, long duration and relative infrequency of the cases themselves in forums with a scarcity of legal precedent. Moreover, issuers in Chapter 9 or similar proceedings may obtain judicial rulings and orders that impair creditors' rights or their ability to collect on amounts owed. In certain cases, judicial decisions may be contrary to AAC's expectations or understanding of the law or its rights thereunder, which may lead to worse outcomes in Chapter 9 or similar proceedings than anticipated at the outset.

Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market, resulting from reduced or limited access to alternative forms of credit (such as bank loans) or other exogenous factors, such as changes in tax law that could reduce certain municipal investors' appetite for tax-exempt municipal bonds or put pressure on issuers in states with high state and local taxes. These factors could deprive issuers access to funding at a level necessary to avoid defaulting on their obligations.

For the public finance credits for which we have an estimate of expected loss at June 30, 2024, the sum of all the highest stress case loss scenarios is $185 and there can be no assurance that losses may not exceed such amounts.

### Other Credits, including International Finance Variability:

It is possible our loss reserves on other types of credits, including those insured by Ambac UK, may be under-estimated because of various risks that vary widely, including the risk that we may not be able to recover or mitigate losses through our remediation processes. For all other credits, including Ambac UK, for which we have an estimate of expected loss, the sum of all the highest stress case loss scenarios is approximately $45 greater than the loss reserves at June 30, 2024. There can be no assurance that losses may not exceed such amounts.

### Long-term Debt

Long-term debt includes AAC surplus notes and the Ambac UK debt issued in connection with a commutation. All long-term debt relates to the Legacy Financial Guarantee segment.

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

|  | June 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Surplus notes | **$495** | $491 |
| Ambac UK debt | **17** | 17 |
| **Total Long-term Debt** | **$512** | **$508** |

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

### VARIABLE INTEREST ENTITIES

Please refer to Note 8. Variable Interest Entities to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q and Note 2. Basis of Presentation and Significant Accounting Policies and Note 12. Variable Interest Entities to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, for information regarding variable interest entities.

### ACCOUNTING STANDARDS

There are no new accounting standards applicable to Ambac that have been issued but not yet adopted.

### U.S. INSURANCE STATUTORY BASIS FINANCIAL RESULTS

AFG's U.S. insurance subsidiaries prepare financial statements under accounting practices prescribed or permitted by its domiciliary state regulator (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company. The National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) is adopted as a component of prescribed practices by each domiciliary state. For further information, see "Ambac Assurance Statutory Basis Financial Results," in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

### Ambac Assurance Corporation

AAC’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $894 and $1,197 at June 30, 2024, respectively, as compared to $897 and $1,201 at December 31, 2023, respectively. As of June 30, 2024, statutory policyholder surplus and qualified statutory capital included $519 principal balance of surplus notes outstanding and $115 liquidation preference of preferred stock outstanding. These surplus notes (in addition to related accrued interest of $500 that is not recorded under statutory basis accounting principles); preferred stock; and all other liabilities, including insurance claims are obligations that, individually and collectively, have claims on the resources of AAC that are senior to AFG's equity and therefore impede AFG's ability to realize residual value and/or receive dividends from AAC. The drivers to the net decrease in policyholder surplus were the statutory net loss of $6 for the six months ended June 30, 2024.

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

### Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $106 at June 30, 2024, as compared to $108 at December 31, 2023. The drivers within the period was net loss at

Everspan Indemnity Insurance Company, including its subsidiaries, of $1 during the six months ended June 30, 2024, in addition to a reduction in policyholders surplus for changes in capital contributions, primarily related to incentive compensation awards.

### AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES

Ambac UK is required to prepare financial statements under FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland." Ambac UK’s shareholder funds under UK GAAP were £505 at June 30, 2024, as compared to £489 at December 31, 2023. At June 30, 2024, the carrying value of cash and investments was £546, a increase from £535 at December 31, 2023. The increase in shareholders’ funds and cash and investments was primarily due to the continued receipt of premiums, investment gains and foreign exchange gains, partially offset by general and administrative expenses and tax payments.

Ambac UK is also required to prepare financial information in accordance with the Solvency II Directive. The basis of preparation of this information is significantly different from both US GAAP and UK GAAP. Available and eligible capital resources under Solvency II, to meet solvency capital requirements, were £448 at June 30, 2024, the most recently published position. Eligible capital resources at June 30, 2024, were in comparison to regulatory capital requirements of £213. Therefore, Ambac UK was in a surplus position in terms of compliance with applicable regulatory capital requirements by £235 at June 30, 2024.

### NON-GAAP FINANCIAL MEASURES

### ($ in millions)

In addition to reporting the Company’s quarterly financial results in accordance with GAAP, the Company is reporting non-GAAP financial measures: EBITDA, Adjusted Net Income and Adjusted Book Value. These amounts are derived from our consolidated financial information, but are not presented in our consolidated financial statements prepared in accordance with GAAP.We present non-GAAP supplemental financial information because we believe such information is of interest to the investment community, and that it provides greater transparency and enhanced visibility into the underlying drivers and performance of our businesses on a basis that may not be otherwise apparent on a GAAP basis. We view these non-GAAP financial measures as important indicators when assessing and evaluating our performance on a segmented and consolidated basis and they are presented to improve the comparability of our results between periods by eliminating the impact of the items that may not be representative of our core operating performance. These non-GAAP financial measures are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently. In connection with the sale of AAC and the acquisition of Beat, management is considering making changes to the current non-GAAP measures which, if any, may occur in future reporting periods.

The following paragraphs define each non-GAAP financial measure. A tabular reconciliation of the non-GAAP financial measure and the most comparable GAAP financial measure is also presented below.

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

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

|  | Three Months Ended June 30, 2024 Legacy Financial Guarantee Insurance | Specialty Property & Casualty Insurance | Insurance Distribution | Corporate & Other | Consoli-dated | Three Months Ended June 30, 2023 Legacy Financial Guarantee Insurance | Specialty Property & Casualty Insurance | Insurance Distribution | Corporate & Other | Consoli-dated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Net income (loss)** | **$11** | **$(1)** | **$1** | **$(11)** | **$(1)** | **$(9)** | **$—** | **$1** | **$(4)** | **$(13)** |
| Adjustments: |  |  |  |  |  |  |  |  |  |  |
| Interest expense | **16** | **—** | **—** | **—** | **16** | 16 | — | — | — | 16 |
| Income taxes | **3** | **—** | **—** | **—** | **2** | 2 | — | — | — | 2 |
| Depreciation | **—** | **—** | **—** | **—** | **1** | — | — | — | — | — |
| Amortization of intangible assets | **7** | **—** | **1** | **—** | **8** | 6 | — | 1 | — | 7 |
| **EBITDA (1)** | **$36** | **$(1)** | **$2** | **$(11)** | **$27** | **$14** | **$—** | **$2** | **$(4)** | **$12** |

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $0.4 and $0.3 for the three months ended June 30, 2024 and 2023, respectively. These noncontrolling interests are in the Insurance Distribution segment.

|  | Six Months Ended June 30, 2024 Legacy Financial Guarantee Insurance | Specialty Property & Casualty Insurance | Insurance Distribution | Corporate & Other | Consoli-dated | Six Months Ended June 30, 2023 Legacy Financial Guarantee Insurance | Specialty Property & Casualty Insurance | Insurance Distribution | Corporate & Other | Consoli-dated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Net income (loss)** | **$31** | **$1** | **$5** | **$(16)** | **$20** | **$(45)** | **$(1)** | **$4** | **$(4)** | **$(46)** |
| Adjustments: |  |  |  |  |  |  |  |  |  |  |
| Interest expense | **32** | **—** | **—** | **—** | **32** | 32 | — | — | — | 32 |
| Income taxes | **7** | **—** | **—** | **—** | **7** | 5 | — | — | — | 6 |
| Depreciation | **—** | **—** | **—** | **1** | **1** | 1 | — | — | — | 1 |
| Amortization of intangible assets | **18** | **—** | **2** | **—** | **21** | 11 | — | 2 | — | 13 |
| EBITDA | **$89** | **$1** | **$7** | **$(16)** | **$81** | **$5** | **$(1)** | **$6** | **$(3)** | **$7** |

(1) EBITDA is prior to the impact of noncontrolling interests, and relates to subsidiaries where Ambac does not own 100% in the amounts, of $1.4 and $1.2 for the six months ended June 30, 2024 and 2023, respectively. These noncontrolling interests are primarily in the Insurance Distribution segment.

***Adjusted Net Income (Loss) —*** We define Adjusted Net Income (Loss) as net income (loss) attributable to common stockholders adjusted to reflect the following items: (i) net investment (gains) losses, including impairments; (ii) amortization of intangible assets; (iii) litigation costs, including attorneys fees and other expenses to defend litigation against the Company, excluding loss adjustment expenses; (iv) foreign exchange (gains) losses; (v) workforce change costs, which primarily include severance and other costs related to employee terminations; and (vi) net (gain) loss on extinguishment of debt. Adjusted Net Income is also adjusted for the effect of the above items on both income taxes and noncontrolling interests. The income tax effects are determined by applying the statutory tax rate in each jurisdiction that generate these adjustments. The noncontrolling interest adjustments relate to subsidiaries where Ambac does not own 100%

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

*($ in millions, except share data)*

| Three Months Ended June 30, | 2024 $ Amount | Per Share | 2023 $ Amount | Per Share |
| --- | ---: | ---: | ---: | ---: |
| **Net income (loss) attributable to common shareholders** | **$(1)** | **$(0.02)** | **$(13)** | **(0.29)** |
| Adjustments: |  |  |  |  |
| Net investment (gains) losses, including impairments | **(4)** | **(0.08)** | 3 | 0.07 |
| Intangible amortization | **8** | **0.18** | 7 | 0.14 |
| Litigation costs | **5** | **0.10** | 8 | 0.17 |
| Foreign exchange (gains) losses | **—** | **0.01** | — | — |
| Workforce change costs | **—** | **—** | — | — |
| Pretax adjusted net income (loss) | **9** | **$0.19** | 4 | $0.09 |
| Income tax effects | **—** | **(0.01)** | (1) | (0.02) |
| Net (gains) attributable to noncontrolling interests | **—** | **—** | — | — |
| **Adjusted Net Income (Loss)** | **$8** | **$0.18** | **$3** | **$0.07** |

### Ambac Financial Group, Inc. 56 Second Quarter 2024 Form 10-Q

*($ in millions, except share data)*

| Six Months Ended June 30, | 2024 $ Amount | Per Share | 2023 $ Amount | Per Share |
| --- | ---: | ---: | ---: | ---: |
| **Net income (loss) attributable to common shareholders** | **$19** | **$0.41** | **$(47)** | **$(1.02)** |
| Adjustments: |  |  |  |  |
| Net investment (gains) losses, including impairments | **(4)** | **(0.09)** | 8 | 0.17 |
| Intangible amortization | **21** | **0.44** | 13 | 0.29 |
| Litigation costs | **11** | **0.24** | 16 | 0.36 |
| Foreign exchange (gains) losses | **1** | **0.02** | — | (0.01) |
| Workforce change costs | **—** | **—** | 1 | 0.02 |
| Pretax adjusted net income (loss) | **48** | **$1.02** | (9) | $(0.19) |
| Income tax effects | **—** | **(0.01)** | (2) | (0.03) |
| Net (gains) attributable to noncontrolling interests | **—** | **(0.01)** | — | (0.01) |
| **Adjusted Net Income (Loss)** | **$47** | **$1.00** | **$(10)** | **$(0.23)** |

***Adjusted Book Value.*** Adjusted book value is defined as Total Ambac Financial Group, Inc. stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following:

- *Insurance intangible asset:* Elimination of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for within adjusted book value consistent with the provisions of the Financial Services—Insurance Topic of the ASC.
- *Net unearned premiums and fees in excess of expected losses:* Addition of the value of the unearned premium revenue ("UPR") on financial guarantee contracts, in excess of expected losses, net of reinsurance. This non-GAAP adjustment presents the economics of UPR and expected losses for financial guarantee contracts on a consistent basis. In accordance with GAAP, stockholders’ equity reflects a reduction for expected losses only to the extent they exceed UPR. However, when expected losses are less than UPR for a financial guarantee contract, neither expected losses nor UPR have an impact on stockholders’ equity. This non-GAAP adjustment adds UPR in excess of expected losses, net of reinsurance, to stockholders’ equity for financial guarantee contracts where expected losses are less than UPR. This adjustment is only made for financial guarantee contracts since such premiums are non-refundable.
- *Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income:* Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”), net of income taxes.

Ambac has a significant U.S. tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result of this, tax planning strategies and other considerations, we utilized a 0% effective tax rate for non-GAAP operating adjustments to Adjusted Book.

The following table reconciles Total Ambac Financial Group, Inc. stockholders’ equity to the non-GAAP measure Adjusted Book Value on a dollar amount and per share basis, for all periods presented:

*($ in millions, except share data)*

|  | June 30, 2024 $ Amount | Per Share | December 31, 2023 $ Amount | Per Share |
| --- | ---: | ---: | ---: | ---: |
| **Total Ambac Financial Group, Inc. stockholders’ equity** | **$1,368** | **$30.25** | **$1,362** | **$30.13** |
| Adjustments: |  |  |  |  |
| Insurance intangible asset | **(226)** | **(5.00)** | (245) | (5.43) |
| Net unearned premiums and fees in excess of expected losses | **157** | **3.46** | 162 | 3.59 |
| Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income | **23** | **0.52** | 20 | 0.45 |
| **Adjusted book value** | **1,322** | **$29.23** | **$1,299** | **$28.74** |

The increase in Adjusted Book Value since December 31, 2023, was primarily attributable to Ambac's net income (excluding earned premium previously included in Adjusted Book Value).

## Market risk

As filed, 393 characters.

As of June 30, 2024 Ambac was party to a US dollar / British pound sterling foreign exchange forward contract to protect against currency fluctuations related to the purchase of Beat. This position was closed on July 26, 2024 resulting in a net gain to Ambac. As of June 30, 2024, there were no other material changes in the market risks that the Company is exposed to since December 31, 2023.

## Controls and procedures

As filed, 1,336 characters.

In connection with the preparation of this second quarter Form 10-Q, an evaluation was carried out by Ambac’s management, with the participation of Ambac’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Ambac’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on its evaluation, Ambac’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2024, Ambac’s disclosure controls and procedures were effective.

During the second quarter of 2024, the Company changed its investment accounting service provider and application. As part of its implementation, the Company evaluated the impact of this new application on its internal control over financial reporting and made changes to controls and procedures where necessary. There were no other changes in our internal control over financial reporting during the second quarter of 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 13,107 characters.

You should carefully consider the risk factors set forth in the “Risk Factors” section, Item 1A to Part I in our Annual Report on Form 10-K for the year ended December 31, 2023, which is hereby incorporated by reference. These important factors may cause our actual results to differ materially from those indicated by our forward-looking statements, including those contained in this report. Please also see the section entitled “Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995” in this quarterly report on Form 10-Q. There have been no material changes to the risk factors we have disclosed in the “Risk Factors” section of our aforementioned Annual Report on Form 10-K, except as noted below.

***The sale of the common stock of Ambac Assurance Corporation is subject to receipt of stockholder approval and other closing conditions, and may not be completed as anticipated, or at all.***

We are seeking the approval of the sale of all of the issued and outstanding shares of common stock, par value $2.50 per share, of Ambac Assurance Corporation, a Wisconsin stock insurance company and wholly-owned subsidiary of AFG (“**AAC”**), for aggregate consideration of $420 million in cash, subject to certain adjustments (the "Sale"), by our stockholders in accordance with Section 271 of the Delaware General Corporation Law on the basis that the Sale could be considered to constitute the sale of substantially all of Ambac’s property and assets within the meaning of that statute and related case law. The closing of the Sale is conditioned on, among other things, the receipt of specified regulatory approvals and AFG obtaining the affirmative vote of the holders of a majority of the outstanding shares of common stock, par value $0.01 per share, of AFG entitled to vote thereon at the special meeting called for such purpose, voting together as a single class in person or by proxy (the "Required Stockholder Approval").

In addition, the purchase agreement relating to the Sale (the "Purchase Agreement") provides for certain termination rights. Buyer and AFG may terminate the Purchase Agreement by mutual written agreement at any time prior to the closing date. In addition, either Buyer or AFG may terminate the Purchase Agreement at any time prior to the closing by giving written notice to the other party if

- the closing has not been consummated on or before April 4, 2025 (the "End Date"); provided, however, that if the closing has not occurred solely due to the failure to obtain applicable governmental and regulatory approvals from the authorities including, but not limited to, the OCI, the

End Date will be automatically extended for an additional ninety (90) days and the parties agree to continue to use their respective reasonable best efforts to satisfy such conditions to closing; provided, further, that the right to terminate the Purchase Agreement for the foregoing is not available to any party whose breach of any provision of the Purchase Agreement results in the failure of the closing to be consummated

- (i) applicable law makes the consummation of the closing illegal or otherwise prohibited or (ii) any judgment, injunction, order or decree of any governmental authority enjoins Buyer and AFG from consummating the closing; or
- AFG fails to obtain the Required Stockholder Approval at the special meeting.

The Purchase Agreement may be terminated by Buyer by written notice to AFG if a breach of any representation or warranty or failure to perform any covenant or agreement shall have occurred that would cause certain conditions not to be satisfied, and such breach is not cured within sixty (60) days of written notice to AFG or is incapable of being cured by the End Date. Additionally, the Purchase Agreement may be terminated by Buyer if at any time the AFG Board of Directors effects an Ambac Board Recommendation Change (as defined in the Purchase Agreement).

The Purchase Agreement may be terminated by AFG by written notice if a breach of any representation or warranty or failure to perform any covenant or agreement shall have occurred that would cause certain conditions not to be satisfied, and such breach is not cured within sixty (60) days of written notice to Buyer or is incapable of being cured by the End Date.

The total proceeds realized from the Sale are contingent upon receiving the Required Stockholder Approval and other closing conditions. There can be no assurances that we will receive the vote and satisfy the conditions. Any delay in receiving the required stockholder vote and satisfying the other closing conditions may increase the risk that the Sale will be terminated, or reduce the benefits we expect to achieve.

***The Sale and the other transactions contemplated by the Purchase Agreement, whether or not completed, may adversely affect the retained business.***

Transactions such as the Sale are often subject to lawsuits by stockholders. It is possible that our common stockholders or other stakeholders will commence or seek to commence litigation against Ambac or the Ambac Board. Such litigation could result in substantial costs and divert management’s attention from other business concerns, which could adversely affect Ambac's specialty property and casualty insurance business and its insurance distribution businesses that Ambac will continue to operate following the completion of the Sale (the "Retained Business").

In addition, our ability to execute on our business strategies for the Retained Business depends on the retention and recruitment of qualified executives and other professionals. We rely upon the services of our current executive and senior management teams.

In addition to these officers, we rely on key staff with insurance, underwriting, business development, risk management, investment, accounting, finance, legal, technology and other technical and specialized skills. The market for qualified executives, senior managers and other employees has become very competitive. As a result of the Sale, we may experience higher employee turnover and finding qualified replacements may be more difficult. The loss of the services of members of our executive and/or senior management teams or our inability to hire and retain other talented personnel could delay or prevent us from succeeding in executing our strategies, which could negatively impact the Retained Business. Further, while the completion of the Sale is pending, we may be unable to attract and retain key personnel and our management’s focus and attention and employee resources may be diverted from operational matters.

***If we fail to complete the Sale and the other transactions contemplated by the Purchase Agreement, our business and financial performance may be adversely affected, including in the event Ambac is required to pay the Termination Fee.***

The completion of the Sale and the other transactions contemplated by the Purchase Agreement is subject to the satisfaction or waiver of various conditions, including the approval of the Sale by our stockholders, which may not be satisfied in a timely manner or at all.

If the Sale is not completed, we will not recoup the costs incurred in connection with negotiating the Sale and the other transactions. Our directors, executive officers and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the Sale, and we will have incurred significant third-party transaction costs, in each case, without any commensurate benefit, which may have a material and adverse effect on our stock price and results of operations.

Furthermore, if the Sale and the other transactions contemplated by the Purchase Agreement are not completed, the announcement of the termination of the Purchase Agreement may adversely affect our relationships with our customers, business partners and employees, which could have a material adverse impact on our ability to effectively operate our business, and we may be required to pay the Termination Fee of $22 million under certain circumstances, each of which could have further adverse effects on our business, results of operations and the trading price of AFG's common stock.

Additionally, we intend to use the proceeds of the Sale to repay all or a portion of the debt used to fund the Beat Transaction. If we do not consummate the Sale then we will need to repay or refinance such debt with other sources of funds, which may not be available on favorable terms or at all. An inability to repay the debt used to fund the Beat Transaction from proceeds of the Sale or other sources, or an inability to refinance such debt on favorable terms or at all, may materially negatively affect our business and results of operations.

***The Purchase Agreement contains provisions that limit our ability to pursue alternatives to the Sale.***

The Purchase Agreement contains provisions that make it more difficult for us to sell AAC to any party other than Buyer. These provisions include the prohibition on our ability to solicit competing proposals and the requirement that we pay Buyer the Termination Fee of $22 million if we terminate the Purchase Agreement prior to the closing of the Sale as a result of our determining to accept a Company Acquisition Proposal (as defined in the Purchase Agreement) that we determine in good faith to be a Superior Proposal (as defined in the Purchase Agreement).

These provisions make it less advantageous for a third party that might have an interest in acquiring Ambac, or all or a significant part of AAC, to consider or propose an alternative transaction, even if that party were prepared to pay consideration with a higher value than the consideration to be paid by Buyer.

***If the Purchase Agreement is not approved or if we fail to complete the Sale, there may not be any other offer from a potential acquiror that the AFG Board determines to be attractive.***

If we fail to complete the Sale, the Board of Directors of AFG, in discharging its fiduciary obligations to our stockholders, may evaluate other strategic alternatives including, but not limited to, continuing to operate AAC and the Legacy Financial Guarantee Insurance business for the foreseeable future or an alternative transaction relating to AAC or Ambac. An alternative transaction, if available, may yield lower consideration or value than the proposed Sale, be on less favorable terms and conditions than those contained in the Purchase Agreement and involve significant delay. Any future sale of substantially all of Ambac’s property and assets within the meaning of Section 271 of the Delaware General Corporation Law and related case law or other similar transaction may be subject to further stockholder approval, and there is no guarantee that Ambac would be able to obtain such stockholder approval in favor of any such sale or other transaction. If the Legacy Financial Guarantee Insurance business is not sold, there can be no assurance that we will realize value at least equivalent to the proceeds of the Sale from the operation of the Legacy Financial Guarantee Insurance business over time, or any value; nor can we predict the timeline for realizing value, if any, from the Legacy Financial Guarantee Insurance business in the absence of the Sale.

***We are planning to further develop and expand our Specialty Property and Casualty Insurance and Insurance Distribution businesses; however, such plans may not be realized, or if realized, may not create value and may negatively impact our financial results.***

Ambac is planning to further develop and expand its Specialty Property and Casualty Insurance and Insurance Distribution businesses, including through the Beat Transaction. Such plans may involve additional acquisitions of assets or existing businesses and the development of businesses through new or existing subsidiaries. Currently, it is not possible to fully predict the future prospects or other characteristics of such businesses. While we expect to conduct business, financial, and legal due diligence in connection with the evaluation of any future business or acquisition opportunities, there can be no assurance that our due diligence will identify every matter that could have a material adverse effect on us. Efforts to pursue certain business opportunities may be unsuccessful or require significant financial or other resources, which could have a negative impact on our operating results and financial condition. To implement our growth strategy, we must be able to meet our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify and hire qualified employees, and effectively integrate any acquisitions we make in our effort to achieve growth. No assurance can be given that we will successfully execute our plans for new business, generate any earnings or value from new businesses or be able to successfully integrate any such business into our current operating structure.

Filed Aug 5, 2024.
Source: SEC EDGAR, the filing index for accession 0000874501-24-000172. Last ingested by Listed: Oct 30, 2026, 12:35 ET. No prices; not investment advice.