Ambac Financial Group Annual Report 2021

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FY2021 Annual Report · Ambac Financial Group

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AMBAC FINANCIAL GROUP, INC.

One World Trade Center

41st Floor

New York, NY 10007

www.ambac.com

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2021 ANNUAL REPORT

3/ ABOUT AMBACVISIONVALUESMISSIONn Optimize our business and its components to achieve maximum return for shareholders n Aggressively pursue financially sound strategies to reduce risk and decrease the size of the insured portfolion Transition to a growth-oriented platform sufficiently capitalized to support businesses that are synergistic with Ambac’s core competenciesn Culture of respect, inclusion, collaboration and transparencyn Attract, retain and reward top performers who meet standards of excellence, integrity and collaborationAmbac Financial Group, Inc. (“Ambac” or “AFG”) is a financial services holding company headquartered in New York City. Ambac’s core business is a growing specialty P&C distribution and underwriting platform. Ambac also has a legacy financial guaranty business that is in run off. Ambac’s common stock trades on the New York Stock Exchange under the symbol “AMBC”. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information. For more information, please go to www.ambac.com. The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock or a holder of 5% or more of Ambac’s common stock increases its ownership interest.Forward-Looking Statements In this Annual Report, we have included statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “expect,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in our most recent SEC filed quarterly or annual report./ DEAR FELLOW SHAREHOLDERS

“ Our accomplishments in 2021 position Ambac
well for the coming year and the Board and
management team remain focused on
maximizing shareholder value through the
execution of key strategies for both the
specialty P&C insurance platform and the
legacy financial guarantee business.”

CLAUDE LeBLANC President and Chief Executive Officer

I write this letter on the heels of a couple of the most challenging years in our
recent history, during which we dealt with the impact of COVID-19 and, more
recently, geopolitical unrest. Notwithstanding these challenges, our employees
and Board remained focused on delivering on our key strategic priorities,
including the launch and material progression of our specialty P&C insurance
business and mitigation of losses in our legacy financial guarantee business.

SPECIALTY P&C INSURANCE PLATFORM
Against the backdrop of a rapidly growing programs market in the United States and healthy rate increases
across the P&C industry, in most classes of business, we transitioned our business with the launch of our
specialty P&C insurance platform. This platform, previously classified into three separate Pillars, has since
evolved into three distinct businesses, under the following names:

n Everspan Group (Formerly Pillar 1)

Our participatory fronting insurance platform;

n Cirrata Group (Formerly Pillar 2)

Our product development and distribution partner division and;

n Redgrove Capital Group (Formerly Pillar 3)

Our strategic investment platform.

Everspan Group, launched in the first quarter of 2021, is an ‘A-’ rated, Class VIII (as designated by AM Best)
participatory fronting platform. At launch, the platform consisted of Everspan Indemnity Insurance, our surplus
lines insurer and Everspan Insurance Company, our admitted insurer. Today, Everspan Group includes four
additional admitted carriers, stemming from our platform expansion in the latter half of 2021 and early 2022,
covering all fifty states.

/ SPECIALTY P&C PROGRAM INSURANCE PLATFORM

EVERSPAN

CIRRATA

REDGROVE

Participatory
Fronting Insurance

Product Development
and Distribution Partner

Strategic
Investments

n Everspan entities received an
AM Best Financial Strength
Rating of ‘A-’ (Excellent) in
February of 2021

n Ten program partners

signed to date

n Platform expanded with the
acquisition of Providence
Washington Insurance
Company and three additional
admitted carriers

n With these acquisitions, admitted
capabilities include all 50 states

n Xchange has successfully

expanded its distribution and
carrier network

n Ever to date distributions to
Ambac of approximately
$6 million

n Ambac is actively exploring

additional acquisitions and/or
establishment of de novo
MGA platforms

n Investments in certain insurance
related businesses, including
Cover Whale, an insurtech MGA

n Actively evaluating investment
opportunities that would be
strategic to the overall specialty
P&C program insurance platform

With its broad carrier base and active certificates
of authority in all fifty states, Everspan Group is
well positioned as a differentiated platform to
offer greater optionality to its program partners.
Furthermore, Everspan sets itself apart from its
competitors with a risk retention appetite of up to
30% of policies underwritten, creating significant
alignment of interest with our reinsurance partners,
while providing customized and highly value-added
solutions for our program partners.

Everspan Group has seen a robust program pipeline,
across various classes of business, from multiple
distribution sources since its launch, and currently
has ten program partners, with a strong pipeline
going into 2022.

Our people are key to our success and I am pleased
that we were able to attract top leadership talent for
Everspan Group, consisting of industry veterans in
underwriting, programs and claims administration
as well as regulatory and compliance.

Cirrata Group, our product development and
distribution partner business includes Xchange,
our first MGU, an A&H business, onboarded in the

beginning of 2021. During 2021 Xchange successfully
expanded its distribution and carrier network and had
a strong finish to the year. Xchange made distributions
of $7.4 million during 2021, 80% of which was paid to
Ambac, consistent with our current ownership stake.

We are actively pursuing additional M&A
acquisitions and de novo opportunities to grow
Cirrata Group’s partner platform, which we can
support through our robust business services unit
providing a broad range of customized services,
including core P&C technology solutions, that we
believe will further enhance our distribution
partners’ competitive positions.

Our last division, Redgrove Capital Group, oversees
strategic investments to further enhance the value of
Everspan and Cirrata. We made three investments in
2021, including those in companies involved in data
analytics and insurance technology, all with attractive
return on investment targets.

Overall, I am very pleased with the progress we made
with our specialty P&C insurance platform in 2021
and believe we are well positioned for further growth
and expansion in 2022.

/ INSURED PORTFOLIO
NET PAR (2)
($ in billions)

/ WATCH LIST AND ADVERSELY
CLASSIFIED CREDITS (1), (2)

($ in billions)

$250

$200

$150

$100

$50

# of Credits

6,000

4,000

Reduced by
17% in 2021

2,000

$25.2

$35

$30

$25

$20

$15

$10

Dec
2015

Dec
2016

Dec
2017

Dec
2018

Dec
2019

Dec
2020

Dec
2021

Dec
2018

Int’l

# of Credits

250

200
$19.9
150

100

0
Dec
2018

Reduced by
23% in 2021

$14.3

$13.2

$10.2

Dec
2019

Dec
2020

Dec
2021

6000

4000

2000

LEGACY FINANCIAL GUARANTY BUSINESS
During 2021 we also continued to progress the
strategic priorities for our legacy financial guaranty
business, which has been in run off since 2008.

Our main focus continues to be active risk management,
capital management and asset recovery, with the goal
of strengthening and deleveraging our capital. Through
these efforts we are enhancing and accelerating the
recovery of value to Ambac and its shareholders.

Net insured par exposure for our legacy portfolio
was $28 billion at December 31st, down approximately
$6 billion or 17% from December 31, 2020.

Our watchlist and adversely classified credits were
reduced to $10 billion at December 31st, down
approximately $3 billion, or 23% from the prior
year end. Proactive de-risking efforts accounted
for decreases of approximately $3 billion of net par
exposure and $2 billion of watch list and adversely
classified credits during 2021.

During the year we also made substantial progress
with regards to our largest risk exposure, Puerto Rico.
Significant milestones were reached over the course of
2021, including signing on to plan support agreements
covering all of our remaining insured Puerto Rico
exposures. Aspects of these plan support agreements
were confirmed by the bankruptcy court in the Plan
of Adjustment (the “POA”) for the Commonwealth of
Puerto Rico, which was approved in January 2022.

Following confirmation, the Commonwealth POA
was consummated on March 15, 2022, and effectively
ended the largest US municipal bankruptcy, as well as
one of the longest and most contentious insolvency
processes in recent memory. While the bankruptcy
process for other Puerto Rico instrumentalities,
such as HTA, still await final court determinations,
the completed Commonwealth POA resolves the
restructuring related to Puerto Rico’s GO, PBA, PRIFA,
and CCDA bonds and, through de-risking transactions,
reduces insured principal and interest exposure to
Puerto Rico by over $450 million, including all of
our remaining GO and PBA exposure and portions
of our PRIFA and CCDA exposures. In addition, the
completed Commonwealth POA allows for further
targeted reduction of our remaining PRIFA and
CCDA exposures.

We expect that HTA will complete its Title III
bankruptcy process later this year, on terms consistent
with the plan support agreement that we joined in the
summer of 2021, with a plan of adjustment available
for consideration in the coming weeks.

This restructuring closes the chapter on one of the
most significant distressed credit obstacles facing
Ambac and, when combined with the 2019 COFINA
restructuring, will reflect the cumulative elimination of
approximately 85% of our total Puerto Rico exposure.

As we look ahead
to 2022, I am excited
about Ambac’s
prospects as we
continue to grow
and expand our
specialty P&C
insurance platform.

REPRESENTATION AND WARRANTY LITIGATION
On the loss recovery front, COVID-19 disruptions to
New York City’s court system have had a direct
impact on our ability to advance our loss recovery
efforts on our Bank of America/Countrywide litigation.
We continue to believe in the merits of our case and
look forward to the ultimate resolution of all of our
RMBS litigations.

STREAMLINING CAPITAL
AND LIABILITY STRUCTURE
We were successful in our strategic goal to streamline
our capital and liability structure, resulting in the
successful execution of two key transactions in 2021,
leading to material economic benefits for Ambac.
These transactions included:

n Junior surplus note exchange transactions,

resulting in the extinguishment of $76
million of debt and accrued interest

n Issuance of new senior secured notes by

Ambac Assurance Corporation, through a
newly formed special purpose entity, proceeds
of which, along with other sources of liquidity,
were used to fully redeem the outstanding
Ambac LSNI notes. The benefits of this
refinancing are lower net interest carry
costs and an extended debt maturity date to
2026. We believe the new notes provide us
with increased financial flexibility during the
pendency of our RMBS litigations

I am pleased with the market receptivity to these
transactions and we continue to evaluate additional
means to further simplify and streamline our capital
and liability structure.

ESG INITIATIVES
During 2021 we also formalized our commitment
to environmental, social and governance practices.
An ESG committee was established to focus on
enhancement of relevant policies and procedures
and related disclosures to reflect ESG practices and
objectives, including the commitment to:

n Meaningful progress each year to integrate
our social responsibility efforts including:

• Diversity and inclusion

• Training, development and
well-being of employees

• Philanthropy within
our community

n Guiding principles concerning

responsible investing

n Data security and privacy

n Strong corporate governance principles

To ensure that ESG is appropriately managed and
communicated throughout the organization, a
governance structure was adopted which includes
oversight by our Board of Directors, executive
leadership and employee participation.

As evidence of our commitment to our ESG
initiatives, we expanded the Board’s diverse skillset
in 2021 with the addition last August of Lisa Iglesias
to our Board of Directors. Lisa brings with her a
wealth of insurance and other business expertise
that will be beneficial to us as we expand our
specialty P&C insurance business.

We also embarked on a plan to improve our
disclosures of the material ESG aspects of our
business by instituting the use of both the GRI
and SASB voluntary ESG reporting frameworks.

In conclusion, our accomplishments in 2021
position Ambac well for the coming year and the
Board and management team remain focused
on maximizing shareholder value through the
execution of key strategies for both the specialty
P&C insurance platform and the legacy financial
guarantee business.

I would like to thank you, our shareholders, for your
ongoing support and the Executive Management
team and our dedicated employees for their tireless
commitment to the execution of our strategic
priorities for the benefit of all of our stakeholders.

Sincerely,

CLAUDE LeBLANC
President and Chief Executive Officer

/ SPECIALTY P&C PROGRAM
INSURANCE PLATFORM

STRATEGIC PRIORITIES FOR THE
SPECIALTY P&C INSURANCE
BUSINESS INCLUDE:

n Growing and diversifying Everspan Group’s
participatory fronting platform with existing
and new program partners;

n Building Cirrata Group into a leading federation
of specialty MGA/U insurance partners through
additional acquisitions and de novo builds,
supported by a centralized business services
unit with core technology solutions and;

n Making opportunistic investments through

Redgrove Capital Group that are strategic to
the overall Specialty P&C insurance platform.

OUR PRIORITIES FOR THE LEGACY
FINANCIAL GUARANTEE INSURANCE
COMPANIES INCLUDE:

n Actively managing, de-risking and mitigating

insured portfolio risk;

n Pursuing loss recovery through active litigation

and other means, particularly RMBS Rep &
Warranty litigation;

n Improving operating efficiency and optimizing

our asset and liability profile and;

n Exploring, at the appropriate time, strategic
options to further maximize value for AFG.

(1) Adversely Classified Credits are either in default or have developed problems that eventually may lead to a default. Watch List Credits are performing credits that demonstrate

the potential for long-term material adverse development.

(2) Par throughout this Annual Report includes capital appreciation bonds (“CABs”) 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.

/ BOARD OF DIRECTORS

/ EXECUTIVE OFFICERS

JEFFREY S. STEIN (3)
Chairman
Founder and Managing Partner
of Stein Advisors LLC

IAN D. HAFT (1), (2), (4)*
Chief Executive Officer
of Surgis Capital LLC
and Chief Financial Officer
of Electric Monster Media, Inc.

DAVID L. HERZOG (1)*, (4)
Former Chief Financial Officer
of AIG

LISA G. IGLESIUS (1)

Executive Vice President
General Counsel of Unum Group

JOAN LAMM-TENNANT (2), (3)*, (4)
Founder and Former
Chief Executive Officer of
Blue Marble Microinsurance

CLAUDE LeBLANC

President and
Chief Executive Officer

DAVID TRICK

Executive Vice President,
Chief Financial Officer
and Treasurer

DAVID BARRANCO

Senior Managing Director,
Head of Risk Management

ROBERT B. EISMAN

Senior Managing Director,
Chief Accounting Officer
and Controller

STEPHEN M. KSENAK

Senior Managing Director
and General Counsel

CLAUDE LeBLANC

President and
Chief Executive Officer

DAN McGINNIS

Senior Managing Director
and Chief Operating Officer

C. JAMES PRIEUR (1), (2)*, (3)
Former Chief Executive Officer
of CNO Financial Group, Inc.

R. SHARON SMITH

Senior Managing Director
and Chief of Staff

(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Governance and Nominating Committee
(4) Member of Strategy and Risk Policy Committee

*Chair of Committee

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

☒

☐

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2021

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-10777

AMBAC FINANCIAL GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware
(State of incorporation)

One World Trade Center New York NY
(Address of principal executive offices)

13-3621676
(I.R.S. employer identification no.)
10007
(Zip code)

(212) 658-7470

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of each exchange on which registered

Common Stock, par value $0.01 per share

Warrants

AMBC

AMBC WS

New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting
company”and"emerging growth company" in Rule 12b-2 of the Exchange Act): (Check one):

Large accelerated filer ☒ Accelerated filer

☐ Non-accelerated filer ☐ Smaller reporting company

☐ Emerging growth company

☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of voting stock held by non-affiliates of the Registrant as of the close of business on June 30, 2021 was
$723,465,112. As of February 22, 2022, there were 46,337,006 shares of Common Stock, par value $0.01 per share, were outstanding.

Documents Incorporated By Reference

Portions of the Registrant’s Proxy Statement related to its annual meeting of stockholders are incorporated by reference in this Form 10-K in
response to Part III Items 10, 11, 12, 13, and 14.

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995 ...........................................................

Item Number

PART I

Business ......................................................................

Introduction ................................................................

Description of the Business ........................................

Enterprise Risk Management .....................................

Available Information ................................................

Insurance Regulatory Matters and Other
Restrictions .................................................................

Investments and Investment Policy ............................

Employees ..................................................................

1A Risk Factors ................................................................

1B Unresolved Staff Comments .......................................

Properties ....................................................................

Legal Proceedings .......................................................

4 Mine Safety Disclosures .............................................

PART II

Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities ....................................................................

Selected Financial Data ..............................................

7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations ..........................

Executive Summary .................................................

Critical Accounting Policies and Estimates ............

Financial Guarantees in Force .................................

Results of Operations ...............................................

Liquidity and Capital Resources ..............................

Balance Sheet ..........................................................

Page

Item Number

Page

PART II (CONTINUED)

Accounting Standards ..............................................

U.S. Insurance Statutory Basis Financial Results ....

Ambac UK Financial Results Under UK
Accounting Principles ..............................................

Non-GAAP Financial Measures ..............................

7A Quantitative and Qualitative Disclosures about

Market Risk ................................................................

Financial Statements and Supplementary Data ..........

Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure .........................

139

9A Controls and Procedures .............................................

139

9B Other Information .......................................................

139

PART III

10 Directors, Executive Officers and Corporate

Governance .................................................................

139

11 Executive Compensation ............................................

140

12 Security Ownership of Certain Beneficial Owners

and Management and Related Stockholder Matters ...
13 Certain Relationships and Related Transactions, and
Director Independence ................................................

140

141

14 Principal Accountant Fees and Services .....................

141

PART IV

15 Exhibits, Financial Statement Schedules ....................

141

Schedule I—Summary of Investments Other Than
Investments in Related Parties .................................
Schedule II—Condensed Financial Information of
Registrant (Parent Company Only) .........................

Schedule IV—Reinsurance ......................................

145

146

151

SIGNATURES ..................................................................

152

(11) Ambac may not be able to obtain financing or raise capital on
acceptable terms or at all due to its substantial indebtedness and
financial condition; (12) the impact of catastrophic public health,
environmental or natural events, including events like the
COVID-19 pandemic, on significant portions of our insured
portfolio; (13) credit risks related to large single risks, risk
concentrations and correlated risks; (14) risks associated with
adverse selection as Ambac’s financial guarantee insurance
portfolio runs off; (15) the risk that Ambac’s risk management
policies and practices do not anticipate certain risks and/or the
magnitude of potential for loss; (16) restrictive covenants in
agreements and instruments that impair Ambac’s ability to pursue
or achieve its business strategies; (17) adverse effects on
operating results or the Company’s financial position resulting
from measures taken to reduce financial guarantee risks in its
insured portfolio; (18) disagreements or disputes with Ambac's
insurance regulators; (19) loss of control rights in transactions for
which we provide financial guarantee insurance; (20) adverse tax
consequences or other costs resulting from the characterization of
the AAC’s surplus notes or other obligations as equity; (21) risks
attendant to the change in composition of securities in the
Ambac’s investment portfolio; (22) adverse impacts from changes
in prevailing interest rates; (23) events or circumstances that
result in the impairment of our intangible assets and/or goodwill
that was recorded in connection with Ambac’s acquisition of 80%
of the membership interests of Xchange Benefits, LLC and
Xchange Affinity Underwriting Agency, LLC; (24) risks
associated with the expected discontinuance of the London Inter-
Bank Offered Rate; (25) factors that may negatively influence the
amount of installment premiums paid to Ambac; (26) risks
relating to determinations of amounts of impairments taken on
investments; (27) the risk of litigation and regulatory inquiries or
investigations, and the risk of adverse outcomes in connection
therewith; (28) actions of stakeholders whose interests are not
aligned with broader interests of the Ambac's stockholders; (29)
system security risks, data protection breaches and cyber attacks;
(30) regulatory oversight of Ambac Assurance UK Limited
(“Ambac UK”) and applicable regulatory restrictions may
adversely affect our ability to realize value from Ambac UK or
the amount of value we ultimately realize; (31) failures in services
or products provided by third parties; (32) our inability to attract
and retain qualified executives, senior managers and other
employees, or the loss of such personnel; (33) fluctuations in
foreign currency exchange rates; (34) failure to realize our
business expansion plans or failure of such plans to create value;
(35) greater competition for our specialty property & casualty
program insurance business; (36) loss or lowering of the AM Best
rating for our property and casualty
insurance company
subsidiaries; (37) disintermediation within the insurance industry
or greater competition that negatively impacts our managing
general agency/underwriting business; (38) changes in law or in
the functioning of the healthcare market that impair the business
model of our accident and health managing general underwriter;
and (39) other risks and uncertainties that have not been identified
at this time.

CAUTIONARY STATEMENT PURSUANT
TO
SECURITIES
PRIVATE
LITIGATION REFORM ACT OF 1995

THE

In this Annual Report, we have included statements that may
constitute “forward-looking statements” within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Words such as “estimate,” “project,” “plan,”
“believe,” “anticipate,” “intend,” “planned,” “potential” and
similar expressions, or future or conditional verbs such as “will,”
“should,” “would,” “could,” and “may,” or the negative of those
expressions or verbs, identify forward-looking statements. We
caution readers that these statements are not guarantees of future
performance. Forward-looking statements are not historical facts
but instead represent only our beliefs regarding future events,
which may by their nature be inherently uncertain and some of
which may be outside our control. These statements may relate to
plans and objectives with respect to the future, among other things
which may change. We are alerting you to the possibility that our
actual results may differ, possibly materially, from the expected
objectives or anticipated results that may be suggested, expressed
or implied by these forward-looking statements. Important factors
that could cause our results to differ, possibly materially, from
those indicated in the forward-looking statements include, among
others, those discussed under “Risk Factors” in Part I, Item 1A
of this Annual Report on Form 10-K.

Any or all of management’s forward-looking statements here or in
other publications may turn out to be incorrect and are based on
management’s current belief or opinions. Ambac Financial
Group’s (“AFG”) and its subsidiaries’ (collectively, “Ambac” or
the “Company”) actual results may vary materially, and there are
no guarantees about the performance of Ambac’s securities.
Among events, risks, uncertainties or factors that could cause
actual results to differ materially are: (1) the highly speculative
nature of AFG’s common stock and volatility in the price of
AFG’s common stock; (2) uncertainty concerning the Company’s
ability to achieve value for holders of its securities, whether from
Ambac Assurance Corporation (“AAC”) and its subsidiaries or
from the specialty property and casualty program insurance
business, the managing general agency/underwriting business, or
related businesses; (3) the inability of AAC to realize the
litigation recoveries,
including RMBS
expected recoveries,
included in its financial statements, or changes in estimated
RMBS litigation recoveries over time; (4) failure to recover
claims paid on Puerto Rico exposures or realization of losses in
amounts higher than expected; (5) inadequacy of reserves
established for losses and loss expenses and possibility that
changes in loss reserves may result in further volatility of earnings
or financial results; (6) potential for rehabilitation proceedings or
other regulatory intervention against AAC; (7) credit risk
throughout Ambac’s business, including but not limited to credit
risk related to insured residential mortgage-backed securities,
student loan and other asset securitizations, public finance
obligations (including risks associated with Chapter 9 and other
restructuring proceedings), issuers of securities in our investment
portfolios, and exposures to reinsurers; (8) our inability to
effectively reduce insured financial guarantee exposures or
achieve recoveries or investment objectives; (9) our inability to
generate the significant amount of cash needed to service our debt
and financial obligations, including through litigation recoveries
or disposition of assets, and our inability to refinance our
indebtedness; (10) Ambac’s substantial
indebtedness could
adversely affect its financial condition and operating flexibility;

| Ambac Financial Group, Inc. 1 2021 FORM 10-K |

PART I

Item 1. Business

INTRODUCTION

Ambac Financial Group, Inc. ("AFG"), headquartered in New
York City, is a financial services holding company incorporated
in the State of Delaware on April 29, 1991. References to
“Ambac,” the “Company,” “we,” “our,” and “us” are to AFG
and its subsidiaries, as the context requires. Ambac's business
operations include:

• Financial Guarantee ("FG") Insurance — Ambac
Assurance Corporation ("AAC") and its wholly owned
subsidiary, Ambac Assurance UK Limited (“Ambac UK”)
are legacy financial guarantee insurance carriers, both of
which have been in runoff since 2008 (the "Financial
Guarantee Insurance companies").

• Specialty Property & Casualty Program Insurance
("SPCP") — Currently includes excess and surplus lines
(“E&S” or “nonadmitted”) insurer Everspan Indemnity
Insurance Company ("Everspan Indemnity") and admitted
insurer Everspan Insurance Company, along with four other
admitted
(“Everspan”).
Everspan insurance carriers that are currently part of the
intercompany pooling agreement received an AM Best
Financial Strength rating of 'A-' (Excellent) in February
2021 and launched its first insurance program in May 2021.

insurance carrier subsidiaries

• Managing General Agency / Underwriting ("MGA/U")
— Currently includes Xchange Benefits, LLC and Xchange
Affinity Underwriting Agency, LLC
(collectively,
“Xchange”) a property and casualty Managing General
Underwriter of which AFG acquired 80% on December 31,
2020. Refer to Note 3. Business Combination to the
Consolidated Financial Statements included in Part II, Item
8 of this Form 10-K for further information relating to this
acquisition.

AFG has $269 million in net assets (excluding its investment in
subsidiaries) and net operating loss carry-forwards of $3,744
million ($2,148 million of which is allocated to AAC) at
December 31, 2021. See Schedule II for more information on
the holding company.

While SPCP and MGA/U (together, the "Specialty P&C
Program Insurance Platform") are distinct businesses, they are
currently not significant enough to Ambac's operations to
warrant segment presentation. Management evaluates
its
reportable segments at
least annually and as facts and
circumstances change.

Corporate Strategy:
The Company's primary goal is to maximize shareholder value
through the execution of key strategies for both its (i) Specialty
P&C Program Insurance Platform and (ii) Financial Guarantee
Insurance companies.###

Specialty P&C Insurance Program Platform strategic priorities
include:

• Growing and diversifying Everspan's participatory fronting

platform with existing and new program partners.

• Building a leading federation of specialty MGA/U partners

through additional acquisitions and de novo builds,
supported by a centralized business services unit including
core technology solutions.

• Making opportunistic investments that are strategic to the

overall Specialty P&C Program Insurance Platform.

Financial Guarantee Insurance companies’ strategic priorities
include:

• Actively managing, de-risking and mitigating insured

portfolio risk.

• Pursuing loss recovery through active litigation and other
means, particularly residential mortgage back security
representation and warranty litigation.

• Improving operating efficiency and optimizing our asset

and liability profile.

• Exploring, at the appropriate time, strategic options to

further maximize value for AFG.

DESCRIPTION OF THE BUSINESS

Financial Guarantee Insurance Business:
Financial guarantee insurance policies provide an unconditional
and irrevocable guarantee which protects the holder of a debt
obligation against non-payment when due of the principal and
interest on the obligations guaranteed. Pursuant
to such
guarantees, AAC and Ambac UK make payments if the obligor
responsible for making payments fails to do so when due. AAC
and Ambac UK's financial condition began to deteriorate in
2007 as a result of which these companies have been unable to
write new financial guaranty business since such time.

Ambac's Financial Guarantee business strategy is to increase the
residual value of AAC and Ambac UK with the ultimate goal of
monetizing such value through (i) dividends and capital
distributions while managing their active run-off; (ii) one or
more reinsurance transactions or other de-risking transactions
that will accelerate or enhance the ability of AAC and/or Ambac
UK to pay dividends and make capital distributions; (iii) the sale
of all or portions of AAC and Ambac UK, or (iv) other strategic
transactions to accelerate or enhance the above-stated corporate
strategy. We can provide no assurance that Ambac will achieve
any of the aforementioned goals. AAC and Ambac UK have
been working
insured
toward reducing risk within
portfolios, such as exposures to financially stressed municipal
entities (including Puerto Rico) and asset-backed securities
(including residential mortgage-backed securities ("RMBS") and
student loan-backed securities). Opportunities for remediating
losses on poorly performing insured transactions depend on a
number of factors including market conditions, the structure of
the underlying risk and associated policy, as well as
counterparty specific factors. AAC's ability to remediate risk
and commute policies may be limited by available liquidity.
Additionally, AAC and Ambac UK are actively managing their
regulatory
to optimize capital
allocation in a challenging environment that includes long

frameworks and seeking

their

| Ambac Financial Group, Inc. 2 2021 FORM 10-K |

duration obligations. AAC is also actively prosecuting legal
claims to recover losses in its FG portfolio.

With regards to AAC, this strategy is subject to the restrictions
set forth in the Settlement Agreement, dated as of June 7, 2010
(the "Settlement Agreement"), by and among AAC, Ambac
Credit Products LLC ("ACP"), AFG and certain counterparties
to credit default swaps with ACP that were guaranteed by AAC;
the Stipulation and Order (as defined in Note 1. Background and
Business Description to the Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K); and in the
indenture for the Tier 2 Notes (as defined in Note 12. Long-term
Debt to the Consolidated Financial Statements included in Part
II, Item 8 of this Form 10-K), each of which requires OCI (as
defined below) and, under certain circumstances, holders of the
debt instruments benefiting from such restrictions, to approve
certain actions taken by or in respect of AAC. In exercising its
approval rights, OCI will act for the benefit of policyholders,
and will not take into account the interests of AFG. See Note 1.
Background and Business Description to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-
K for further information.

Financial guarantee revenues consist mostly of premiums earned
from insurance contracts, net of reinsurance. Financial guarantee
expenses consist of: (i) loss and commutation payments; (ii) loss
adjustment expenses; (iii)
interest expense on debt, (iv)
operating expenses and (v) insurance intangible amortization.

AAC’s ability to pay dividends to AFG has been significantly
restricted by the deterioration of AAC’s financial condition and
by regulatory, legal and contractual restrictions. It is highly
unlikely that AAC will be able to make dividend payments to
AFG for the foreseeable future, which constrains AFG's
liquidity. Refer to "Dividend Restrictions, Including Contractual
Restrictions" below and Note 8.
Insurance Regulatory
Restrictions to the Consolidated Financial Statements included
in Part II, Item 8 in this Form 10-K, for more information on
dividend payment restrictions.

Interest rate derivative transactions are executed through Ambac
Financial Services (“AFS”), a wholly-owned subsidiary of
AAC. The primary activity of AFS is to partially hedge interest
rate risk in the financial guarantee insurance and investment
portfolios. Accordingly, interest rate derivatives are positioned
to benefit from rising rates. Under agreements governing interest
rate derivative positions, AFS generally must post collateral or
margin in excess of the market value of the swaps and futures
contracts. A termination of AFS’s derivatives could result in
losses. AFS has borrowed cash and securities from AAC to help
support its collateral and margin posting requirements, previous
termination payments and other cash needs.

Credit risk associated with interest rate derivative positions
primarily relates to the potential default of a counterparty. As
AFS's interest rate derivatives generally consist of centrally
cleared swaps, US treasury futures, the associated credit risk is
mitigated through the use of industry standard collateral or
margin requirements. For the small number of remaining legacy
derivatives with financial guarantee customers that do not
require collateral, credit risk is managed through the risk
management processes described in the Risk Management
Group section below.

Ambac manages a variety of risks inherent in its businesses,
including credit, market, liquidity, operational and legal. These
risks are identified, measured, and monitored through a variety
of control mechanisms, which are in place at different levels
throughout the organization. See “Quantitative and Qualitative
Disclosures About Market Risk” included in Part II, Item 7A in
this Form 10-K for further information.

Risk Management

the assets and/or obligor supporting

Ambac’s financial guarantee insurance policies and credit
derivative contracts expose the Company to the direct credit risk
of
the guaranteed
obligation. In addition, insured transactions expose Ambac to
indirect risks that may increase our overall risk, such as credit
risk separate from, but correlated with, our direct credit risk;
market; model; economic; natural disaster; pandemic and
mortality or other non-credit type risks. Please refer to Item 7
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Financial Guarantees in Force”
section below for details on the financial guarantee insured
portfolio.

The Risk Management Group ("RMG") is primarily responsible
for the development, implementation and oversight of loss
mitigation strategies, surveillance and remediation of the insured
financial guarantee portfolio (including through the pursuit of
recoveries in respect of paid claims and commutations of
policies). Our ability to execute certain risk management
activities may be limited by the restrictions set forth in the
Settlement Agreement, the Stipulation and Order and the
indenture for the Tier 2 Notes. See Note 1. Background and
Business Description to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for further
information.

Ambac’s RMG has an organizational structure designed around
four primary areas of focus: Surveillance, Risk Remediation,
Credit Risk Management and Loss Reserving and Analytics.

Surveillance

The Surveillance group's focus is on the early identification of
potential stress and/or credit deterioration and the related
insured portfolio.
analysis of credit exposures
Additionally, Surveillance evaluates the impact of changes in
the economic, regulatory or political environment on the insured
portfolio.

the

Analysts in this group perform periodic credit reviews of insured
exposures according to a schedule based on the risk profile of
the guaranteed obligations or as necessitated by specific credit
events or other macro-economic variables. Risk-adjusted
surveillance strategies have been developed for each bond type
with review periods and scope of review based upon each bond
type’s risk profile. The risk profile is assessed regularly in
response to our own experience and judgments or external
factors such as the economic environment and industry trends.
The focus of a credit review is to assess performance, identify
credit trends and recommend appropriate credit classifications,
ratings and changes to a transaction or bond type’s review
period and surveillance requirements. Please refer to Note 2.
Basis of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements included in Part II, Item 8 in

| Ambac Financial Group, Inc. 3 2021 FORM 10-K |

this Form 10-K for further discussion of the various credit
classifications utilized by Ambac. If a problem is detected, the
Surveillance group will then work with the Risk Remediation
group on a loss mitigation plan, as necessary.

surveillance activities

The insured portfolio contains exposures that are correlated and/
or concentrated. RMG's
include
identifying these types of exposures and identifying the risks
that would or could trigger credit deterioration across these
related exposures. This is the case with student loans and
RMBS, for example, which have several correlations including
those associated with consumer lending, unemployment and
home prices. In the future, Ambac’s portfolio may be subject to
similar credit deterioration arising from concentrated and/or
correlated risks. Examples of other such risks that could impact
our portfolio, and that our surveillance is designed to monitor
include the impact of potential municipal bankruptcy contagion,
the impact of tax reform on state and municipal bond issuers,
the impact of large scale domestic military cutbacks on our
privatized military housing portfolio and event risk such as
pandemics (e.g., COVID-19), natural disasters or other regional
stresses. Most such risks cannot be predicted and may
materialize unexpectedly or develop rapidly. Although our
surveillance allows us to connect the event and stress to the
related exposures and assign an adverse credit classification and
estimate losses across the affected credits, when necessary, we
may not have adequate resources or contractual rights and
remedies to mitigate loss arising from such risks.

Risk Remediation

Risk Remediation's focus is on exposure reduction and loss
mitigation related to the insured portfolio. In particular, this
group focuses on reducing exposure to credits that have negative
developing trends, the potential for future adverse development
or are already adversely classified by, among other things,
exercising rights and remedies, which may help to mitigate
losses in the event of further deterioration or events of default,
or, as available, working with an issuer to refinance, defease or
otherwise retire debt.

Loss mitigation focuses on the execution of commutation and
related claims reduction or workout strategies for policies with
potential future claims. For certain adversely classified, survey
list and watch list credits, Risk Remediation will develop and
implement a remediation or loss mitigation plan that could
include actions such as working with the issuer, trustee, bond
counsel, servicer and other interested parties in an attempt to
remediate the problem and minimize AAC’s exposure to
potential loss. Other actions could include working with bond
holders and other economic stakeholders to negotiate, structure
and execute solutions, such as commutations. In addition,
reinsurance is used as a remediation tool to reduce exposure to
certain targeted policies and large concentrations.

Adversely classified, survey list and watch list credits are
tracked closely as part of the risk remediation process and are
discussed at regularly scheduled meetings with Credit Risk
Management
in “Credit Risk
Management”).
the RMG will engage
restructuring or workout experts, attorneys and/or other
consultants with appropriate expertise in the targeted loss
mitigation area to assist in examining the underlying contracts or

In some cases,

(see discussion

following

collateral, providing industry specific advice and/or executing
strategies.

We have established cross-functional teams in key areas of
focus, comprised of personnel both within the RMG and in other
departments, as part of the risk remediation process. An example
of such efforts includes the teams of professionals focused on
the review and enforcement of contractual representations and
warranties ("R&W") supporting RMBS policies. Members of
these cross-functional teams will often work with external
experts in the pursuit of risk reduction efforts.

Credit Risk Management ("CRM")

The CRM function manages the decision process for all material
matters that affect credit exposures within the insured portfolio.
CRM provides a forum for independent assessments, reviews
and approvals and drives consistency and timeliness. The scope
of credit matters under the purview of CRM includes material
amendments, consents and waivers, evaluation of remediation or
review scheduling, credit
loss mitigation plans, credit
classifications, rating designations, review of watch list or
adversely classified credits, sector reviews and overall portfolio
reviews. Formal plans or transactions that relate to risk
remediation, loss mitigation or restructuring may also require
AAC Risk Committee approval, as described below in the
section entitled, "Enterprise Risk Management."

Control Rights

In structured transactions, including certain structured public
finance transactions, AAC may be the control party as a result of
insuring the transaction’s senior class or tranche of debt
obligations. The control party may direct specified parties,
usually the trustee, to take or not take certain actions following
contractual defaults or trigger events. Control rights and the
scope of direction and remedies vary considerably among our
insured transactions. Because Ambac is party to and/or has
certain rights in documents supporting transactions in the
insured portfolio, Ambac frequently receives requests for
amendments, consents and waivers (“ACWs”). CRM reviews,
analyzes and processes all requests for ACWs. The decision to
approve or reject ACWs is based upon certain credit factors,
such as the issuer’s ability to repay the bonds and the bond’s
security features and structure. As part of the CRM process,
members of the RMG review, analyze and process all requests
for ACWs. Similarly, in certain international structured finance,
regulated utility, public-private partnerships and other
international transactions, Ambac UK may be the control party.
Because Ambac UK is party to and/or has certain rights in
documents supporting Ambac UK-insured transactions, Ambac
UK receives requests for ACWs. At Ambac UK, the Portfolio
Risk Management team reviews, analyzes and processes ACWs
with similar credit considerations as noted in the AAC process
factored into the decision to approve or reject the ACW.

As a part of the Segregated Account Rehabilitation Proceedings
(as defined in Note 1. Background and Business Description to
the Consolidated Financial Statements included in Part II, Item 8
of this Form 10-K), the Rehabilitation Court (as defined in Note
1. Background and Business Description to the Consolidated
Financial Statements included in Part II, Item 8 of this Form 10-
K) enjoined certain actions by other parties to preserve AAC’s
control rights that could otherwise have lapsed or been

| Ambac Financial Group, Inc. 4 2021 FORM 10-K |

compromised. Pursuant to the Second Amended Plan of
Rehabilitation (as defined in Note 1. Background and Business
Description to the Consolidated Financial Statements included
in Part II, Item 8 of this Form 10-K) and orders of the
Rehabilitation Court, such protections continue after
the
the Segregated Account Rehabilitation
conclusion of
Proceedings.

Watch List and Adversely Classified Credits

Watch list and adversely classified credits are tracked closely by
the appropriate RMG teams and discussed as part of the CRM
process. Adversely classified credit meetings include members
of RMG and other groups within the Company, as necessary.
The review schedule for adversely classified credits is tailored to
the remediation plan to track and prompt timely action and
proper
internal and external resourcing. A summary of
developments regarding adversely classified credits and credit
trends is also provided to AFG’s, AAC’s and Ambac UK's
Board of Directors no less than quarterly.

Ambac assigns internal credit ratings to individual exposures as
part of the surveillance process. These internal credit ratings,
which represent Ambac’s independent judgments, are based
upon underlying credit parameters consistent with the exposure
type.

Loss Reserving and Analytics ("LRA")

LRA manages the quarterly loss reserving process for insured
portfolio credits with projected policy claims. It also supports
the development, operation and/or maintenance of various
analytical models used in the loss reserving process as well as in
other risk management functions. LRA works with surveillance
and risk remediation analysts responsible for a particular credit
on the development, review and implementation of loss reserve
scenarios and related analysis.

administrators

and managing general

Specialty Property & Casualty Program
Insurance
Everspan’s strategy is to develop a sustainable, long-term
specialty property & casualty program insurance business with
diverse classes of risks. Everspan sources business through
agents
program
(collectively “MGA”), reinsurers, brokers, producers and others.
Everspan
its
distribution partners. Subject
to Everspan's operational
oversight, Everspan engages third parties to market and
administer policies and handle claims within defined authorities
on Everspan's behalf.
Everspan's management team has
significant years of experience in the program insurance
business and has long-standing and broad relationships with
MGAs, reinsurers, brokers, producers and third-party claims
administrators.

long-term relationships with

is developing

Everspan
is comprised of Everspan Indemnity Insurance
Company, an E&S carrier, which is eligible to write business in
all U.S. states and territories and five admitted carriers.
Everspan's admitted carriers include:

• Everspan Insurance Company, which holds certificates of
authority in fifty-one U.S. states and territories, of which
forty-six grant full property and casualty authority.

• Providence Washington Insurance Company (“PWIC”) and
21st Century Indemnity Insurance Company, 21st Century
Pacific Insurance Company and 21st Century Auto
Insurance Company of New Jersey (collectively, the "21st
Century Companies"), which were acquired by Everspan
Insurance Company on October 1, 2021 and January 1,
2022, respectively.

• PWIC holds certificates of authority in forty-seven states
and territories; and the vast majority of PWIC’s legacy
liabilities have been transferred out of PWIC pursuant to an
insurance business transfer, which was approved by the
Oklahoma County District Court in October 2020. All
remaining liabilities are fully ceded to reinsurers and are
supported by an unlimited indemnity from the Seller,
Enstar Holdings (US), which mitigates any residual risk to
these reinsurers.

• The 21st Century Companies were acquired from a national
insurance group that has a Financial Strength Rating of
“A” (Excellent) from AM Best. The 21st Century
Companies collectively possess active certificates of
authority in thirty-six states. All legacy liabilities remain
with affiliates of the sellers through reinsurance and
contractual indemnities. The 21st Century Companies will
be re-named during 2022.

Everspan is focused on generating strong underwriting results
via its participatory risk retention business model. For the year
ended December 31, 2021, Everspan issued insurance policies
generating $13 million of gross written premium, of which
Everspan retained approximately 20%. Everspan may retain up
to 30% of risk on each program and will reinsure the remainder
to reinsurers and other providers of risk capital. These reinsurers
may be domestic and foreign (re)insurers and institutional risk
investors (capacity providers) that want access to specific lines
of U.S. property and casualty insurance business that they may
not have the required licenses and filings to otherwise insure.
Everspan purchases reinsurance to manage its net retention on
individual risks and overall exposure to losses, while providing
it with the ability to offer policies with sufficient limits to meet
producer and policyholder needs. Generally,
reinsurance
contracts are specific to a program, are purchased on an annual
basis and are subject to renegotiation at renewal. The key
contractual provisions include, but are not limited to, those
relating to ceding commissions, fronting fees, required reports to
reinsurers, responsibility for taxes, arbitration in the event of a
dispute and Everspan's termination rights when, among other
triggers, a reinsurer defaults (such as by failing to collateralize
its obligations when required) or its financial strength falls
below an acceptable level. Everspan’s ceded reinsurance
contracts do not legally discharge Everspan from its primary
liability for the full amount of the policies, and Everspan will be
required to pay the loss and bear collection risk if a reinsurer
fails to meet its obligations under the reinsurance agreement.
Everspan mitigates this credit risk by selecting well capitalized,
highly rated, authorized capacity providers, or requiring that the
capacity provider post collateral to secure the reinsured risks.
See Note 7. Insurance Contracts to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K for
further information on reinsurance recoverables, including the
evaluation for credit impairments.

| Ambac Financial Group, Inc. 5 2021 FORM 10-K |

Competition:

Everspan faces competition from program business market
participants such as State National, Clear Blue Insurance Group,
Accelerant Specialty, Benchmark Insurance Company, Falls
Lake Insurance, Fortegra Insurance Group, Spinnaker Insurance
Company and Accredited Surety and Casualty Company, Inc.
Most of these entities have both admitted and E&S carriers.
Competition may take the form of lower ceding fees, broader
coverages, greater product flexibility, higher coverage limits,
greater customer service or higher financial strength ratings by
independent rating agencies.

influence

Few barriers exist to prevent insurers from entering target
markets within the property and casualty industry. Market
the degree of
conditions and capital capacity
competition at any point in time. During periods of excess
underwriting capacity, as defined by the availability of capital,
competition can result in lower pricing and less favorable policy
terms and conditions for insurers. During periods of reduced
underwriting capacity, pricing and policy terms and conditions
are generally more favorable for insurers. Historically, the
performance of the property and casualty insurance industries
has tended to fluctuate in cyclical periods of price competition
and excess underwriting capacity, followed by periods of high
premium rates and shortages of underwriting capacity. At any
given time, Everspan's portfolio of insurance products could
experience varying combinations of these characteristics. This
cyclical market pattern can be more pronounced in the specialty
insurance and reinsurance markets in which Everspan competes
than in the standard insurance market. For the last several years
the property and casualty industry has been in a period of high
premium rates with a shortage of underwriting capacity. While
not anticipated to end in the short-term, this cyclical period will
eventually end, perhaps unexpectedly. The end of this favorable
cycle could have negative consequences for Everspan's growth
and profitability prospects.

Business Acquisition and Program Partner Selection:

As noted above, most of Everspan’s programs are sourced either
from MGAs or through other third parties, such as reinsurance
brokers, that are seeking to provide customized insurance
solutions that require a carrier with a high rating from AM Best.
Everspan works with MGAs that leverage both data and
technology to streamline or improve the underwriting process.

For each new opportunity that Everspan chooses to evaluate, an
initial evaluation of the MGA is conducted, including an
assessment of its underwriting approach, philosophy, size,
quality of management, past performance, future performance
targets and, above all, compatibility with Everspan’s operating
model, risk appetite, and existing book of business. Upon
receipt of a new submission, Everspan promptly determines
whether the program is within Everspan's appetite and Everspan
has the ability to write the program; it then either declines or
starts an initial diligence process. During the initial diligence
process, underwriting, actuarial and program management
submission. If approved by these
resources review the
resources, an underwriting memorandum is prepared and
submitted to Everspan's Underwriting Risk Committee for initial
approval. Everspan's Underwriting Risk Committee is chaired
by Everspan’s Chief Underwriting Officer and consists of
employees and consultants with expertise in underwriting,

credit, and finance. If initial approval is received, Everspan then
conducts comprehensive underwriting, claims, operational,
compliance and financial diligence on the partner. As part of the
diligence process, Everspan works closely with the potential
MGA to design the program’s underwriting guidelines, ongoing
reporting and auditing requirements. Everspan also typically
requires the producing partner to retain underwriting risk or
otherwise align incentives with the program’s underwriting
performance.

typically performed by a

Additionally, as part of the diligence process for each program,
Everspan will perform a review of the claims management
function,
third-party claims
administrator or (“TPA”), which in some cases are managed by
the MGA or producing partner. Diligence focuses on claims
handling and
litigation management, compliance, finance,
governance, staff and vendor management, data and IT.

After due diligence is completed and reinsurers are identified,
each program is presented to the Underwriting Risk Committee
for final approval. The Underwriting Risk Committee will
consider recommendations made by the credit subcommittee as
respects the solvency of the MGA and/or reinsurers.

Ongoing monitoring:

For active programs, Everspan authorizes MGAs to underwrite
and bind coverages in accordance with approved underwriting
guidelines and delegates authority to the TPA for claims
adjustment and payment. Everspan closely monitors each MGA
and TPA’s adherence to the agreed upon underwriting and
claims guidelines. Everspan will conduct periodic reviews of
loss experience, rate levels, reserves and the overall financial
health of the MGA and TPA and hold monthly underwriting
meetings with both the MGA and TPA. Underwriting and claims
data is provided by the MGAs and TPAs monthly. Additionally,
Everspan conducts underwriting, claims and accounting audits,
generally on-site, for each program at least once a year.
Although Everspan monitors its programs on an ongoing basis
including performance of statutory
required procedures,
monitoring efforts may not be adequate, or these entities may
exceed their underwriting or claims settlement authorities or
otherwise breach obligations owed to Everspan. To the extent
that these entities exceed their authorities or otherwise breach
obligations owed to Everspan in the future, our results of
operations or financial condition could be materially adversely
affected. Everspan maintains the right to terminate relationships
with its MGAs and TPAs. Reasons to terminate a relationship
include an inability to produce targeted underwriting results,
writing exposures outside of agreed upon risk tolerances,
delinquency in meeting reporting requirements, a change of
strategic direction, or failure to meet collateral or other
commitments to Everspan.

Ratings:

Ratings are an important factor in assessing Everspan’s
competitive position in the insurance industry. AM Best assigns
Financial Strength Ratings (FSRs) to property and casualty
insurance companies based on quantitative criteria such as
profitability, leverage and liquidity, as well as qualitative
assessments such as the spread of risk, the adequacy and
soundness of ceded reinsurance, the quality and estimated
market value of assets, the adequacy of loss reserves and surplus

| Ambac Financial Group, Inc. 6 2021 FORM 10-K |

and the competence, experience and integrity of management.
AM Best's FSR scale ranges from 'A++' (superior) to 'D' (poor).
These ratings are not a recommendation to buy, sell or hold any
security, and they may be revised or withdrawn at any time by
AM Best. Additionally, AM Best assigns a Best’s Financial
Size Category (FSC) to letter-rated insurers, which is a
convenient indicator of the company’s size. The FSC is
represented by Roman numerals ranging from Class I (smallest)
to Class XV (largest). The FSC is not part of the FSR.

Everspan insurance carriers that were part of the intercompany
pooling agreement during 2021 received an AM Best rating of
'A-' (Excellent) and Financial Size Category of Class VIII. We
view this rating and financial size category as a competitive
advantage in the marketplace. Under the intercompany pooling
agreement, affiliated parties agree to and associate themselves,
as the Everspan Pool, for the purpose of insuring and reinsuring
all business written by or on behalf of each of them, with the
intention that each party shall participate, jointly and severally,
in the fortunes of the combined underwriting, reinsurance,
retrocessions, and claim operations of the other party to the
extent of their respective fixed percentage in the Everspan Pool.
It is expected that the newly acquired admitted carriers will be
participants to the Everspan Pool in 2022 or have a reinsurance
agreement with an Everspan entity to share underwriting risk.

A downgrade in the AM Best rating could adversely impact
Everspan’s business volumes and competitive position because
demand for certain of its products may be reduced, particularly
because some customers require
that Everspan maintain
minimum ratings to enter, maintain or renew business with it.

Managing General Agency / Underwriting
Ambac’s MGA/U strategy is to build a diversified portfolio of
MGA/U covering various P&C products. Ambac expects to
grow the MGA/U business using several strategies, including (i)
organic growth, (ii) additional acquisitions and/or partnerships,
and (iii) hiring experienced underwriting teams to incubate our
own MGA/U. Key criteria include a track record of profitability
and a seasoned management team. Insurance underwritten
through Ambac's MGA/Us may utilize Everspan as an insurance
carrier, but will not necessarily be required to do so, depending
on strategic and operational considerations.

On December 31, 2020, Ambac acquired 80% of
the
membership interests of Xchange. Xchange's management team
has significant longstanding relationships with carriers, agents,
policyholders, affinity groups and reinsurers. Ambac has the
option to purchase the remaining 20% after 2023 and Xchange's
management has the option to sell their 20% to Ambac after
2025. Xchange was formed in 2010 and operates through
specialty producers in accident and health sectors across the
U.S. which are typically not targeted by large direct writers and
to whom Xchange customized service.

Below is a description of Xchange's largest products for which it
is delegated underwriting authority by insurance carriers:

Employer Stop Loss ("ESL") — provides protection for self-
insured employers by serving as a reimbursement mechanism
for catastrophic claims, both specific and
in aggregate
exceeding pre-determined levels.

Limited Medical ("LM") — designed for those not covered by
traditional Affordable Care Act medical programs and sold
primarily through affinity groups, providing a variety of
medically related benefits such as inpatient hospital stays,
diagnostic services or physician visits.

Short-term Medical ("STM") — sold primarily through affinity
groups, providing non Affordable Care Act comprehensive
medical coverage for short durations (i.e. less than one year).

Xchange underwrote premiums for its carriers of approximately
$118 million for the year ended December 31, 2021.

is compensated

Xchange
its services primarily by
for
commissions paid by insurance carriers for underwriting,
structuring and/or administering polices and, in the case of ESL,
managing claims under an agency agreement. Commission
revenues are usually based on a percentage of the premiums paid
by the insured. Xchange is also eligible to receive profit sharing
contingent commissions on certain programs (mostly LM and
STM) based on the underwriting results of the policies it writes,
which may cause some variability in revenue and earning
recognition. Gross Commission revenues for 2021 were $26
million. Business written by Xchange is generally concentrated
in January and July, which may result in revenue and earnings
concentrations in the first and third quarters each calendar year.
Xchange's core expenses include commissions it pays to its
independent agents / producers and compensation for its
management and staff, which currently total 21 individuals.
Commission expenses are a variable cost as we pay a percentage
of premiums written to the agents / producers.

Xchange conducts business through approximately ten insurance
carriers and dozens of agents and other distributors.
Commission revenue and expense growth will be driven by
Xchange’s expansion of its U.S. geographic distribution,
diversification of its products and by adding new insurance
carriers and their related distribution network.

Competition:

The MGA/U business is highly competitive, and firms actively
compete with Xchange for customers and insurance carrier
capacity.

• The ESL market is increasing in size as large companies
continue to transition from fully insured to self-funded. As
the market size increases, capital is flowing into the market,
but prices and margins remain stable. Blue Cross,
UnitedHealth, CIGNA and Aetna are the largest writers.
Competition also comes from large direct writers such as
Tokio Marine, HCC and Sun Life as well as smaller
carriers such as Gerber Life writing through other MGA/U
firms.

• For LM and STM, overall market conditions remain stable.
The overall market is large as entrepreneurs and the
unemployed seek options
insurance.
Competition for Xchange's business comes from both direct
carriers and other intermediaries and, depending on the
product, may include Blue Cross, UnitedHealth, CIGNA,
Aetna, Tokio Marine, Houston Casualty Company, Sun
Life, United Health, Axis, Chubb, and National General.

individual

for

| Ambac Financial Group, Inc. 7 2021 FORM 10-K |

ENTERPRISE RISK MANAGEMENT

The Company's policies and procedures relating
to risk
assessment and risk management are overseen by its Board of
Directors. The Board of Directors takes an enterprise-wide
approach to risk management oversight that is designed to
support the Company's business plans at a level of risk
considered by the Board to be reasonable. A fundamental part of
risk assessment and risk management is not only understanding
the risks the Company faces and what steps management is
taking to manage those risks, but also understanding what level
of risk is appropriate for the Company. The Board of Directors
periodically reviews the Company's business plan, factoring risk
management into account. It also approves the Company's risk
appetite statements, which articulate the Company's tolerance
for certain risks and describes the general types of risk that the
Company accepts, within certain parameters, or attempts to
avoid.

While the Board of Directors has the ultimate oversight
responsibility for
the risk management process, various
committees of the Board also have responsibilities related to risk
assessment and risk management, and management has
responsibility for managing the risks to which the Company is
exposed and reporting on such matters to the Board of Directors
and applicable Board committees.

the

respect

risk assessment and

integrity of Ambac’s

• The Audit Committee oversees the management of risks
financial
associated with
statements and its compliance with legal and regulatory
requirements. In addition, the Audit Committee discusses
policies with
risk
management, including major financial risk exposures and
the steps management has taken to monitor and control
such exposures. The Audit Committee reviews with
management, internal auditors and independent auditors
Ambac's critical accounting policies, Ambac's system of
internal controls over financial reporting and the quality
and appropriateness of disclosure and content in the
financial
financial
communications.

and other

statements

external

• The Compensation Committee oversees the management of
risk primarily associated with our ability to attract,
motivate and retain quality talent (particularly executive
talent) and with setting financial incentives that do not
motivate undue risk-taking.

• The Governance and Nominating Committee oversees the
management of risk primarily associated with Ambac’s
ability to attract and retain quality directors, Ambac’s
corporate governance programs and practices and our
compliance therewith, including integration of ESG and
the
sustainability policies, practices and goals
Company's business strategy and decision making.
Additionally, the Governance and Nominating Committee
oversees the processes for evaluation of the performance of
the Board of Directors and its committees each year and
considers risk management effectiveness as part of its
evaluation. The Governance and Nominating Committee
the business ethics and
also performs oversight of
compliance program, and
reviews compliance with
Ambac’s Code of Business Conduct.

into

• The Strategy Committee oversees the management of risk
and risk appetite primarily with respect to strategic plans
and initiatives.

The Board of Directors receives quarterly updates from Board
committees and the Board provides guidance to individual
committee activities, as appropriate.

In order to assist the Board of Directors in overseeing Ambac’s
risk management, Ambac uses enterprise risk management, a
company-wide process that involves the Board of Directors,
management and other personnel in an integrated effort to
identify, assess and manage a broad range of risks (e.g., credit,
financial, legal, liquidity, market, model, operational, regulatory,
reputational and strategic), that may affect the Company’s
ability to execute on its corporate strategy and fulfill its business
objectives. The Enterprise Risk Committee (“ERC”), which is a
management committee, is comprised of executive and senior
level management responsible for assisting in the management
of the Company’s risks on an individual and aggregate basis.
The ERC produces the relevant risk management information
for executive and senior management and the Board of
Directors.

Ambac management has established other management
committees to assist in managing the risks throughout the
enterprise. These committees will meet monthly or as needed
on an ad hoc basis.

• The AAC Risk Committee's objective is to establish an
interdisciplinary team of professionals to provide oversight
of the key risk remediation issues impacting AAC. The
purview of the committee is to review and approve risk
remediation activities for the financial guarantee insured
portfolio. Additionally, the Risk Committee will provide
oversight and review new risk remediation structures or
approaches in connection with risk remediation plans or
anticipated transactions. Members of the Risk Committee
the Chief Executive Officer, Head of Risk
include
Management, Chief Financial Officer and senior managers
from
throughout risk, corporate services, operations,
investment management, legal and finance.

• The Asset Liability Management Committee's (“ALCO”)
objective is to foster an enterprise wide culture and
approach to liquidity management, asset management, asset
valuation and hedging. Members of ALCO include the
Chief Executive Officer, Chief Financial Officer, Head of
Risk Management and senior managers from investment
management and the Risk Management Group.

• The Disclosure Committee's objective is to assist the CEO
and CFO in their responsibilities to design, establish,
maintain and evaluate the effectiveness of disclosure
controls and procedures. Members of the Disclosure
Committee include the CEO, CFO, Chief Accounting
Officer, General Counsel, Chief Operating Officer, Head of
Risk Management and senior managers from finance and
legal.

Everspan established an Underwriting Risk Committee in 2021
to provide oversight of the active underwriting operations of
Everspan, develop underwriting parameters, and assist the
Boards of the Everspan companies in overseeing the integrity
and effectiveness of Everspan’s underwriting risk management

| Ambac Financial Group, Inc. 8 2021 FORM 10-K |

framework. Members of the committee include Ambac's Chief
Executive Officer, key members of Everspan management and
other senior managers or advisors of Ambac. Additionally, a
Reinsurance & Program Administrator Credit Risk sub-
committee was established at the direction of the Underwriting
Risk Committee to assist with the management of credit risk
emanating from ceded reinsurance and program administrators.

Xchange established an Underwriting Committee in 2021 for the
purpose of reviewing and approving any new business initiative
or product line proposed to be undertaken by Xchange.
Members of the Underwriting Committee include Ambac's
Chief Executive Officer, Chief Financial Officer, key members
of Xchange management and other senior managers or advisors
of Ambac.

AVAILABLE INFORMATION

Our Internet address is www.ambac.com. We make available
through the investor relations section of our web site, annual
reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, and any amendments to those
reports, filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934, as amended, as well as
proxy statements, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the U.S.
Securities and Exchange Commission. Our Investor Relations
Department can be contacted at Ambac Financial Group, Inc.,
One World Trade Center, 41st Floor, New York, New York
10007, Attn: Investor Relations, telephone: 212-208-3222 email:
ir@ambac.com. The reference to our website address does not
constitute inclusion or incorporation by reference of the
information contained on our website in this Form 10-K or other
filings with the SEC and the information contained on our
website is not part of this document.

INSURANCE REGULATORY MATTERS
AND OTHER RESTRICTIONS

Regulatory Matters
United States

AAC is domiciled in the state of Wisconsin and is therefore
subject to the insurance laws and regulations of the State of
Wisconsin and regulated by the Wisconsin Office of the
Commissioner of Insurance (“OCI”) as a domestic insurer.
Everspan Indemnity and its wholly owned subsidiary, Everspan
Insurance Company ("Everspan Insurance") are domiciled in the
state of Arizona and are therefore subject to the insurance laws
and regulations of the State of Arizona and regulated by the
Arizona Department of Insurance and Financial Institutions as
domestic insurers. The subsidiaries of Everspan Insurance are
domiciled in various States and are therefore subject to the
insurance laws and regulations of their respective domiciliary
States and regulated by the insurance departments of those
States as domestic insurers. AAC, Everspan Insurance and its
laws and
subsidiaries are also subject
regulations of the other jurisdictions in which they are licensed
and operate as foreign insurers in such jurisdictions. See Note 8.
Insurance Regulatory Restrictions to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K for
further information on regulatory restrictions.

insurance

the

Pursuant to the terms of the Settlement Agreement, the
Stipulation and Order and the indenture for the Tier 2 Notes,
AAC must seek prior approval by OCI of certain corporate
actions. The Settlement Agreement, Stipulation and Order and
indenture for the Tier 2 Notes include covenants which restrict
the operations of AAC. The Settlement Agreement will remain
in force until the surplus notes issued thereunder have been
redeemed, repurchased or repaid in full. The Stipulation and
Order will remain in force for so long as OCI determines it to be
necessary. The indenture for the Tier 2 Notes will remain in
force until the Tier 2 Notes have been redeemed, repurchased or
repaid in full. Certain of the restrictions in the Settlement
Agreement and indenture for the Tier 2 Notes may be waived
with the approval of the OCI and/or the requisite percentage of
holders of debt securities issued thereunder.

Xchange Benefits is a property and casualty managing general
underwriter, specializing in accident and health insurance.
Xchange Affinity is also a managing general underwriter.
Xchange Benefits and Xchange Affinity, like some other
managing general underwriters and program administrators, may
be subject to licensing requirements and regulation by insurance
regulators in various states in which they conduct business.

Cybersecurity and Privacy Regulation

Ambac and its subsidiaries are subject to various U.S. Federal
and state laws and regulations with respect to privacy, data
protection and cybersecurity that require financial institutions,
including insurance companies and agencies, to safeguard
personal and other sensitive information, and may provide for
notice of their practices relating to the collection, disclosure and
processing of personal information, and any related security
breaches. For example, the National Association of Insurance
Commissioners (“NAIC”) adopted the NAIC Insurance Data
Security Model Law (#668) (“NAIC Model Law”) that creates
rules for insurers and other covered entities addressing data
security and the investigation and notification of cybersecurity
events involving unauthorized access to, or the misuse of,
certain nonpublic information. This includes maintaining an
information security program based on ongoing risk assessment,
overseeing third-party service providers, investigating data
breaches and notifying regulators of a cybersecurity event.
Legislation based on the NAIC Model Law has been enacted in
several states and may be enacted in other states. Certain of our
subsidiaries, as insurance companies and agencies licensed in
the State of New York, are also required to comply with the
New York Department of Financial Services (“NYDFS”)
cybersecurity regulation, which establishes requirements for
covered
implement a
cybersecurity program designed to protect the confidentiality,
integrity and availability of information systems of regulated
entities, and information stored on those systems. The regulation
imposes a governance framework for cybersecurity program,
risk based minimum standards for technology systems for data
protection, monitoring and testing, third-party service provider
reviews, security incident response and reporting to NYDFS of
certain security incidents, annual certifications of regulatory
compliance to NYDFS, and other requirements.

institutions

financial

services

The California Consumer Privacy Act, went into effect in
January 2020, and provides additional privacy rights for
California residents, and in November 2020, California further

| Ambac Financial Group, Inc. 9 2021 FORM 10-K |

expanded privacy rights for California residents by enacting the
California Privacy Rights Act. In 2021 Virginia and Colorado
enacted similar privacy laws. We anticipate federal and state
regulators to continue to enact legislation related to privacy and
cybersecurity.

The federal Health Insurance Portability and Accountability Act
of 1996 and its implementing regulations (“HIPAA”) impose
minimum standards on covered entities, such as health insurers,
for the privacy and security of protected health information
(“PHI”). The Health Information Technology for Economic and
Clinical Health Act, enacted in 2009 (“HITECH”) provides for
the extension of certain privacy and security provisions of
HIPAA to business associates of covered entities that handle
electronic PHI. Xchange specializes in accident and health
insurance and is a business associate of the health insurers
carriers it partners with, making it subject to compliance with
the provisions of HITECH and HIPAA applicable to business
associates.

United Kingdom

The Prudential Regulatory Authority ("PRA") and Financial
Conduct Authority ("FCA") (and their predecessor regulator the
Financial Services Authority (“FSA”)) exercise significant
oversight over Ambac UK. In 2009, the FSA limited Ambac
UK’s license to undertaking only run-off related activity. As
such, Ambac UK is authorized to run-off its insurance portfolio
in the United Kingdom. See Note 8. Insurance Regulatory
Restrictions to the Consolidated Financial Statements included
in Part II, Item 8 in this Form 10-K for further information on
regulatory restrictions.

AFG and certain of its subsidiaries are also subject to non-U.S.
laws and regulations relating to the cybersecurity and privacy of
the information of clients, employees or others. AFG’s UK
subsidiary, Ambac UK, has conducted insurance business
throughout Europe and is subject to the U.K.’s Data Protection
Act 2018, and the E.U.’s General Data Protection Regulation
(GDPR), but these laws should not have a significant impact on
Ambac UK. The application, interpretation and enforcement of
these non-U.S laws and regulations are often uncertain, and
may have an impact on AFG and its subsidiaries businesses and
operations.

Regulation of Change in Control

Under applicable insurance law, any acquisition of control of
AFG, or any other direct or indirect acquisition of control of
AAC or one or more members of the Everspan, requires the
prior approval (or non-disapproval) of the domiciliary regulator
of the acquired company (or, in the case of AFG, the domiciliary
regulators of AAC and each member of the Everspan).
“Control” is generally defined as the direct or indirect power to
direct or cause the direction of the management and policies of a
person. Any purchaser of 10% or more of the outstanding voting
stock of a corporation is presumed to have acquired control of
that corporation and its subsidiaries unless the applicable
insurance regulator, upon application, determines otherwise. For
purposes of this test, AFG believes that a holder of common
stock having the right to cast 10% or more of the votes which
may be cast by the holders of all shares of common stock of
AFG would be presumably deemed to have control of AAC,
Everspan Indemnity, Everspan Insurance and its subsidiaries

insurance

applicable

the meaning of

laws and
within
regulations, although
their
discretion deem control not to exist where, for example, control
is disclaimed by a passive investor. The United Kingdom has
similar requirements applicable in respect of AFG, as the
ultimate holding company of Ambac UK.

insurance
regulators may

Dividend Restrictions, Including Contractual
Restrictions
Due to contractual and regulatory restrictions, AAC has been
unable to pay ordinary dividends to AFG since 2008 and will be
unable to pay ordinary dividends in 2022. AAC’s ability to pay
dividends is further restricted by the Settlement Agreement, the
Stipulation and Order, the indenture for the Tier 2 Notes and the
terms of its Auction Market Preferred Shares ("AMPS"). See
Note 8. Insurance Regulatory Restrictions to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-
K for further information on dividends. As a result of these
restrictions, AAC is not expected to pay dividends to AFG for
the foreseeable future.

Pursuant to the Settlement Agreement and the indenture for the
Tier 2 Notes, AAC may not make any “Restricted
Payment” (which includes dividends from AAC to AFG) in
excess of $5 million in the aggregate per annum, other than
Restricted Payments from AAC to AFG in an amount up to $7.5
million per annum solely to pay operating expenses of AFG.
Concurrent with making any such Restricted Payment, a pro rata
amount of AAC's surplus notes would also need to be redeemed
at par. Any such payment on surplus notes would require either
payment or collateralization of a proportional amount of the Tier
2 Notes (or interest thereon) in accordance with the terms of the
Tier 2 Note indenture.

The Stipulation and Order requires OCI approval for the
payment of any dividend or distribution on the common stock of
AAC.

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

the date

While the UK insurance regulatory laws impose no statutory
restrictions on an insurer’s ability to declare a dividend, the
PRA’s and FCA’s capital requirements in practice act as a
restriction on the payment of dividends, where a firm has a
lower level of regulatory capital than its regulatory capital
requirement as is the case for Ambac UK. Further, the FSA
amended Ambac UK’s license in 2010 such that the PRA must
specifically approve any transfer of value and/or assets from
Ambac UK to AAC or any other Ambac group company, other
than in respect of certain disclosed contracts between the two
parties (such as in respect of a management services agreement

| Ambac Financial Group, Inc. 10 2021 FORM 10-K |

between AAC and Ambac UK). As a result, Ambac UK is not
expected to pay any dividends to AAC for the foreseeable
future.

Everspan Indemnity, Everspan Insurance and its subsidiaries are
also subject to regulatory restrictions on their ability to pay
dividends. Everspan Indemnity and Everspan Insurance do not
have sufficient earned surplus at this time to pay ordinary
dividends under the insurance laws and regulations of Arizona.
Furthermore, certain subsidiaries of Everspan Insurance are
restricted from paying dividends to Everspan Insurance until
2025 or later, unless otherwise approved by the domestic
regulator of the relevant subsidiary, pursuant to the regulatory
orders approving the acquisition of those subsidiaries.

INVESTMENTS AND INVESTMENT
POLICY

the consolidated non-VIE
As of December 31, 2021,
investments of Ambac had an aggregate fair value of
approximately $2,955 million. Investments are managed both
internally by experienced investment managers and externally
by investment management firms. All investments are made in
accordance with the general objectives, policies, and guidelines
for investments reviewed or overseen by the Board of Directors
of the applicable subsidiary. These policies and guidelines
include liquidity, credit quality, diversification and duration
objectives and are periodically reviewed and revised as
appropriate. Additionally, senior credit personnel monitor the
portfolio on a continuous basis.

As of December 31, 2021, the AAC and Everspan non-VIE
investment portfolios had an aggregate
fair value of
approximately $2,123 million. The investment objective is to
achieve the highest risk-adjusted after-tax return on a diversified
investment portfolio consistent with the respective company's
risk tolerance while employing active asset/liability management
practices to satisfy all operating and strategic liquidity needs. In
addition to internal investment policies and guidelines, the
investment portfolio of each company is subject to limits on the
types and quality of investments imposed by applicable
insurance laws and regulations of the jurisdictions in which it is
licensed. The Board of Directors of each respective subsidiary
approves any changes to the investment policy. Within its
guidelines, AAC opportunistically purchases and sells AAC and
Ambac UK insured securities given their relative risk/reward
characteristics. In certain instances, AAC may exceed its
established credit rating or concentration limits with appropriate
regulatory approval. Changes to AAC’s investment policies are
subject to approval by OCI pursuant to covenants made by AAC
in the Settlement Agreement, the Stipulation and Order and the
indenture for the Tier 2 Notes. See Note 1. Background and
Business Description and Note 12. Long-term Debt to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K for more information about the Settlement
Agreement, the Stipulation and Order and the indenture for the
Tier 2 Notes. Such requirements could adversely impact the
performance of the investment portfolio.

As of December 31, 2021, the non-VIE Ambac UK investment
portfolio had an aggregate fair value of approximately $669
million. Ambac UK’s investment policy is designed with the

primary objectives of ensuring a reasonable risk-adjusted return
over the remaining runoff of the insured portfolio and that
Ambac UK is able to meet its financial obligations as they fall
due, in particular with respect to policy holder claims. Ambac
UK’s investment portfolio is primarily diversified fixed maturity
securities and pooled investment funds. The portfolio is subject
to internal investment guidelines and may be subject to limits on
types and quality of investments imposed by its regulator. The
Board of Directors of Ambac UK approves any changes or
exceptions to Ambac UK’s investment policy.

As of December 31, 2021, the non-VIE AFG (parent company
only, excluding investments in subsidiaries) investment portfolio
had an aggregate fair value of approximately $254 million. The
primary investment objective is to preserve capital for strategic
uses while maximizing income. The investment portfolio is
subject to internal investment guidelines. Such guidelines set
forth minimum credit rating requirements and credit risk
concentration limits. Included in the investment portfolio is
AFG's investment in securities insured or issued by AAC,
including surplus notes ($90 million fair value at December 31,
2021) that are eliminated in consolidation.

The following table provide certain information concerning the
consolidated investments of Ambac:

2021

2020

Investment Category
($ in millions)
December 31,

Carrying
Value (2)

Weighted
Average
Yield (1)

Carrying
Value (2)

Weighted
Average
Yield (1)

Municipal obligations ..... $

Corporate securities .........

Foreign obligations .........

U.S. government
obligations .......................

Residential mortgage-
backed securities .............

Asset-backed securities ...

Total long-term fixed
maturity investments .......

Short-term investments ...

Other investments (3)

.......

340

613

5.3 % $

358

2.2 % 1,077

0.5 %

4.8 %

3.9 %

0.2 %

1.0 %

121

1.6 %

252

393

7.3 %

5.0 %

302

377

1,745

3.9 % 2,332

519

690

— %

617

595

6.6 %

5.7 %

4.3 %

0.1 %

— %

3.4 %

Total

$ 2,955

2.9 % $ 3,544

(1) Yields are stated on a pre-tax basis, based on average amortized
cost for both long and short term fixed-maturity investments.

(2)

insured"). Refer

Includes investments guaranteed by AAC and Ambac UK
("Ambac
the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K for further discussion of Ambac insured securities
held in the investment portfolio.

to Note 4. Investments of

(3) Other investments include interests in pooled investment funds that
are either classified as trading securities or are reported under the
equity method and for 2020 Ambac's interests in an unconsolidated
trust created in connection with its sale of junior surplus notes on
August 28, 2014.

EMPLOYEES

As of December 31, 2021, Ambac had 122 employees in the
United States and 10 employees in the United Kingdom. Our
2021 voluntary turnover rate was approximately 4.7%. Ambac
considers its employee relations to be satisfactory.

| Ambac Financial Group, Inc. 11 2021 FORM 10-K |

Ambac’s focus has been on identifying and retaining key talent
through individual development programs following skills
assessments. Ambac’s succession planning has
identified
internal candidates that could fill executive management and
senior management positions as the need arises. The Company
has established a senior advisory team to work with, and advise,
executive management on key initiatives, and has invested in
both personal and professional growth programs to identify and
prepare individuals for promotion within the Company. The
Company continues to rely on compensation components (such
as salary, long-term incentive plan awards, deferred cash awards
and short-term incentive plan awards) to support employee
retention and discourage excessive risk taking. The Company
incorporates performance metrics as part of the annual short-
term incentive bonus offering with increased bonus potential for
exceptional results. We utilize third-party benchmark data to
establish market-based compensation levels. We believe that our
current compensation and
reflect high
performance expectations as part of our merit pay philosophy.
The targeted use of long-term equity incentive plan awards for
key talent is an important element of Ambac’s long-term
retention strategy.

incentive

levels

Item 1A. Risk Factors ($ in millions)

Capitalized terms used but not defined in this section shall have
the meanings ascribed thereto in Part I, Item 1 in this Form 10-K
or in Note 1. Background and Business Description to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K unless otherwise indicated.

Our risk factors are organized in the following sections

Risks Related to AFG Common Shares .............................
Risks Related to FG Insured Portfolio Losses ..................
Risks Related to Capital, Liquidity and Markets ..............
Risks Related to Financial and Credit Markets ................
Risks Related to the Company's Business .........................
Risks Related to Taxation ..................................................
Risks Related to Strategic Plan .........................................

Page
12
13
16
20
21
26
26

Risks Related to AFG Common Shares

Investments
in AFG's common stock are highly
speculative and the price per share of AFG's common
stock may be subject to a high degree of volatility,
including significant price declines.

Ambac's legacy financial guarantee business is in run-off and
faces significant risks and uncertainties described elsewhere in
Part I, Item 1A. Risk Factors. In addition, Ambac's Specialty
Property & Casualty Program Insurance and Managing General
Agency / Underwriting businesses are new and relatively small
and therefore are also subject to uncertainties described
elsewhere in Part I, Item 1A. Risk Factors. Although AFG's
common stock is listed on the New York Stock Exchange
("NYSE"), there can be no assurance as to the liquidity of the
trading market or the price at which such shares can be sold.
The price of the shares may decline substantially in response to

a number of events or circumstances, including but not limited
to:

• adverse developments in our financial condition or results

of operations;

• actual or perceived adverse developments with regards to
AAC's residential mortgage-backed securities ("RMBS")
litigations;

• changes in the actual or perceived risk within our FG
to

insured
concentrations of credit risk, such as in Puerto Rico;

particularly with

portfolio,

regards

• changes to regulatory status;

• changes in investors’ or analysts’ valuation measures for

our stock;

• market perceptions of our success, or lack thereof, in
pursuing and implementing our Specialty Property &
Casualty Program Insurance and Managing General
Agency / Underwriting businesses and our new business
strategy more generally;

• the

impact or perceived

impact of any acquisition,
disposition or other strategic transaction, including entry
into a new line of business, on the value or long-term
prospects of the Company; and

• results and actions of other participants in our industries.

In addition, the price of AFG's shares may be affected by the
additional risks described below, including risks associated with
AAC’s ability to deliver value to AFG. Investments in AFG's
common stock should be considered highly speculative and may
be subject to a high degree of volatility.

AFG may not be able to realize value from AAC; risk
remains that AAC could be subject to rehabilitation
proceedings.

The value of AFG's common stock is partially dependent upon
realizing residual value and/or receiving dividends from AAC;
the receipt of payments to be made by AAC pursuant to the
intercompany expense sharing and cost allocation agreement
(the "Cost Allocation Agreement"); the receipt of payments on
investments made in surplus notes issued by AAC; and the
receipt of payments on other investments. There can be no
assurance that AFG will be able to realize residual value and/or
receive dividends from AAC, which is in run-off. AFG's ability
to realize residual value and/or receive dividends from AAC will
depend upon, amongst other considerations, AAC's ability to
satisfy all of its obligations that are senior to AFG's equity
interests, including obligations to policyholders, holders of its
indebtedness (including surplus notes, the Sitka AAC Note and
the Tier 2 Notes) and holders of its preferred stock. AAC's
ability to satisfy all of its obligations that are senior to AFG's
equity depends on a number of considerations, including its
ability to achieve recoveries, particularly from litigations
concerning insured RMBS; mitigate losses from its insured
portfolio, which is subject to significant risks and uncertainties,
including as a result of varying potential perceptions of the value
of AAC’s guarantees and securities; realize material value from
its investment in Ambac UK; and repay its indebtedness in a
timely manner such that accruing interest costs are manageable.

Increased loss development in the FG insured portfolio or
significant losses or other events resulting from litigation,

| Ambac Financial Group, Inc. 12 2021 FORM 10-K |

particularly the failure to achieve sufficient recoveries from
existing litigations concerning insured RMBS, or the inability of
AAC to pay its debts or other obligations may prompt OCI to
determine that it is in the best interests of policyholders to
initiate rehabilitation proceedings with respect to AAC or to
issue supervisory orders that impose restrictions on AAC, either
preemptively or in response to any such event or circumstance.

the assertion of damages by counterparties,

If OCI were to decide to initiate rehabilitation proceedings with
respect to AAC, adverse consequences may result, including,
without limitation and absent enforceable protective injunctive
relief,
the
acceleration of losses based on early termination triggers, and
the loss of control rights in insured transactions. Any such
consequences may reduce or eliminate any residual value of
AAC for AFG. For example, if AAC were to lose control rights,
its ability to mitigate loss severities and realize remediation
recoveries will be compromised, and actual ultimate losses in
the insured portfolio could exceed current loss reserves.
Additionally, the rehabilitator would assume control of all of
AAC’s assets and management of AAC. In exercising control,
for
the
the benefit of
policyholders, which may
in material adverse
consequences for our security holders. Similar risks would arise
if Ambac UK were to become subject to a proceeding to protect
the interests of its policyholders, in which case AAC's ability to
realize value from Ambac UK (and consequently AFG's ability
to realize value from AAC) would diminish. If OCI were to
issue supervisory orders imposing restrictions on AAC, AAC's
ability to satisfy its obligations to policyholders or creditors, or
its ability to deliver value to AFG, may be significantly
constrained.

rehabilitator would act solely

result

Due to the above considerations, as well as applicable legal and
contractual restrictions described elsewhere herein, it is highly
unlikely that AAC will be able to pay AFG any dividends for the
foreseeable future. Furthermore, the payments to be made to
AFG under the intercompany Cost Allocation Agreement are
subject to, in certain instances, OCI approval, making the
amount and timing of such payments uncertain.

Risks Related to FG Insured Portfolio Losses

Loss reserves for the FG business may not be adequate
to cover potential losses, and changes in loss reserves
may result in further volatility of net income and
comprehensive income.

its

Loss reserves are established when management has observed
credit deterioration
insured credits. Loss reserves
established with respect to our non-derivative FG insurance
policies issued to beneficiaries, including VIEs for which we do
not consolidate the VIE, are based upon estimates and
judgments by management, including estimates and judgments
with respect to the probability of default; the severity of loss
to execute policy
upon default; management’s ability
commutations,
loss mitigation
restructurings and other
strategies; and estimated remediation recoveries for, among
other things, breaches by RMBS issuers of representations and
warranties. The objective of establishing loss reserve estimates
is not to, and our loss reserves do not, reflect the worst possible
outcomes. While our reserving scenarios reflect a wide range of
possible outcomes (on a probability weighted basis), reflecting

the significant uncertainty regarding future developments and
outcomes, our loss reserves may change materially based on
future developments. As a result of inherent uncertainties in the
estimates and judgments made to determine loss reserves, there
can be no assurance that either the actual losses in our financial
guarantee insurance portfolio will not exceed such reserves or
that our reserves will not materially change over time as
circumstances, our assumptions, or our models change.

Catastrophic public health or environmental events, like
the COVID-19 pandemic or those associated with
hurricanes, earthquakes, wildfires and droughts, that
result in material disruption of economic activity, loss of
human life or significant property damage, can have a
materially negative impact on the financial performance
of issuers of public finance, structured finance, investor
owned utility, privatized military housing and other
obligations insured by AAC. Such stresses could result
losses on
in
obligations of those obligations.

liquidity claims and/or permanent

The COVID-19 pandemic caused economic and financial
disruptions that adversely affected, and may continue to
adversely affect, our business and results of operations. In
particular, Ambac insures the obligations of a number of issuers
that have been, or may in the future be, substantially affected by
the prolonged economic effects of COVID-19, such as
municipalities and securitizations, including those backed by
consumer loans such as mortgages or student loans. As
described more fully in Management's Discussion and Analysis
of Financial Condition and Results of Operations, municipalities
and their authorities, agencies and instrumentalities, especially
those dependent on narrow revenue streams flowing from
particular economic activities, such as the collection of hotel
occupancy taxes, have suffered, and may to continue to suffer,
from depressed revenues due to the lingering negative economic
impact brought about by the COVID-19 pandemic in certain
parts of the economy. Furthermore, securitizations dependent on
cash flows from payments on mortgage loans have experienced,
and may continue to experience, shortfalls in receipts due to
borrower nonpayments. Notably, in response to the COVID-19
pandemic, the U.S. Federal government and State governments
and their agencies adopted policies or guidelines to provide
emergency relief to consumers, such as limiting debt collection
efforts, encouraging or requiring extensions, modifications or
forbearance with respect to certain loans and fees, and
establishing foreclosure and eviction moratoriums. Most of these
policies or guidelines have since expired, but as a result of the
impact of delays in mortgage foreclosures and of potential
forbearance-related mortgage loan modifications AAC may
experience higher losses in its insured portfolio of RMBS
securities. See Part II, Item 7 of this Form 10-K, Management's
Discussion and Analysis of Financial Condition and Results of
Operations, Executive Summary, Financial Guarantees in Force,
Liquidity and Capital Resources and Balance Sheet for further
detail.

AAC also insures the obligations of a number of issuers that
have been, or may in the future be, substantially affected by
environmental or other public health events, including flooding,
hurricanes, earthquakes, wildfires and drought. In addition,
certain catastrophic environmental events, notably wildfires, can

| Ambac Financial Group, Inc. 13 2021 FORM 10-K |

result in significant potential liabilities for issuers such as
investor-owned utilities, that increase bankruptcy risk and the
potential default on obligations of the issuer insured by AAC.

The ultimate impact of a catastrophic public health event like
COVID-19 or a catastrophic environmental event on issuers and
their obligations, and the economy in general, is by its very
nature uncertain, and will be determined by a number of factors
including, but not limited to, the depth and duration of a
particular crisis; the extent to which affected consumers,
businesses, municipal entities and other debtors or sources of
revenues recover from depressed economic circumstances, and
the timelines for such recoveries; the level and efficacy of
government intervention or support for municipal entities,
consumers, businesses and the financial markets via emergency
relief measures; the availability of insurance; the availability of
cost-effective financing; management of public health crisis
remediation efforts; the effectiveness of other public or private
crisis management efforts, mitigation measures or support; and
certain socio-economic variables, such as unemployment levels.
Consequently, if issuers affected by such catastrophic events do
not have sufficient resources or financial flexibility, receive
adequate measures of support or realize the appropriate level of
economic recovery, their ultimate ability to service the debt
insured by Ambac could be materially impaired and Ambac
could suffer material permanent losses and therefore may have
an adverse effect on our results of operations and financial
condition.

AAC insures obligations of the Commonwealth of
Puerto Rico, including certain of its authorities and
public corporations that are or were subject to Title III
or Title VI proceedings under the Puerto Rico Oversight,
Management and Stability Act ("PROMESA"). AAC
has made, and will continue to be required to make
significant amounts of policy payments over the next
several years, which will lead to material permanent
losses. The recoverability of these policy payments is
subject to uncertainty as well as variability in terms of
the value of portions of the plan consideration to be
made available under the various PROMESA plans of
the
adjustment and qualifying modifications
obligations AAC insures. While we believe our reserves
are adequate to cover losses on Puerto Rico insured
bonds, there can be no assurance that AAC may not
incur additional losses in the future. Such losses may
have a material adverse effect on Ambac's results of
operation and financial condition.

for

including

AAC has exposure to the Commonwealth of Puerto Rico (the
its authorities and public
"Commonwealth"),
corporations. Each has its own credit risk profile attributable to,
as applicable, discrete revenue sources, direct general obligation
pledges and/or general obligation guarantees. AAC had
approximately $1,054 of net par exposure to the Commonwealth
instrumentalities as of December 31, 2021.
and
Components of the overall Puerto Rico net par outstanding
include capital appreciation bonds that are reported at the par
amount at the time of issuance of the related insurance policy as
opposed to the current accreted value of the bonds. The
outstanding net insured amount including accretion on capital

these

appreciation bonds is approximately $1,280 as of December 31,
2021. Total net insured lifetime debt service (net par and
interest)
its
instrumentalities was approximately $2,423 as of December 31,
2021.

the Commonwealth of Puerto Rico and

As of July 27, 2021, AAC had signed on to (i) the PRIFA
Related Plan Support Agreement (“PRIFA PSA”), dated as of
July 27, 2021, by and among the Federal Oversight and
Management Board for Puerto Rico, as representative of the
Commonwealth of Puerto Rico (the “Oversight Board”), AAC,
Financial Guaranty Insurance Company (“FGIC”), and certain
holders of bonds issued by PRIFA, (ii) the PRHTA/CCDA
Related Plan Support Agreement (“PRHTA/CCDA PSA”),
dated as of May 5, 2021, by and among the Oversight Board, as
representative of the Commonwealth of Puerto Rico and Puerto
Rico Highways and Transportation Authority (“PRHTA”), and
certain creditors of the Commonwealth and PRHTA, and (iii)
the Amended and Restated Plan Support Agreement ("Amended
and Restated GO / PBA PSA"), dated as of July 12, 2021, by
and among the Oversight Board, as representative of the
Commonwealth of Puerto Rico, Puerto Rico Public Buildings
Authority (“PBA”) and the Employee Retirement System of the
Government of the Commonwealth of Puerto Rico, and certain
other creditors of the Commonwealth and PBA. As of the
October 18, 2021 voting deadline, AAC had voted to support the
amended Commonwealth Plan of Adjustment and as of the
November 3, 2021 voting deadline, AAC voted to support the
Title VI Qualifying Modifications for both PRIFA and CCDA
(the "PRIFA QM" and "CCDA QM", respectively). On January
18, 2022, Judge Laura Taylor Swain, U.S. District Court for the
District of Puerto Rico, confirmed a modified version of the
Eighth Amended Title III Joint Plan of Adjustment of the
Commonwealth of Puerto Rico ("Eighth Amended POA"). On
January 22, 2022, Judge Swain approved the PRIFA QM and the
CCDA QM.

While the Eighth Amended POA, the PRIFA QM, and CCDA
QM are expected to become effective on or before March 15,
2022, they remain subject to appeal. On January 28, 2022,
Federación de Maestros de Puerto Rico, Inc., Grupo Magisterial
Educadores(as) por la Democracia, Unidad, Cambio, Militancia
y Organización Sindical, Inc., and Unión Nacional de
Educadores y Trabajadores de la Educación, Inc. (collectively,
the"Teachers' Unions") filed a notice of appeal of the Court's
order confirming the Eighth Amended POA. A number of credit
unions (the "Credit Unions") filed their notice of appeal on the
same day. On February 1, 2022, the Teachers' Union moved for
a stay of the confirmation order while the appeal is pending. On
February 3, 2022, Suiza Dairy Corp. filed its notice of appeal of
the Court's order confirming the Eighth Amended POA. On
February 4, 2022, Asociación Puertorriqueña de la Judicatura,
Inc. ("APJ") filed a notice of appeal of the confirmation order, as
well as a motion for a stay of the same pending appeal. The
Credit Unions filed their motion for a stay pending appeal on
February 4, 2022. Briefing in connection with the motions for a
stay pending appeal was complete as of February 17, 2022. The
Court has taken the motions on submission. Because the
effective dates of the PRIFA QM and CCDA QM are
conditioned on the occurrence of the effective date of the Eighth
Amended POA, a stay pending the appeal of the Eighth
Amended POA would delay the effective dates for each of the
Eighth Amended POA, PRIFA QM, and CCDA QM.

| Ambac Financial Group, Inc. 14 2021 FORM 10-K |

The Plan of Adjustment for the PRHTA ("PRHTA POA") is
expected to be filed prior to March 31, 2022, with a
confirmation hearing expected to follow later in 2022.

As a result of the developments described in this Risk Factor
and elsewhere in this Annual Report on Form 10-K (see Part II,
Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Financial Guarantees in
Force, and Note 6. Financial Guarantees in Force to the
Consolidated Financial Statements included in Part II, Item 8 in
this Annual Report on Form 10-K), the Commonwealth and
certain of its instrumentalities are continuing to default on debt
service payments, including payments owed on bonds insured
by AAC. AAC has made, and will continue to be required to
make, significant amounts of policy payments over the next
several years which will lead to material permanent losses. The
recoverability of these policy payments is subject to uncertainty
as well as variability as it relates, in particular, to the realizable
value of the contingent value instrument ("CVI") portions of the
plan consideration to be made available under the recently-
confirmed Commonwealth Plan of Adjustment, PRIFA QM, and
CCDA QM, and the proposed PRHTA POA.

The outcome of the pending appeal of order confirming the
Eighth Amended POA remains uncertain at this time and no
assurances can be given that the PRHTA POA will be confirmed
or that material changes will not be made to the PRHTA POA
prior to confirmation. Additionally, it is possible that certain
together with associated
restructuring process solutions,
legislation, budgetary, and/or public policy proposals could be
adopted that significantly further impair our exposures or impact
the value of the creditor consideration, including the new GO
and PRHTA bonds and CVI, contemplated by
the
Commonwealth Plan of Adjustment, the CCDA QM, the PRIFA
QM, and the PRHTA POA. Furthermore, it is also possible that
economic or demographic outcomes may be as, or worse than,
forecasted in the Commonwealth Fiscal Plan, which could result
in performance-dependent sources of recovery like the CVI to
produce no value or less value than expected based on current
circumstances and assumptions. Given the potential variability
of the CVI together with the aforementioned uncertainties and
risks related to the consideration to be made available under
various plans of adjustment and qualifying modifications as well
as to the risk related to the confirmation of the PRHTA POA,
there can be no assurance that AAC will not experience losses
materially exceeding current reserves whereby AAC's financial
condition would be materially adversely affected.

While our reserving scenarios reflect a wide range of possible
outcomes reflecting the significant uncertainty regarding future
developments and outcomes, given our exposure to Puerto Rico
and the economic, fiscal, legal and political uncertainties
associated therewith, our loss reserves may ultimately prove to
be insufficient to cover our losses, potentially by a material
amount, and may be subject to material volatility. Changes to
our loss reserves may have a material adverse impact on AAC’s
results of operations and financial condition.

AAC is subject to credit risk and other risks in its
insured portfolio, including related to RMBS and
securities backed by student loans, Public Finance
obligations, and International obligations. We are also

subject to risks associated with adverse selection as our
insured portfolio runs off.

Performance of our insured FG transactions, including (but not
limited to) RMBS transactions and those involving securities
backed by student loans, can be adversely affected by general
economic conditions, such as recession, unemployment levels,
underemployment, home prices that decline or do not increase in
the patterns assumed in our models, increasing foreclosure rates
and unavailability of consumer credit, mortgage product
attributes, such as interest rate adjustments and balloon payment
or
obligations,
and/or
misrepresentations, mortgage and
servicer
performance or underperformance and financial difficulty, such
as risks related to whether the servicer may be required to delay
the remittance of any cash collections held by it or received by it
after the time it becomes subject to bankruptcy or insolvency
proceedings.

originator
student

borrower

fraud

loan

While further deterioration in the performance of consumer
assets, including mortgage-related assets and student loans, may
occur, the timing, extent and duration of any future deterioration
of the credit markets is unknown, as is the impact on potential
claim payments and ultimate losses on the securities within our
insured FG portfolio. In addition, there can be no assurance that
any governmental or private sector initiatives designed to
address such credit deterioration in the markets will be
successful or inure to the benefit of the transactions we
insure. For example, any initiative which permits the discharge
of student loan debt in bankruptcy may adversely affect our
portfolio. Similarly, servicer settlements with governmental
authorities regarding foreclosure or servicing irregularities are
generally designed to protect borrowers and may increase losses
on securities we insure. In particular, the student loan industry
and, specifically, trusts with securities insured by AAC have
been subject to heightened Consumer Finance Protection Bureau
("CFPB") scrutiny and enforcement action over servicing and
collections practices and potential chain of title issues and,
consequently, any settlements, orders or penalties resulting from
CFPB actions, or any failure on the part of servicers or other
parties asserting claims against delinquent borrowers to establish
title to the loans, could lead to increased losses on securities we
insure.

In addition, there can be no assurance that AAC would be
successful, or that it would not be delayed, in enforcing the
subordination provisions, credit enhancements or other
contractual provisions of RMBS or any other security that AAC
insures.

Some issuers in AAC's Public Finance insured portfolio are
experiencing fiscal stress that could result in increased losses on
those obligations or increased liquidity claims, including losses
or claims resulting from payment defaults, Chapter 9 bankruptcy
or other restructuring proceedings or loss of market access.
Issuers of public finance obligations insured by AAC have
reported, or may
report, budget shortfalls, significantly
underfunded pensions or other fiscal stresses that imperil their
ability to pay debt service or will require them to significantly
raise taxes and/or cut spending in order to satisfy their
obligations. Furthermore, over time, the consequences of poor
public policy decisions by state and local governments or
increases in tax burdens can impact demographic trends, such as

| Ambac Financial Group, Inc. 15 2021 FORM 10-K |

out-migration from one state or municipality to another, that
may negatively impact the creditworthiness of related issuers.
Some issuers of obligations insured by AAC have declared
payment moratoriums, defaulted or filed for bankruptcy or
similar debt adjustment proceedings, raising concerns about
their ultimate ability or willingness to service the debt insured
by AAC and AAC's ability to recover claims paid in the future.
If the issuers of the obligations in the public finance portfolio
are unable to raise taxes, cut spending, or receive federal or state
assistance, or if such issuers default or file for bankruptcy under
Chapter 9 or for similar relief under other laws that allow for the
adjustment of debts, AAC may experience liquidity claims and/
or ultimate losses on those obligations, which could adversely
affect the Company's business, financial condition and results of
operations. 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.

As the runoff of the insured portfolio continues, the proportion
of exposures we rate as below investment grade relative to the
aggregate insured portfolio is likely to increase, leaving the
portfolio increasingly concentrated in higher risk exposures.
This risk may result in greater volatility or have adverse effects
on the Company's results from operations and on our financial
condition.

We may not be able to effectively reduce FG insured
exposures. Measures taken to reduce such risks may
have an adverse effect on the Company's operating
results or financial position.

In pursuing the objective of improving our financial position, we
are seeking to terminate, commute, reinsure or otherwise reduce
FG insured exposures. De-risking transactions may not be
feasible or economically viable. We cannot provide any
assurance that any such transaction will be consummated in the
future, or if it is, as to the timing, terms or conditions of any
such transaction. Even if we consummate one or more of such
transactions, doing so may ultimately prove to be unsuccessful
in creating value for any or all of our stakeholders and may
negatively impact our operating results or financial position.

Our credit risk management policies and practices may
not adequately identify significant risks.

As described in Part I, Item 1, “Risk Management” in this Form
10-K, we have established risk management policies and
practices which seek to mitigate our exposure to credit risk in
our insured portfolio. Ongoing surveillance of credit risks in our
insured portfolio is an important component of our risk
management process. These policies and practices in the past
have not insulated us from risks that were unforeseen and which
had unanticipated loss severity, and such policies and practices
may not do so in the future. There can be no assurance that these
policies and practices will be adequate to avoid future losses. If
we are not able to identify significant risks, we may not be able
to timely mitigate such risks, thereby increasing the amount of
losses to which we are exposed. An inability to identify
significant risks could also result in the failure to establish loss
reserves that are sufficient in relation to such risks.

We use analytical models and tools to assist our
projection of performance of our insured FG obligations
and our investment portfolio but actual results could
differ materially from the model and tool outputs and
related analyses.

We rely on internally and externally developed complex
financial models, including default models related to RMBS and
a waterfall tool provided by a nationally recognized vendor for
RMBS and student loan exposures, to project performance of
our insured FG obligations and similar securities in our
investment portfolio. These models and tools assume various
conditions, probability scenarios, facts and circumstances, and
there can be no assurance that such models or tools accurately
predict or measure the quantum of losses, loss reserves and
timing of losses. Differences in the models and tools that we
employ, uncertainties or flaws in these financial models and
tools, or faulty assumptions inherent in these financial models
and tools or those determined by management could lead to
material changes in projected outcomes, and could include
increased losses, loss reserves and/or credit impairments on the
investment portfolio. Moreover, estimates of
transaction
performance depend in part on the interpretation of contracts
and other bases of our legal rights. Such interpretations may
prove to be incorrect or different interpretations may be
employed by bond trustees and other transaction participants
and, ultimately courts, which could lead to increased losses, loss
reserves and/or investment impairments.

Political developments may materially adversely affect
our insured portfolio.

Our insured exposures and our results of operations can be
materially affected by political developments at the federal, state
and/or local government levels. Government shutdowns, trade
disputes, political turnover, judicial decisions, adverse changes
in federal funding, or poor public policy decision making could
disrupt the national and local economies where we have insured
exposures. In addition, we are exposed to correlation risk as a
result of the possibility that multiple credits may concurrently
and/or consecutively experience losses or increased stress as a
result of any such event or series of events.

Risks Related to Capital, Liquidity and
Markets

Our inability to realize the expected recoveries included
in our financial statements could adversely impact our
liquidity, financial condition and results of operations
and the value of our securities, including the Sitka
Senior Secured Notes and Tier 2 Notes.

things, representations with respect

AAC is pursuing claims in litigation with respect to certain
RMBS transactions that it insured. These claims are based on,
among other
the
characteristics of the securitized loans, the absence of borrower
misrepresentations in the underlying loan pools or other
misconduct in the origination process, the compliance of loans
with the prevailing underwriting policies, and compliance of the
RMBS transaction counterparties with policies and procedures
related to loan origination and securitization. In such cases,
where contract claims are being pursued, the sponsor of the
transaction is obligated to repurchase, cure or substitute

| Ambac Financial Group, Inc. 16 2021 FORM 10-K |

collateral for any loan that breaches the representations and
warranties, subject to the terms and conditions of the applicable
contracts. However, generally the sponsors have not honored
those obligations and have vigorously defended claims brought
against them.

significant period of time after the resolution of the RMBS
litigations, AAC's obligation to pay interest on the surplus notes
would continue to grow, which would diminish AAC's financial
flexibility and reduce the likelihood that AAC will be able to
pay dividends or otherwise bring value to AFG.

As of December 31, 2021, we have estimated RMBS R&W
subrogation recoveries of $1,704 (net of reinsurance) included in
our financial statements. These estimated recoveries are based
on the contractual claims brought in the aforementioned
litigations and represent a probability-weighted estimate of
amounts we expect to recover under various possible scenarios.
The estimated recoveries we have recorded do not represent the
best or the worst possible outcomes with respect to any
particular transaction or group of transactions.

There can be no assurance that AAC will be successful in
prosecuting its claims in the RMBS litigations. The outcome of
any litigation, including the RMBS litigations, is inherently
unpredictable, including because of risks intrinsic in the
adversarial nature of litigation. Motions made to the court,
rulings and appeals - in the cases being prosecuted by AAC or in
other relevant cases - could delay or otherwise impact any
recovery by AAC. Moreover, rulings that may be adverse to
AAC (in any of its RMBS litigations, as well as in other RMBS
cases in which it is not a party, including an unrelated RMBS
case with an appeal argued on February 8, 2022 at the New
York Court of Appeals (decision pending) involving issues
relevant to AAC’s breach of contract claims, which could affect
one of the bases supporting the inclusion of all breaching loans
in AAC's breach-of-contract cases) could adversely affect
AAC’s ability to pursue its claims, or the amount or timing of
any recovery, or negatively alter settlement dynamics with
RMBS litigation defendants.

Due to the foregoing factors, any litigation award or settlement
may be for an amount less than the amount necessary (even
when combined with other pledged collateral) to pay the Sitka
Senior Secured Notes or the Tier 2 Notes, which could have a
material adverse effect on our financial condition or results of
operations. Such an award or settlement would also impair
AAC’s ability to repay its outstanding surplus notes, on a timely
basis or at all. In the event that AAC is unable to satisfy its
obligations with respect to the Sitka Senior Secured Notes or
the Tier 2 Notes, holders will have the right to foreclose on any
available collateral and to sue AAC for failure to make required
payments; however, there can be no assurance that the sale of
collateral will produce proceeds in an amount sufficient to pay
any or all amounts due on the Sitka Senior Secured Notes or the
Tier 2 Notes, as the case may be, or that holders will be
successful in any litigation seeking payments from AAC.

Even if AAC were to recover the estimated RMBS R&W
subrogation recoveries of $1,704 (net of reinsurance) included in
our financial statements and pay off or cause to be paid off the
Sitka Senior Secured Notes and the Tier 2 Notes, AAC may still
be unable to deliver value to AFG, through dividends or
otherwise. In such a scenario, AAC may not have sufficient
capital and surplus, or may not be permitted by OCI, to pay off
its surplus notes or a substantial portion of them, whether
immediately following the resolution of the RMBS litigations or
within a reasonable timeframe thereafter. If the surplus notes or
a substantial portion of them were to remain outstanding for a

Additionally, while AAC may pursue settlement negotiations,
there can be no assurance that any settlement negotiations will
materialize or that any settlement agreement can be reached on
terms acceptable to AAC, or at all. Depending on the length of
time required to resolve these litigations, either through
settlement or at trial, AAC could incur greater litigation
expenses than currently projected. If a case is brought to trial,
AAC’s ultimate recovery would be subject to the additional
risks inherent in any trial, including adverse findings or
determinations by the trier of fact or the court, which could
materially adversely impact the value of our securities, including
the Sitka Senior Secured Notes and the Tier 2 Notes.

Any litigation award is subject to risks of recovery, including
that a defendant is unable to pay a judgment that AAC may
obtain in litigation. In some instances, AAC also has claims
against a parent or an acquirer of the counterparty. However,
AAC may not be successful in enforcing its claims against any
successor entity.

The RMBS litigations could also be adversely affected if AAC
does not have sufficient resources to actively prosecute its
liquidation,
claims or becomes subject
conservation or dissolution, or otherwise impaired by actions of
OCI.

to rehabilitation,

Our ability to realize the estimated RMBS R&W subrogation
recoveries included in our financial statements and the timing of
the recoveries, if any, is subject to significant uncertainty,
including the risks described above and uncertainties inherent in
the assumptions used in estimating such recoveries. The amount
of these subrogation recoveries is significant and if we were
unable to recover all such amounts, our stockholders’ equity as
of December 31, 2021, would decrease from $1,098 to $(606).

We expect to recover material amounts of claims payments
through remediation measures, including the litigation described
above, as well as through cash flows in the securitization
structures of transactions that AAC insures. Realization of such
expected recoveries is subject to various risks and uncertainties,
including the rights and defenses of other parties with interests
that conflict with AAC’s interests, the performance of the
collateral and assets backing the obligations that AAC insures,
and the performance of servicers involved in securitizations in
which AAC participates as insurer. Additionally, our ability to
realize recoveries in insured transactions may be impaired if the
continuing orders of the Rehabilitation Court are not effective.

Adverse developments with respect to any of the factors
described above may cause our recoveries to fall below
expectations, which could have a material adverse effect on our
financial condition, including our capital and liquidity, and may
result in adverse consequences such as impairing the ability of
AAC
its
outstanding debt and preferred stock obligations; the initiation of
rehabilitation proceedings against AAC; eliminating or reducing
the possibility of AAC delivering value to AFG, through

its financial obligations, particularly

to honor

| Ambac Financial Group, Inc. 17 2021 FORM 10-K |

dividends or otherwise; diminished business prospects due to
third party concerns about our ability to recover losses; and a
significant drop in the value of securities issued or insured by
AFG or AAC, including the Sitka Senior Secured Notes and the
Tier 2 Notes.

Ambac’s estimate of RMBS litigation recoveries is
subject to significant uncertainty and changes to the
estimate could adversely impact its liquidity, financial
condition and results of operations.

For Ambac’s RMBS cases for which it records an RMBS R&W
subrogation recovery in its financial statements, Ambac has
obtained loan files from the relevant original pool and has
conducted loan file re-underwriting to derive a breach rate that is
extrapolated to estimate the damages Ambac expects to recover.
Ambac does not estimate an RMBS R&W subrogation recovery
for litigations where its sole claim is for fraudulent inducement.
Nor does Ambac include potential recoveries attributable to pre-
judgment interest in the estimate of subrogation recoveries.

The amount estimated for purposes of Ambac’s RMBS R&W
subrogation recovery and the amount Ambac may ultimately
receive is subject to significant uncertainty, as described in the
immediately preceding risk factor. Ambac’s findings and
assumptions regarding collateral performance and Ambac’s
expectations with respect to the outcome of the RMBS
litigations and related timing have a significant impact on
Ambac’s estimated RMBS R&W subrogation recovery. If these
findings, assumptions or estimates prove to be incorrect or
otherwise do not support our claims, actual recoveries could
differ materially from
those estimated. Although Ambac
believes that its methodology for estimating recoveries is
appropriate, the methodologies Ambac uses to estimate expected
collateral losses and specific transaction performance may not
be similar to methodologies used by Ambac’s competitors,
counterparties or other market participants. The determination of
expected RMBS R&W subrogation recoveries is an inherently
subjective and complex process involving numerous estimates
and assumptions and judgments by management, using both
internal and external data sources
to derive a specific
transaction's cash flows. Ambac reevaluates its estimated R&W
recoveries on a quarterly basis
the
preparation of its financial statements. See “Critical Accounting
Policies and Estimates” in Part II, Item 7, Note 2. Basis of
Presentation and Significant Accounting Policies and Note 7.
Insurance Contracts to the Consolidated Financial Statements
included in Part II, Item 8 of this Form 10-K for the fiscal year
ended December 31, 2021. As a result of any reevaluation, the
estimated amount of Ambac’s R&W recovery may be adjusted
downward due to, among other things, changes in law or
developments in RMBS litigation cases that impact our
estimated recoveries, changes in management's view of such
estimated recoveries or timing of receipt thereof and/or changes
in the loss reserves related to such recoveries, and any
adjustment may be material. A reduction in estimated R&W
recoveries may result in material changes in Ambac’s financial
condition, including its capital and liquidity. Management
makes no representation that the estimated R&W recoveries will
not be reduced in the future, possibly materially, including in the
near term. As a result of the foregoing factors, Ambac’s current
estimates may not reflect Ambac’s ultimate recovery, and
management makes no representation that the actual amounts

in connection with

recovered, if any, will not differ materially from those estimated.
The failure of Ambac’s actual recoveries to meet or exceed its
current estimates could result in a material adverse effect on
Ambac’s financial condition, including its capital and liquidity.

AAC's ability to generate the significant amount of cash
needed to service its debt and financial obligations and
its ability to refinance all or a portion of its indebtedness
or obtain additional financing depends on many factors
beyond our control.

AAC is highly leveraged. AAC’s ability to make payments on
and/or refinance its debt and to fund its operations will depend
on its ability to generate substantial operating cash flow and on
the performance of the FG insured portfolio. AAC’s cash flow
generation will depend on receipt of premiums, investment
returns, receipts from subsidiaries and expected litigation
recoveries, offset by policyholder claims, commutation
payments, reinsurance premiums, operating and loss adjustment
expenses, and interest expense, which will be subject to
prevailing economic conditions and to financial, business and
other factors, many of which are beyond our control and many
of which are event-driven. There is substantial risk that AAC
may not have the financial resources necessary to pay its debts
in full and on time due to risks associated with its cash flow,
expected litigation recoveries and insured portfolio, as discussed
elsewhere in these Risk Factors.

As of December 31, 2021, AAC had approximately $1,508 of
indebtedness outstanding (the Tier 2 Notes and the Sitka AAC
Note) that are senior to its surplus notes. AAC had $853
principal balance of
surplus notes outstanding as of
December 31, 2021. The Tier 2 Notes and the Sitka AAC Note
are secured by potential litigation recoveries (and in the case of
the Sitka AAC Note, other assets), the receipt of which is highly
uncertain. Failure to achieve litigation recoveries in an amount
sufficient to repay the Tier 2 Notes and the Sitka AAC Note
would materially weaken AAC’s ability
its
indebtedness.

to service

If AAC cannot pay its policyholders’ claims or service its debt,
it will have to take actions such as selling assets, restructuring or
refinancing its debt or seeking additional capital. Any of these
remedies may not, if necessary, be effected on commercially
reasonable terms, or at all. The value of assets to be sold,
including collateral for the Sitka AAC Note and the Tier 2 Notes
in the event of liquidation, will depend on market and economic
conditions, the availability of buyers, the requirements and
conditions of local law, including regulatory restrictions, and
other factors that may result in AAC or a party enforcing rights
against AAC to be unable to receive proceeds sufficient to
discharge debts or other obligations. Furthermore, the ability of
creditors or claimants to realize upon any assets, including
collateral, may also be subject to bankruptcy and insolvency law
limitations or similar
insurance
company rehabilitation or liquidation proceedings. Because of
these and other factors beyond our control, AAC may be unable
to pay or discharge the principal, interest or other amounts on its
indebtedness when due or ever, which may precipitate defaults,
rehabilitation proceedings,
increased supervision by OCI,
enforcement actions by creditors, policyholders and/or other
claimants, and other actions by or against AAC or AFG that may

limitations applicable

| Ambac Financial Group, Inc. 18 2021 FORM 10-K |

impair AAC's creditworthiness and value or

further
creditworthiness and value of AFG.
AAC has
indebtedness, which could
adversely affect our financial condition, operational
flexibility and our ability to obtain financing in the
future.

substantial

the

substantial

AAC's
significant
consequences for our financial condition and operational
flexibility. For example, it could:

indebtedness could have

• increase our vulnerability to general adverse economic,

competitive and industry conditions;

• limit our ability to obtain additional financing in the future
for working capital, capital expenditures, payment of
policyholder
requirements,
debt
acquisitions, general corporate purposes or other purposes
on satisfactory terms or at all;

claims,

service

• require AAC to dedicate a substantial portion of its cash
flow from operations to the payment of indebtedness,
thereby reducing the funds available for operations and to
fund the execution of key strategies;

• limit or restrict AFG from making strategic acquisitions or

cause us to make non-strategic divestitures;

• limit AAC's ability or increase the costs to refinance
indebtedness or repay such indebtedness due to ongoing
interest accretion;

• limit our ability to attract and retain key employees; and

• limit our ability to enter into hedging transactions by
reducing the number of counterparties with whom we can
enter into such transactions, as well as the volume of those
transactions.

Despite current indebtedness levels, we may incur additional
debt. While restrictive covenants in certain of our contracts may
limit the amount of additional indebtedness AAC may incur, we
may obtain waivers of those restrictions and incur additional
indebtedness in the future. In addition, if Ambac incurred
indebtedness, its ability to make scheduled payments on, or
refinance, any such indebtedness may depend on the ability of
our subsidiaries to make distributions or pay dividends, which in
turn will depend on their future operating performance and
contractual, legal and regulatory restrictions on the payment of
distributions or dividends to which they may be subject. There
can be no assurance that any such dividends or distributions
would be made. This could further exacerbate the risks
associated with AAC's substantial leverage.

Revenues and cash flow would be adversely impacted by
a decline in realization of installment premiums.

A significant percentage of our FG premium revenue is
attributable to installment premiums. The amount of installment
premiums we actually realize could be reduced in the future due
to factors such as early termination of insurance contracts,
accelerated prepayments of underlying obligations or
insufficiency of cash flows (by the premium paying entity).
Such reductions would result in lower revenues.

The composition of the securities in our investment
portfolio exposes us to greater risk than before we
invested in alternative assets.

Each of AAC and Ambac UK maintains a portion of its
investment portfolio in below investment grade securities,
equities and/or alternative assets, such as hedge funds, with the
objective to increase risk-adjusted portfolio returns. Investments
in below investment grade securities, equities and alternative
assets could expose AAC and/or Ambac UK to greater earnings
volatility, increased losses and decreased liquidity in the
investment portfolio.

We may have future capital needs and may not be able
to obtain third-party financing or raise additional third-
party capital on acceptable terms, or at all.

An inability to obtain third-party debt financing or raise
additional third-party capital, when required by us or when
business conditions warrant, could have a material adverse
effect on our business, financial condition and results of
operations.
Our financial condition, the risks described
elsewhere in Part I, Item 1A of this Form 10-K for the fiscal
year ended December 31, 2021, as well as other factors, may
constrain our financing abilities. Our ability to secure third-
party financing will depend upon our future operating
performance, regulatory conditions, the availability of credit
generally, economic conditions and financial, business and other
factors, many of which are beyond our control. The market
conditions and the macroeconomic conditions that affect our
business could have a material adverse effect on our ability to
secure third-party financing on favorable terms, if at all.

If third-party financing is not available when needed, or is
available on unfavorable terms, we may be unable to take
advantage of business opportunities, respond to competitive
pressures or effectively and efficiently manage our balance
sheet, any of which could have a material adverse effect on our
business, financial condition and results of operations.

The determination of the amount of credit impairments
taken on our investments is highly subjective and could
materially impact our results of operations or financial
position.

The determination of the amount of credit impairments on our
investments varies by investment type and is based upon our
periodic evaluation and assessment of known and inherent risks
associated with the respective asset class. Such evaluations and
assessments are revised as conditions change and new
information becomes available. Management updates
its
evaluations regularly and reflects changes in impairments as
such evaluations are revised. There can be no assurance that
management has accurately assessed the level of impairments
taken in our financial statements. Furthermore, additional
impairments may need to be taken in the future and historical
trends may not be indicative of future impairments. We use
financial models and tools to project impairments. Differences
and flaws in these models and tools, and/or faulty assumptions
inherent in these models and tools and those determined by
management, could lead to increased impairments.

| Ambac Financial Group, Inc. 19 2021 FORM 10-K |

Risks Related to the Financial and Credit
Markets

Changes in prevailing interest rate levels and market
conditions could adversely impact our business results
and prospects.

Increases in prevailing interest rate levels can adversely affect
the value of our investment portfolio and, therefore, our
financial strength. In the event that investments must be sold in
order to pay claims, to pay debt obligations, to meet collateral
posting requirements or to meet other liquidity needs, such
investments would
likely be sold at discounted prices.
Additionally, increasing interest rates would have an adverse
impact on AAC's insured portfolio. For example, increasing
interest rates could result in higher claim payments in respect of
defaulted obligations that bear floating rates of interest. Higher
interest rates can also lead to increased credit stress on consumer
asset-backed transactions (as the securitized assets supporting a
portion of
rate consumer
obligations), slower prepayment speeds and resulting “extension
risk” relative to such consumer asset-backed transactions in our
insured and investment portfolios, and decreased refinancing
activity.

these exposures are

floating

Decreasing interest rates could result in early terminations of FG
insurance policies in respect of which AAC and Ambac UK are
paid on an installment basis and do not receive a termination
premium, thus reducing premium earned for these transactions.
Decreases in prevailing interest rates may also limit growth of,
or reduce, investment income and may adversely impact interest
rate swap values.

Our investment portfolio may also be adversely affected by
credit rating downgrades, ABS and RMBS prepayment speeds,
foreign exchange movements, spread volatility, and credit
losses.

We are subject to credit risk throughout our FG
risks,
businesses,
risk
concentrations, correlated
reinsurance
counterparty credit risk.

single
risks and

including

large

and

other

portfolios,

We are exposed to the risk that issuers of debt which AAC and
Ambac UK have insured, issuers of debt which we hold in our
investment
contract
reinsurers
counterparties of AAC and Ambac UK (including derivative
counterparties) may default in their financial obligations,
whether as the result of insolvency, lack of liquidity, operational
failure, fraud or other reasons. These credit risks could cause
increased losses and loss reserves, and/or estimates of credit
impairments and mark-to-market losses, in amongst other
places, our investment portfolios which materially adversely
impact our results of operations and financial strength. Such
credit risks may be in the form of large single risk exposures to
particular issuers, reinsurers, counterparties or sectors; losses
caused by catastrophic events (including public health crises,
terrorist acts and natural disasters); losses in respect of different,
but correlated, credit exposures; or other forms of credit risk.

The amount of interest payable on the Sitka Senior
Secured Notes is set once per quarter based on the three-
month LIBOR rate (or an Alternative Reference Rate as
applicable) on the applicable interest determination date,
which rate may fluctuate substantially; increases in
interest rates will increase the cost of servicing our debt
reducing our profitability and our ability to service our
debt.

The Sitka Senior Secured Notes will bear interest at floating
rates that could rise significantly, increasing AAC’s interest
expense and reducing its cash flow and profitability. Each one
percentage point increase in interest rates above the 75 basis
point LIBOR (or Alternative Reference Rate as applicable) floor
would result in a $12 increase in the annual cash interest
payments due on the Sitka Senior Secured Notes. If AAC’s
interest expense increases significantly, whether due to changes
in LIBOR (or Alternative Reference Rate as applicable) or
its current
if
increased borrowing costs
indebtedness, AAC may not be able to make payments with
respect to the Sitka Senior Secured Notes or its other
indebtedness.

refinances

Uncertainties regarding the expected discontinuance of
the London Inter-Bank Offered Rate or any other
interest
adverse
rate
consequences.

could have

benchmark

In 2017, the U.K. Financial Conduct Authority (“FCA”), which
regulates the London Interbank Offered Rate ("LIBOR"),
announced that it will no longer persuade or compel banks to
submit rates for the calculation of LIBOR after 2021. On
November 30, 2020, the ICE Benchmark Administration and the
FCA announced that most tenors of USD LIBOR are expected
to be published only through June 2023. However, Non-USD
LIBOR, certain less common tenors of USD-LIBOR and certain
other indices which are utilized as benchmarks ceased to be
published at the end of 2021. In October 2021 noteholders of
obligations insured by Ambac UK consented to the replacement
of GBP LIBOR references with compounded SONIA plus a
credit adjustment spread effective on the first interest payment
date in 2022. AAC and Ambac UK therefore no longer insure
any obligations linked to Non-USD LIBOR. AAC and/or
Ambac UK insure securities, own assets, are party to certain
derivative contracts and have issued debt and other obligations
that reference USD LIBOR.

(“SOFR”)

for certain

In 2021, New York State passed legislation addressing the
cessation of U.S. Dollar (“USD”) LIBOR and specified a
recommended benchmark replacement based on the Secured
Overnight Financing Rate
legacy
transactions. Similar federal legislation is pending and has
already been passed by the House of Representatives. The
Alternative Rates Committee, the Federal Reserve Board and
several industry associations and groups have expressed support
for the New York law and are encouraging Federal legislation.
While Ambac believes the New York LIBOR law and pending
federal legislation are generally positive steps, there remains
significant uncertainty about whether the federal legislation will
be enacted and how such laws will be interpreted or challenged
as well as about other aspects of the discontinuance of LIBOR,
including the impact of the Federal legislation, if passed.

| Ambac Financial Group, Inc. 20 2021 FORM 10-K |

While regulators and market participants continue to promote
the creation and functioning of post-LIBOR indices (SOFR in
particular), the impact of the discontinuance and replacement of
LIBOR is uncertain. It is not currently possible to know with
certainty what rate or rates may become accepted alternatives to
LIBOR, or what the effect of any such changes in views and
alternatives may have on the financial markets for LIBOR-
linked financial instruments for the periods preceding and
following LIBOR's cessation. Differences
in contractual
provisions of certain legacy assets and liabilities and other
factors may cause the consequences of the discontinuance of
LIBOR to vary by instrument. While enacted and pending
legislation is intended to address issues with respect to legacy
LIBOR-linked assets and liabilities, it is unclear whether they
will completely address the issues associated with legacy
transactions.

Nevertheless, the value of our assets, derivatives and liabilities;
costs to operate our business; and the losses associated with our
insured portfolio may be affected in a way that may ultimately
materially adversely impact Ambac’s results of operations and
financial condition. In addition, Ambac may experience adverse
tax and accounting impacts, system and model disruption, and
increased liquidity demands in connection with the transition
away from LIBOR
that may have adverse operational
consequences resulting in further adverse impacts on Ambac’s
results of operations and financial condition. Ambac continues
to actively monitor developments surrounding the transition
from LIBOR-based indices and evaluate the potential impact. In
addition to reviewing several hundred transactions involving
various LIBOR-based indices, Ambac has made, and is in the
process of making, adjustments to its reporting and analytical
infrastructures to facilitate the transition from LIBOR.

Risks Related to the Company's Business

Everspan may not be successful in executing its business
than expected
plans or may experience greater
losses and/or reinsurance
insurance underwriting
counterparty
losses
material to Everspan's capital position, a downgrade of
its AM Best rating and a loss of its franchise value.
Such events could have a material adverse impact on the
value of AFG's shares.

losses, which could result

Everspan is in the nascent stage of the specialty insurance
program business. Its business plans entails establishing
programs with managing general agents ("MGAs") and
managing general underwriters ("MGUs") over time. The
success of these programs is dependent upon the quality of
business sourced by the MGAs and MGUs, the quality of
underwriting oversight of the MGAs and MGUs by Everspan,
the quality and creditworthiness of reinsurance obtained with
respect to the risks underwritten by Everspan, loss experience
over time, premium levels, competition and other factors, some
of which are outside Everspan's control. Should Everspan fail in
executing its business plans or experience greater than expected
losses due to shortcomings in the management of programs,
Everspan's underwriting of risks, the performance of reinsurers
or other factors, Everspan may suffer losses that are material to
its capital position, a downgrade in its AM Best rating and/or a

loss of its franchise value. Any such outcomes could have a
material adverse impact on the value of AFG's shares.

Failure of Everspan's Program Partners or Xchange to
properly market, underwrite or administer policies could
adversely affect us.

Insurance

The marketing, underwriting, claims administration and
administration of policies in our Specialty Property & Casualty
Program
and Managing General Agency/
Underwriting businesses have been contracted to Everspan's
program partners and our owned MGU, Xchange. Any failure
by them to properly handle these functions could result in
liability to us. Even though Everspan's program partners may be
required to compensate us for any such liability, there are risks
that such compensation may be
insufficient or entirely
unavailable if, for example, the relevant program partner
becomes insolvent or is otherwise unable to pay us. Any such
failures could result in monetary losses, create regulatory issues
or harm our reputation, which could materially and adversely
affect our business, financial condition and results of operations.
A downgrade in the AM Best financial strength ratings
of our specialty program property and casualty
insurance company subsidiaries may negatively affect
our business.

Our specialty program property and casualty insurance company
subsidiaries are evaluated for overall financial strength by AM
Best to receive financial strength ratings ("FSRs"), which are an
important factor in establishing the competitive position of
insurance companies. These FSRs reflect AM Best’s opinion of
our specialty program property and casualty insurance company
subsidiaries’ financial strength, operating performance, strategic
position and ability to meet obligations to policyholders, and are
not evaluations directed to investors. Our specialty program
property and casualty insurance company subsidiaries’ FSRs are
subject to periodic review, and the criteria used in the rating
methodologies are subject to change. All of our insurance
company subsidiaries of Everspan currently writing business are
rated "A-" (Excellent). A downgrade in Everspan's FSR could
lead to Everspan's program partners moving business to other
insurance companies, which would adversely affect our
business, financial condition and results of operations.

If in our Specialty Program Property and Casualty
Insurance business we are unable
to accurately
underwrite risks and charge competitive yet profitable
rates to our clients and policyholders, our business,
financial condition and results of operations may be
adversely affected.

In general, the premiums for our specialty program property and
casualty insurance policies are established at the time a policy is
issued and, therefore, before all of our underlying costs are
known. Like other property and casualty insurance companies,
Everspan relies on estimates and assumptions in setting its
rates. Establishing adequate premium
premium
is
rates
to generate
together with
necessary,
sufficient revenue to offset losses, loss adjustment expenses and
other general and administrative expenses in order to earn a
profit. If Everspan does not accurately assess the risks that it
assumes, it may not charge adequate premiums to cover its
losses and expenses, which would adversely affect our results of

investment

income,

| Ambac Financial Group, Inc. 21 2021 FORM 10-K |

reduce

implement

its premiums

too high, which could

operations and our profitability. Alternatively, Everspan could
set
its
competitiveness and lead to lower policyholder retention,
resulting in lower revenues. Pricing is a highly complex exercise
involving the acquisition and analysis of historical loss data and
the projection of future trends, loss costs and expenses, and
inflation trends, among other factors, for each of Everspan's
products in multiple risk tiers and many different markets.
Everspan seeks
in
accordance with its assumptions. Everspan's ability to undertake
these efforts successfully and, as a result, to accurately price its
policies, is subject to a number of risks and uncertainties,
including insufficient or unreliable data; incorrect or incomplete
analysis of available data; uncertainties generally inherent in
estimates and assumptions; failure to implement appropriate
actuarial projections and ratings formulas or other pricing
methodologies; regulatory constraints on rate increases; failure
to accurately estimate investment yields and the duration of
liabilities for
loss adjustment expenses; and
unanticipated court decisions, legislation or regulatory action.

its pricing accurately

losses and

If Everspan is unable to obtain reinsurance coverage at
reasonable prices or on terms that adequately protect it,
we may be required to bear increased risks or reduce the
level of our underwriting commitments.

Our specialty program property and casualty insurance company
subsidiaries purchase reinsurance as part of our overall risk
management strategy. While reinsurance does not discharge our
insurance subsidiaries from their obligations to pay claims for
losses insured under their insurance policies, it does make the
reinsurer liable to them for the reinsured portion of the risk. As
part of our strategy for our specialty program property and
casualty business, we reinsure underwriting risk to third-party
reinsurers. At the inception of a new program, Everspan acts as
an issuing carrier and reinsures a majority of such risk to third
parties. Everspan may be unable to maintain its current
reinsurance arrangements or to obtain other reinsurance in
if
adequate amounts and at favorable rates, particularly
reinsurers become unwilling or unable to support our specialty
program property and casualty business
future.
Additionally, market conditions beyond our control may impact
the availability and cost of reinsurance and could have an
adverse effect on our business, financial condition and results of
operations. A decline in the availability of reinsurance may
increase the cost of reinsurance and materially and adversely
affect our business prospects. Everspan may, at certain times, be
forced to incur additional costs for reinsurance or may be unable
to obtain sufficient reinsurance on acceptable terms. In the latter
case, Everspan would have to accept an increase in exposure to
risk, reduce the amount of business written by it or seek
alternatives in line with Everspan's risk limits, all of which could
adversely affect our business, financial condition and results of
operations.

the

Everspan is subject to reinsurance counterparty credit
risk. Its reinsurers may not pay on losses in a timely
fashion, or at all.

Everspan purchases reinsurance to transfer part of the risk it has
assumed to reinsurance companies in exchange for part of the
premium Everspan receives in connection with the risk.
Although reinsurance makes reinsurers liable to Everspan for the

risk transferred or ceded to the reinsurer, it does not relieve
Everspan of its liability to policyholders. Accordingly, Everspan
is exposed to credit risk with respect to its reinsurers, especially
to the extent reinsurance receivables are not sufficiently secured
by collateral or do not benefit from other credit enhancements.
Everspan also bears the risk that a reinsurer may be unwilling to
pay amounts it has recorded as reinsurance recoverable for any
reason, including that the terms of the reinsurance contract do
not reflect the intent of the parties of the contract or there is a
disagreement between the parties as to their intent; the terms of
the contract cannot be legally enforced; the terms of the contract
are interpreted by a court or arbitration panel differently than
intended by Everspan; the reinsurance transaction performs
differently than Everspan anticipated due to a flawed design of
the reinsurance structure, terms or conditions; or changes in law
and regulation, or in the interpretation of laws and regulations,
affects a reinsurance transaction.

The insolvency of one or more of Everspan's reinsurers, or their
inability or unwillingness to make timely payments if and when
required under the terms of reinsurance contracts, could
adversely affect our business, financial condition and results of
operations.

Our ability to grow our Specialty Program Property and
Casualty Insurance Business will depend in part on the
addition of new Program Partners, and our inability to
effectively onboard such new Program Partners could
have an adverse effect on our business, financial
condition and results of operations.

Our ability to grow our specialty program property and casualty
insurance business will depend in part on the addition of new
program partners. If Everspan does not effectively onboard new
program partners, including assisting such program partners to
quickly resolve any post-onboarding matters and provide
effective ongoing support, Everspan's ability to add new
program partners and its relationships with its existing program
partners could be adversely affected. Additionally, Everspan's
reputation with potential new customers could be damaged if it
fails to meet the requirements of its customers as a result of its
failure to effectively onboard new program partners. Such
reputational damage could make it more difficult for Everspan
to attract new and retain existing program partners, which could
have an adverse effect on our business, financial condition and
results of operations.

We compete with a large number of companies in the
property
for
underwriting premium.

insurance

industry

casualty

and

We compete with a large number of companies in the property
and casualty insurance industry for underwriting premium.
intense competition for premium,
During periods of
in
specialty program property and casualty
particular, our
insurance and managing general agency
/ underwriting
businesses may be challenged to maintain competitiveness with
other companies that may seek to write policies without the
same regard for risk and profitability targeted by our specialty
program property and casualty insurance and managing general
agency / underwriting businesses. During these times, it may be
difficult for Everspan or our MGAs and MGUs to grow or

| Ambac Financial Group, Inc. 22 2021 FORM 10-K |

maintain premium volume without
standards, sacrificing income, or both.

lowering underwriting

In addition, our specialty program property and casualty
insurance and managing general agency
/ underwriting
businesses face competition from a wide range of specialty
insurance companies, underwriting agencies and intermediaries,
as well as diversified financial services companies that are
significantly larger than our specialty program property and
casualty insurance and managing general agency/underwriting
businesses are and that have significantly greater financial,
marketing, management and other resources. Some of these
competitors also have greater market recognition than we do.
The greater resources or market presence that these competitors
possess may enable them to avoid or defray particular costs,
employ greater pricing flexibility, have a higher tolerance for
risk or loss, or exploit other advantages that may make it more
difficult for us to compete. We may incur increased costs in
competing for underwriting revenues in this environment. If we
are unable to compete effectively in the markets in which our
specialty program property and casualty
insurance and
managing general agency/underwriting businesses operate or
expand into, our underwriting revenues may decline, as well as
overall business results.

System security risks, data protection breaches and
cyber-attacks could adversely affect our business and
results of operations.

from

functions and a prolonged

We rely on our information technology systems for many
enterprise-critical
failure or
interruption of these systems for any reason could cause
significant disruption to our operations and have a material
adverse effect on our business, financial condition and operating
results. Our information technology and application systems
may be vulnerable to threats from computer viruses, natural
disasters, unauthorized access, cyber-attack and other similar
disruptions. Computer hackers may be able to penetrate our
network’s system security and misappropriate or compromise
confidential information, create system disruptions or cause
shutdowns. In addition to our own confidential information, we
sometimes receive and are required to protect confidential
information obtained
third parties and personally
identifiable information of individuals. To the extent any
disruption or security breach results in a loss or damage to our
data, or inappropriate disclosure of our confidential information
or that of others, or personally identifiable information of
individuals, it could cause significant financial losses that are
either not, or not fully, insured against, cause damage to our
reputation, affect our relationships with third parties, lead to
claims against us, result in regulatory action, or otherwise have a
material adverse effect on our business or results of operations.
In addition, we may be required to incur significant costs to
mitigate the damage caused by any security breach, or to protect
against future damage. Moreover, although we have incident
response, disaster recovery and business continuity plans in
place, we may not be able to adequately execute these plans in a
timely fashion in the event of a disruption to our information
technology and application systems.

We may be adversely affected by failures in services or
products provided by third parties.

We outsource and may further outsource certain technology and
business process functions, and rely upon third-party vendors for
other essential services and information, such as the provision of
data used in setting loss reserves. If we do not effectively
develop, implement and monitor our vendor relationships, if
third party providers do not perform as anticipated, if we
experience technological or other problems with a transition, or
if vendor relationships relevant to our business process functions
are terminated, we may not realize expected productivity
improvements or cost efficiencies and may experience
operational difficulties, increased costs and a loss of business. A
material failure by an external service or information provider or
a material defect in the products, services or information
provided thereby could adversely affect our financial condition
and results of operations. Our outsourcing of certain technology
and business process functions to third parties may expose us to
increased risk related to data security, service disruptions or the
effectiveness of our control system. These risks could increase
as vendors increasingly offer cloud-based software services
rather than software services which can be run within our data
centers or as we choose to move additional functions to the
cloud.

Our inability to attract and retain qualified executives,
senior managers and other employees or the loss of any
of these personnel could negatively impact our business.

Our ability to execute on our business strategies depends on the
retention and recruitment of qualified executives and other
professionals. We rely substantially 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, credit, risk mitigation, structured finance,
investment, accounting, finance, legal, technology and other
technical and specialized skills. As a result of AAC’s financial
situation, there is a higher risk that executive officers and other
key staff will leave the Company and replacements may not be
motivated to join the Company. The loss of the services of
members of our executive 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 further negatively impact our business.

investigations, and

We are subject to the risk of litigation and regulatory
inquiries or
the outcome of
proceedings we are or may become involved in could
have a material adverse effect on our business,
operations, financial position, profitability or cash flows.

AAC is defending or otherwise involved in various lawsuits
relating to its FG business. In addition, the Company from time
to time receives various regulatory inquiries and requests for
information, and its insurance company subsidiaries are subject
to examination by regulatory authorities. Please see Note 19.
Commitments and Contingencies to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K for
information on these various proceedings.

It is not possible to predict the extent to which whether
additional suits involving AFG, AAC or one or more other
subsidiaries will be filed or the extent to which additional

| Ambac Financial Group, Inc. 23 2021 FORM 10-K |

regulatory inquiries or requests for information will be made,
and it is also not possible to predict the outcome of litigation,
inquiries, requests for information or examination. It is possible
that there could be unfavorable outcomes in these or other
proceedings. Management is unable to make a meaningful
estimate of the amount or range of loss that could result from
unfavorable outcomes or of the expenses that will be incurred in
connection with such lawsuits or regulatory matters. Under
some circumstances, adverse results in any such proceedings
and/or the incurring of significant litigation or other expenses
could be material to our business, operations, financial position,
profitability or cash flows.

Our business could be negatively affected by actions of
stakeholders whose interests may not be aligned with the
broader interests of our stockholders.

Ambac could be negatively affected as a result of actions by
stakeholders whose interests may not be aligned with the
broader interests of our stockholders, and responding to any
such actions could be costly and time-consuming, disrupt
operations and divert
the attention of management and
employees. Such activities could interfere with our ability to
execute on our strategic plans.

The Settlement Agreement, Stipulation and Order and
Indenture for the Tier 2 Notes contain restrictive
covenants that may impair AAC's ability to pursue its
business strategies.

Pursuant to the terms of the Settlement Agreement, Stipulation
and Order and indenture for the Tier 2 Notes, AAC must seek
prior approval by OCI of certain corporate actions. The
Settlement Agreement, Stipulation and Order and indenture for
the Tier 2 Notes also include covenants which restrict the
operations of AAC which, (i) in the case of the Settlement
Agreement, remain in force until the surplus notes that were
issued pursuant to the Settlement Agreement have been
redeemed, repurchased or repaid in full, (ii) in the case of the
Stipulation and Order, remain in place until the OCI decides to
relax such restrictions, and (iii) in the case of the indenture for
the Tier 2 Notes, remain in force until the Tier 2 Notes have
been redeemed, repurchased or repaid in full. Certain of these
restrictions may be waived with the approval of holders of the
applicable debt securities and/or OCI. If we are unable to obtain
the required consents under the Settlement Agreement, the
Stipulation and Order and/or the indenture for the Tier 2 Notes,
AAC may not be able to execute its planned business strategies.

OCI has certain enforcement rights with respect to the
Settlement Agreement and Stipulation and Order. Disputes may
arise over the interpretation of such agreements, the exercise or
purported exercise of rights thereunder, or the performance of or
failure or purported failure to perform obligations thereunder.
Any such dispute could have material adverse effects on AAC,
and the Company more broadly, whether through litigation,
administrative proceedings, supervisory orders, failure
to
execute transactions sought by management, interference with
corporate strategies, objectives or prerogatives, inefficient
decision-making or execution, forced realignment of resources,
increased costs, distractions to management, strained working
relationships or otherwise. Such effects would also increase the

risk that OCI would seek to initiate rehabilitation proceedings or
issue supervisory orders against AAC.

Actions of the PRA and FCA could reduce the value of
Ambac UK realizable by AAC, which would adversely
affect our securityholders.

Ambac’s international business is operated by Ambac UK,
which is regulated by the Prudential Regulation Authority
(“PRA”) for prudential purposes and the Financial Conduct
Authority (“FCA”) for conduct purposes. The terms of Ambac
UK’s regulatory authority are now restricted and Ambac UK is
in run-off. Among other things, Ambac UK may not write any
new business, and, with respect to any entity within the Ambac
group of affiliates, commute, vary or terminate any existing
financial guaranty policy, transfer certain assets, or pay
dividends, without the prior approval of the PRA and FCA. The
PRA and FCA act generally in the interests of Ambac UK
policyholders and will not take into account the interests of
AAC or the securityholders of Ambac when considering
whether
Accordingly,
determinations made by the PRA and FCA, in their capacity as
Ambac UK’s regulators, could potentially result in adverse
consequences for our securityholders and also reduce the value
realizable by AAC for Ambac UK.

to provide any such approval.

Regulatory uncertainty in relation to Ambac UK’s
capital position could adversely affect the value of
Ambac UK and affect our securityholders.

Under applicable regulatory capital rules (“Solvency II”) Ambac
UK was deficient in terms of capital until September 30, 2021,
but as at December 31, 2021 expects to meet the capital
requirements under these rules. Ambac UK's regulators are
aware of the deficiency which previously existed, and dialogue
between Ambac UK and its regulators remains ongoing with
respect to options for strengthening the capital position further
whilst Ambac UK remains in run-off.

there remains a risk

Until Ambac UK has been able to strengthen its capital position,
through the natural run-off of the insurance portfolio or
otherwise,
that market movements
impacting its investments or adverse credit developments
insured
loss reserving requirements within
impacting
portfolio could result in the capital position becoming deficient
once again.

its

The PRA supervisory statement SS7/15 “Supervision of firms in
difficulty or run-off” notes that “there are many circumstances
in which a run-off strategy is in the best interests of
policyholders” and notes that the PRA will review such firms
and that they “may be permitted to continue activities necessary
to carry out existing contracts in a manner, and for so long as,
the PRA considers necessary in order to afford an appropriate
degree of protection to policyholders”. If Ambac UK were to
return to a capital deficit position then its run-off would become
subject to the PRA taking no action in relation to that capital
deficit and related Solvency II requirements. Alternative courses
of action open to the PRA could adversely impact the
anticipated run-off trajectory of Ambac UK and impact its value.

| Ambac Financial Group, Inc. 24 2021 FORM 10-K |

Impairment of the intangible and goodwill assets, which
resulted from
the acquisition of Xchange, could
adversely affect our results of operations.

In connection with Ambac’s acquisition of 80% of the
membership interests of Xchange, Ambac recorded the fair
value of identifiable intangible assets (primarily related to
distribution relationships) and goodwill. The intangible assets
will be amortized over their remaining useful lives. The
Company will test intangible assets for impairment if certain
events occur or circumstances change indicating that the
carrying amount of the intangible asset may not be recoverable.
Goodwill will be tested for impairment annually or whenever
events occur or circumstances change that may indicate
impairment. Intangible asset and goodwill impairments are
driven by a variety of factors, which could include, among other
things, declining future cash flows of the acquired business as
addressed in other risk factors related to the Managing General
Underwriting Business. Any intangible asset or goodwill
impairment could adversely affect the Company's operating
results and financial condition.

Xchange derives a significant portion of its commission
revenues
insurance
companies, the loss of any of which could result in lower
commissions or loss of business production.

limited number of

from a

from

For the year ended December 31, 2021, a majority of Xchange’s
total commissions was derived
insurance policies
underwritten by a limited number of insurance companies.
Should one or more of these insurance companies terminate its
arrangements with Xchange or otherwise decrease the number of
insurance policies underwritten for it, Xchange may lose
significant commission revenues or lose significant business
to
production while
underwrite the business.

insurance companies

it seeks other

Xchange’s business, results of operation, financial
condition and liquidity may be materially adversely
affected by certain potential claims, regulatory actions
or proceedings.

Xchange is subject to various potential claims, regulatory
actions and other proceedings, including those relating to
alleged errors and omissions in connection with the placement
or servicing of insurance and/or the provision of services in the
ordinary course of business, of which we cannot, and likely will
not be able to, predict the outcome with certainty. Because
Xchange often assists customers with matters
involving
substantial amounts of money, including the placement of
insurance and the handling of related claims that customers may
assert, errors and omissions, claims against it may arise alleging
potential liability for all or part of the amounts in question. Also,
the failure of an insurer with whom Xchange places business
could result in errors and omissions claims against it by its
customers, which could adversely affect Ambac’s results of
operations and financial condition. Claimants may seek large
damage awards, and these claims may involve potentially
significant legal costs and damages. In addition, regardless of
monetary costs, these matters could have a material adverse
effect on Xchange's reputation and cause harm to its carrier,
customer or employee relationships, or divert personnel and
management resources.

Xchange’s current market share may decrease because
of disintermediation within the insurance industry,
including
insurance
companies, technology companies and the financial
services industry, as well as the shift away from
traditional insurance markets.

competition

increased

from

The MGU business is highly competitive and Xchange actively
competes with numerous firms for customers and insurance
companies, many of which have relationships with insurance
companies or have a significant presence in niche insurance
markets that may give them an advantage. Other competitive
concerns may include pricing, the entrance of technology
companies into the MGU business and the direct-to-consumer
insurance carriers that don't utilize third party agents and brokers
as production sources. Additionally, the insurance industry may
experience
therefore may
experience increased competition from insurance companies and
the financial services industry, as a growing number of larger
financial institutions increasingly, and aggressively, offer a
wider variety of financial services, including MGU services.
While Xchange collaborates and competes in these segments on
a fee-for-service basis, we cannot be certain that such alternative
markets will provide the same level of insurance coverage or
profitability as traditional insurance markets.

and Xchange

consolidation,

Changes in law or in the functioning of the healthcare
market could significantly impair Xchange’s business
and therefore negatively impact Ambac’s financial
condition and results of operation.

has

industry. While Xchange

Adoption of a single payer healthcare system or a public health
insurance option would likely adversely impact the entire
historically
healthcare
demonstrated an ability to adjust its products to major changes
in the healthcare industry, given its focus on Accident and
Health products, Xchange would likely be adversely impacted
by such a material change in the U.S. healthcare system
particularly if private health insurance is eliminated, materially
limited, or is rendered noncompetitive. Material adverse
developments to Xchange's business would have a negative
impact on Ambac's financial condition and results of operations
which could be material.

Xchange’s business and results of operation and
financial condition may be adversely affected by
conditions that result in reduced insurer capacity.

Xchange’s results of operations depend on the continued
capacity of insurance carriers to underwrite risk and provide
coverage, which depends in turn on those insurance companies’
ability to procure reinsurance. Capacity among insurance
carriers and reinsurers for Xchange's products may diminish
because of Xchange's performance or due to factors outside
Xchange's control. For example, capacity could be reduced by
insurance companies failing or withdrawing from writing certain
coverages that Xchange offers to its customers. To the extent
that reinsurance becomes less widely available or significantly
more expensive, Xchange may not be able to procure the
amount or types of coverage that its customers desire and the
coverage Xchange is able to procure for its customers may be
more expensive or limited.

| Ambac Financial Group, Inc. 25 2021 FORM 10-K |

Variations in Xchange’s commissions that result from
the timing of policy renewals and the net effect of new
and lost business production may have unexpected
effects on our results of operation.

Xchange’s commission income can vary quarterly or annually
due to the timing of policy renewals and the net effect of new
and lost business production. Xchange does not control the
factors that cause these variations. Specifically, customers’
demand for insurance products can influence the timing of
renewals, new business and lost business (which includes
policies that are not renewed), and cancellations. Quarterly and
annual fluctuations in revenues based upon increases and
decreases associated with the timing of new business, policy
insurance companies may
renewals and payments from
adversely affect our financial condition, results of operations
and cash flows. Profit-sharing contingent commissions are paid
by insurance companies based upon the profitability of the
business placed with such companies. In the past these
commissions have accounted for a significant amount of
Xchange’s total commissions and fees. Due to, among other
things, the inherent uncertainty of loss in Xchange’s industry
and changes in underwriting criteria by insurance companies,
there will be a level of uncertainty related to the payment of
profit-sharing contingent commissions.

Risks Related to Taxation

Certain surplus notes or other obligations of AAC may
be characterized as equity of AAC and as a result, AAC
may no longer be a member of the U.S. federal income
tax consolidated group of which AFG is the common
parent.

It is possible that certain surplus notes or other obligations of
AAC may be characterized as equity of AAC for U.S. federal
income tax purposes. If such surplus notes or other obligations
are characterized as equity of AAC that is taken into account for
tax affiliation purposes and it is determined that such “equity”
represented more than twenty percent of the total value of the
stock of AAC, AAC may no longer be characterized as an
includable corporation that is affiliated with AFG. As a result,
AAC would no longer be characterized as a member of the U.S.
federal income tax consolidated group of which AFG is the
common parent (the “Ambac Consolidated Group”) and AAC
would be required to file a separate consolidated tax return as
the common parent of a new U.S. federal income tax
consolidated group including AAC as the new common parent
and AAC’s affiliated subsidiaries (the “AAC Consolidated Tax
Group”).

To the extent AAC is no longer a member of the Ambac
Consolidated Group, AAC’s net operating loss carry-forwards
("NOLs") (and certain other available tax attributes of AAC and
the other members of the AAC Consolidated Tax Group) may
no longer be available for use by the AAC Consolidated Tax
Group or any of the remaining members of the AAC
Consolidated Tax Group to reduce the U.S. federal income tax
liabilities of the AAC Consolidated Tax Group. AFG, AAC and
their affiliates entered into a tax sharing agreement that would
require AFG to make certain tax elections that could mitigate the
loss of NOLs and other tax attributes resulting from a
deconsolidation of AAC from the Ambac Consolidated Group.

However, in the event of a deconsolidation, certain other
benefits resulting from U.S. federal income tax consolidation
may no longer be available to the Ambac Consolidated Group,
including certain favorable rules relating
transactions
occurring between members of the Ambac Consolidated Group
and members of the AAC Consolidated Tax Group. A
deconsolidation of AAC from the Ambac Consolidated Group
could have a material adverse impact on our results of
operations and financial condition.

If surplus notes or other obligations are characterized as
equity of AAC, the AAC NOLs (and certain other tax
attributes or tax benefits of the Ambac Consolidated
Group) may be subject to limitation under Section 382 of
the Tax Code.

It is possible that certain surplus notes or other obligations may
be characterized as equity of AAC for U.S. federal income tax
purposes. Such characterization could result in an “ownership
change” of AAC for purposes of Section 382 of the Tax Code. If
such an ownership change were to occur, the value and amount
of the AAC NOLs would be substantially impaired, increasing
the U.S. federal income tax liability of AAC and materially
reducing the value of AAC’s stock owned by AFG and the
potential for future dividend payments from AAC to AFG.

Deductions with respect to interest accruing on certain
surplus notes may be eliminated or deferred until
payment.

To the extent certain surplus notes are characterized as equity
for U.S. federal income tax purposes, accrued interest will not
be deductible by AAC. In addition, even if such surplus notes
are characterized as debt for U.S. federal income tax purposes,
the deduction of interest accruing on such surplus notes may be
deferred until paid or eliminated in part depending upon (i) the
terms of any deferral and payment provisions provided in such
surplus notes, (ii) whether such surplus notes have “significant
original issue discount,” and (iii) the yield to maturity of surplus
notes. To the extent deductions with respect to interest are
eliminated or deferred, the U.S. federal income tax of AAC or
the members of the AAC Consolidated Tax Group as the case
may be, could be increased reducing the amount of cash
available to pay its obligations and, therefore, the value of
AAC’s stock owned by AFG and the potential for future
dividend payments from AAC to AFG.

Risks Related to Strategic Plan

Ambac is planning to further develop and expand the
Specialty Property and Casualty Program Insurance
business and
the Managing General Agency/
Underwriting business; however, such plans may not be
realized, or if realized, may not create value and may
negatively impact our financial results.

The value of AFG's common stock depends in part upon the
ability of Ambac to generate earnings apart from AAC. Ambac
is planning to further develop and expand the Specialty Property
and Casualty Program Insurance Business and the Managing
General Agency/Underwriting business. Such plans may involve
additional acquisitions of assets or existing businesses and the
development of businesses through new or existing subsidiaries.

| Ambac Financial Group, Inc. 26 2021 FORM 10-K |

It is not possible at this time 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 our due diligence
investigations 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 effect 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 assurances can be
given that Ambac will successfully execute its 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. The failure to manage our growth
effectively could have a material adverse effect on our business,
financial condition and results of operations.

Moreover, Ambac’s ability to enter into new businesses may be
constrained, given the financial condition of AAC, counterparty
or rating agency concerns about AAC's ability to mitigate
insured portfolio losses or recover losses in litigation, the
difficulty of leveraging or monetizing Ambac’s other assets, and
the uncertainty of Ambac's ability to raise capital. Due to these
factors, as well as those relating to AAC as described in this
Item 1A. Risk Factors, the value of our securities is speculative.

Should changes in Ambac’s circumstances or financial condition
or in the political, economic and/or legal environment occur,
there can be no assurance that all or any part of our strategy and/
or initiatives will not be abandoned or amended to take account
of such changes. Any such adjustment or abandonment may
have an material adverse effect on our securities.

Item 1B. Unresolved Staff Comments — No

matters require disclosure.

Item 2. Properties

The executive office of Ambac is located at One World Trade
Center, New York, New York 10007, and consists of 46,927
square feet of office space, under a sublease agreement that
expires in January 2030. Ambac continues to hold a lease at
One State Street Plaza that expires in December 2029 (25,871
square feet). Ambac has sublet this space through its expiration
date. During 2020 and 2021, Ambac temporarily leased
additional office space in New Jersey related to its COVID
response plan. The New Jersey lease expired in September 2021.

Ambac UK maintains an office in London, England, which
consists of 3,514 square feet of office space, under a lease
agreement that expires in October 2025.

Xchange maintains office space in (i) Armonk, NY which
consists of 2,754 square feet under a lease agreement that
expires in July 2028 and (ii) Indianapolis, IN which consists of
3,678 square feet under a lease agreement that expires in March
2024.

Ambac maintains a disaster recovery site in Kingston, NY which
consists of 12,374 square feet under a lease that expires in
March 2024. During a disaster event, the site would allow
employees in our New York offices an alternative office
location.

Item 3. Legal Proceedings

Refer to Notes to the Consolidated Financial Statements—Note
19. Commitments and Contingencies included in Part II, Item 8
in this Form 10-K for a discussion on legal proceedings against
Ambac.

Item 4. Mine Safety Disclosures — Not

applicable.

PART II

Item 5. Market for Registrant's Common

Equity, Related Stockholder Matters
and Issuer Purchases of Equity
Securities

Market Information
Since February 3, 2020, the Company 's common stock and
warrants have been trading on the NYSE under the symbol
“AMBC" and "AMBC WS", respectively. Prior to being listed
on the NYSE, the Company's common stock and warrants were
listed on NASDAQ under
the symbols “AMBC” and
"AMBCW," respectively.

Holders
On February 22, 2022, there were 20 stockholders of record of
AFG’s common stock and 60 holders of record of AFG's
warrants.

Dividends
The Company did not pay cash dividends on its common stock
during 2021 and 2020. Information concerning restrictions on
the payment of dividends from Ambac's insurance subsidiaries is
set forth in Item 1 above under the caption “Dividend
Restrictions, Including Contractual Restrictions" and in Note 8.
Insurance Regulatory Restrictions to the Consolidated Financial
Statements included in Part II, Item 8 in this Form 10-K.

Purchases of Equity Securities By the Issuer and
Affiliated Purchasers
The following table summarized Ambac's share purchases
during the fourth quarter of 2021. When restricted stock unit
awards issued by Ambac vest or settle, they become taxable
compensation to employees. For certain awards, shares may be
withheld to cover the employee's portion of withholding taxes.
In the fourth quarter of 2021, Ambac purchased shares from
employees that settled restricted stock units to meet employee
tax withholdings.

| Ambac Financial Group, Inc. 27 2021 FORM 10-K |

October
2021

November
2021

December
2021

Fourth
Quarter
2021

.........

Total Shares
Purchased (1)
Average Price
Paid Per Share ...... $
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan ..

Maximum
Number of Shares
That may Yet be
Purchased Under
the Plan .................

8,057

1,342

—

9,399

14.38

16.49

— $

14.68

—

(1) There were no other repurchase of equity securities made during
the three months ended December 31, 2021. Ambac does not have
a stock repurchase program.

Warrants
Each warrant represents the right to purchase one share of AFG
common stock. The warrants are exercisable for cash at any
time on or prior to April 30, 2023, at an exercise price of $16.67
per share. The warrants also have a cashless exercise provision.

On June 30, 2015, the Board of Directors of AFG authorized the
establishment of a warrant repurchase program that permits the
repurchase of up to $10 million of warrants. On November 3,
2016, the Board of Directors of AFG authorized an additional
$10 million to the warrant repurchase program. The remaining
aggregate authorization at December 31, 2021, is $11.9 million.
Ambac currently has 4,877,617 warrants outstanding.

Stock Performance Graph

The following graph compares the performance of an investment in our common stock from the close of business on December 30, 2016,
through December 31, 2021, with the Russell 2000 Index and S&P Completion Index. The graph assumes $100 was invested on
December 30, 2016, in our common stock at the closing price of $22.50 per share and at the closing price for the Russell 2000 Index and
S&P Completion Index. It also assumes that dividends (if any) were reinvested on the date of payment without payment of any
commissions. The performance shown in the graph represents past performance and should not be considered an indication of future
performance.

$200

$150

$100

$50

2016

2017

2018

2019

2020

2021

Ambac Financial Group, Inc.

Russell 2000 Index

S&P Completion Index

Ambac Financial Group, Inc. .........................................
Russell 2000 Index .........................................................
S&P Completion Index ..................................................

December 31,

2016
$100
$100
$100

2017
$71
$113
$116

2018
$77
$100
$104

2019
$96
$123
$131

2020
$68
$147
$171

2021
$71
$167
$191

| Ambac Financial Group, Inc. 28 2021 FORM 10-K |

Item 6. Selected Financial Data

Reserved

Item 7. Management’s Discussion and

Analysis of Financial Condition and
Results of Operations

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
the perspective of
results of
management of our
operations, cash flows, liquidity and certain other factors
that may affect future results;

financial condition,

from

• Context to the 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 Item 8 of this Report and
the matters described under Item 1A. Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2021.
Refer to Item 1. Business and Note 1. Background and Business
Description 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:

Executive Summary ..........................................................
Critical Accounting Estimates .........................................
Financial Guarantees in Force ........................................
Results of Operations .......................................................
Liquidity and Capital Resources ......................................
Balance Sheet ...................................................................
Accounting Standards ......................................................
Ambac Assurance Statutory Basis Financial Results ......
Ambac UK Financial Results under UK Accounting
Principles .........................................................................
Non-GAAP Financial Measures ......................................

Page
29
32
34
42
46
48
54
54

56
57

EXECUTIVE SUMMARY ($ in millions)

AFG
During 2021, AFG progressed the development of its specialty
property
business.
program
Developments included the following:

insurance

casualty

and

• AFG contributed $92 of additional capital to Everspan.

• Everspan received an 'A-' Financial Strength Rating from

AM Best in February 2021.

• Everspan launched its specialty insurance program business

in May 2021.

• To support expansion of the admitted insurance component
of its business, during 2021 Everspan entered into stock
purchase agreements to acquire four insurance shell
companies. Such acquisitions will enhance Everspan's
capabilities to launch new admitted programs, develop
innovative products and provide enhanced flexibility to
foster strategic relationships with prospective program
partners. On October 1, 2021, Everspan completed the
acquisition of Providence Washington Insurance Company
(“PWIC”) from a subsidiary of Enstar Group Limited.
PWIC holds certificates of authority in forty-seven states
and territories. PWIC's legacy liabilities were fully ceded
to reinsurers and Everspan also benefits from an unlimited,
uncapped indemnity from Enstar Holdings (US) to mitigate
any residual risk to these reinsurers. On January 3, 2022,
Everspan completed the acquisition of the 21st Century
Companies (three carriers) from a national insurance group
that has a Financial Strength Rating of “A” (Excellent)
from AM Best. The 21st Century Companies collectively
possess certificates of authority in thirty-nine states. All
legacy liabilities remain with affiliates of the sellers
through reinsurance and contractual indemnities. The 21st
Century Companies will be re-named during 2022.

• During 2021, AFG made minority investments in certain
insurance related businesses, including insurtech platforms,
that we believe will be synergistic to our specialty property
& casualty program insurance or Managing General
Agency/Underwriting businesses.

• See below AAC and Subsidiaries for the various 2021

activities relating to the financial guarantee business

In addition to its focus on Xchange, AFG is actively seeking to
expand the MGA/U business though additional acquisitions and
development of new MGA/U companies.

Net Assets

As of December 31, 2021, net assets of AFG, excluding its
equity investments in subsidiaries, were $269.

($ in millions)

Cash and short-term investments .................................

Other investments (1)

.....................................................

Other net assets ............................................................

Total

125

130

269

(1)

Includes surplus notes (fair value of $90) issued by AAC that are
eliminated in consolidation.

AAC and Subsidiaries
A key strategy for Ambac is to increase the value of its
investment in AAC by actively managing its assets and
liabilities. Asset management primarily entails maximizing the
risk-adjusted return on non-VIE invested assets and managing
liquidity to help ensure resources are available to meet
operational and strategic cash needs. These strategic cash needs
include activities associated with Ambac's liability management
and loss mitigation programs.

| Ambac Financial Group, Inc. 29 2021 FORM 10-K |

Asset Management

internal

Investment portfolios are subject
investment
guidelines, as well as limits on types and quality of investments
imposed by insurance laws and regulations. The investment
portfolios of AAC and Ambac UK hold fixed maturity securities
and various pooled investment funds. Refer to Note 4.
Investments to the Consolidated Financial Statements, included
in Part II, Item 8 in this Form 10-K for further details of fixed
maturity investments by asset category and pooled investment
funds by investment type.

At December 31, 2021, Ambac and its subsidiaries owned $609
of distressed Ambac-insured bonds,
including significant
concentrations of insured Puerto Rico and RMBS bonds.

Subject to internal and regulatory guidelines, market conditions
and other constraints, Ambac may continue to opportunistically
purchase or sell Ambac-insured securities, surplus notes and/or
other Ambac issued securities, and may consider opportunities
to exchange securities issued by it from time to time for other
securities issued by it.

Liability and Insured Exposure Management

AAC's Risk Management Group focuses on the implementation
and execution of risk reduction, defeasance and loss recovery
strategies. Analysts evaluate the estimated timing and severity
of projected policy claims as well as the potential impact of loss
mitigation or remediation strategies in order to target and
thereof, for commutation,
prioritize policies, or portions
reinsurance, refinancing, restructuring or other risk reduction
strategies. For targeted policies, analysts will engage with
issuers, bondholders and other economic stakeholders
to
negotiate, structure and execute such strategies. During 2021,
Ambac completed risk reduction transactions consisting of quota
share reinsurance, refinancings, and commutations of $2,695, of
which, quota share reinsurance represented $1,695.

The following table provides a comparison of total, adversely
classified ("ACC") and watch list credit net par outstanding in
the insured portfolio at December 31, 2021 and 2020. Net par
exposure within the U.S. public finance market includes 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.

($ in billions)
December 31,

2021

2020 Variance

Total ........................ $ 28,020 $ 33,888 $

(5,868)

ACC ........................ $

6,361 $

8,458 $

(2,097)

Watch List .............. $

3,824 $

4,720 $

(896)

(17) %

(25) %

(19) %

The decrease in total, ACC and watch list credit net par
outstanding resulted from active de-risking initiatives, as noted
above, as well as scheduled maturities, amortizations, refundings
and calls.

We have been paying claims for several years on most of our
exposure to Puerto Rico, which consists of several different
issuing entities (all below investment grade). These issuing
entities, which have been part of the PROMESA restructuring
process that began in 2016, each have their own credit risk

profile attributable to discrete revenue sources, direct general
obligation pledges, and/or general obligation guarantees.

resolve

On January 18, 2022, Judge Swain, U.S. District Court for the
District of Puerto Rico, confirmed
the modified Eighth
Amended Plan of Adjustment for the Commonwealth of Puerto
Rico ("Eighth Amended POA"). On January 20, 2022, Judge
Swain approved the Qualifying Modifications for PRIFA and
CCDA ("PRIFA QM" and "CCDA QM", respectively).
Although the Eighth Amended POA, the PRIFA QM and CCDA
QM remain subject to appeal (see Risk Factors— "Insured
Portfolio Losses"), the Eighth Amended POA, PRIFA QM, and
CCDA QM are expected to become effective on or before
March 15, 2022. Consummation of the plan of adjustment and
the PROMESA
qualifying modifications will
restructuring process for the GO, PBA, PRIFA and CCDA
issuing entities that have portions of their bonds insured by
AAC. On the effective date of the Eighth Amended POA,
PRIFA QM, and CCDA QM, and pursuant to bondholder
elections, (i) all of the remaining outstanding AAC-insured GO
and PBA bonds will be satisfied and eliminated via
commutation or acceleration, and (ii) about 39% and 19% of the
par of AAC's outstanding AAC-insured PRIFA and CCDA
bonds, respectively, will be reduced via commutation, with the
remainder of those bonds (belonging to bondholders who elected
not to commute their AAC Insurance Policies) being deposited
into trusts together with such policies and the bondholders'
respective shares of distributed Eighth Amended POA, PRIFA
QM, or CCDA QM consideration. Those bondholders
participating in the trusts are expected to receive scheduled
payments from the applicable trust, unless Ambac elects, in its
sole discretion, to pay all or a portion of the outstanding par
amounts of the AAC-insured bonds in such trust.

AAC-insured bonds of PRHTA are subject to the PRHTA POA,
a separate plan of adjustment that is expected to be filed prior to
March 31, 2022, with a confirmation hearing to follow later in
2022.

Refer to Part II, Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations, Financial
Guarantees in Force, in this Annual Report on Form 10-K for
additional information regarding the different issuing entities
that encompass Ambac's exposures to Puerto Rico.

COVID-19
The COVID-19 pandemic had, and to a lesser degree, continues
to have, an impact on general economic conditions; including,
but not limited to, higher unemployment; volatility in the capital
markets; closure or severe curtailment of the operations and,
hence, revenues, of many businesses and public and private
enterprises to which we are directly or indirectly exposed.

COVID-19 and the public health responses by the US federal
and state governments at the onset of the pandemic resulted in a
shut down for several months of significant portions of the US
economy, including areas that Ambac's insured obligors rely
upon to generate the revenues and cash flows necessary to
service debts we insure. In the U.S. and Europe, where most of
Ambac's financial guaranty exposure is located, significant fiscal
stimulus measures, monetary policy actions and other relief
measures helped to moderate the negative economic impacts of
COVID-19 and supported the economic recovery which began

| Ambac Financial Group, Inc. 30 2021 FORM 10-K |

in the second half of 2020 and continues into 2022. As of
December 31, 2021, there have been no defaults of Ambac-
insured obligations as a result of the COVID-19 pandemic.

the resulting delays

Despite the significant overall benefit of the above relief
measures, which were designed to help mitigate the economic
impact of the COVID-19 pandemic generally, certain of these
measures may still adversely affect Ambac's insured portfolio.
In particular, this includes the U.S. government's temporary
relief measures that required mortgage loan servicers to offer
relief to borrowers who suffer hardship as a result of COVID-19.
These relief measures included moratoriums on foreclosures and
evictions as well as the expansion of forbearance and subsequent
repayment options. While these relief measures have largely
in starting mortgage
since expired,
foreclosure processes and
impact of potential post-
the
forbearance related mortgage loan modifications may have an
adverse
transactions.
Consequently, we have anticipated that we will experience an
increase in claim payments for certain of our insured RMBS
obligations following the resumption of foreclosure activity and
the
loan
implementation of post-forbearance mortgage
modifications. However, since the onset of the COVID-19
pandemic, much of the potential increase in claim experience
has been offset by the benefit to excess spread within the
securitization structures as a result of the reduction in interest
rates, which is expected to result in higher excess spread
recoveries to Ambac.

impact on our

insured RMBS

counterparties. Each of

The impact from the COVID-19 pandemic on Ambac also
includes the ability of our counterparties to pay their obligations
when due, most notably AAC's reinsurers for their portion of
future financial guaranty claim payments. Ambac has reinsured
approximately 17.9% of its gross par outstanding to five
reinsurance
reinsurance
counterparties (i) is experienced in the business of reinsuring
and/or writing financial guaranty insurance and (ii) have current
ratings of A+ (by S&P) or better and have collateralization or
triggers upon downgrade within Ambac's
replacement
reinsurance agreements. Ambac actively monitors each of these
reinsurance entities and currently believes they have the ability
to perform under their respective reinsurance policies, but this is
subject to change.

these

Given the economic uncertainties associated with the duration
and effects of the COVID-19 pandemic, it is impossible to fully
predict all of its consequences and, as a result, it is possible that
our future operating results and financial condition may be
materially adversely affected. Refer to "Financial Guarantees In
Force,"
"Balance Sheet
Commentary" for further financial details on the current impact
from COVID-19.

"Results of Operations" and

With regard to Ambac's new business strategic objective, we
continue to evaluate opportunities in a disciplined manner. Our
evaluation process
impact of
incorporates
COVID-19 on historical and prospective business results.

the perceived

Financial Statement Impact of Foreign Currency
The impact of foreign currency as reported in Ambac's
Consolidated Statement of Total Comprehensive Income (Loss)
for the year ended December 31, 2021 included the following:

($ in millions)
Net income (1)
......................................................................
Gain (losses) on foreign currency translation (net of tax) ..

Unrealized gains (losses) on non-functional currency
available-for-sale securities (net of tax) .............................
Impact on total comprehensive income (loss)

(7)

(8)

(12)

(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 and accordingly, we recognized net foreign currency
transaction gains/(losses) as a result of changes to foreign currency
rates through our Consolidated Statement of Total Comprehensive
Income (Loss). Refer to Note 2. Basis of Presentation and
Significant Accounting Policies to the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report in
Form 10-K for further details on transaction gains and losses.

Future changes to currency rates, may adversely affect our
financial results. Refer to Part II, Item 7A "Quantitative and
Qualitative Disclosures about Market Risk"
further
information on the impact of future currency rate changes on
Ambac's financial instruments.

for

LIBOR Sunset
In July 2017, the Financial Conduct Authority, the authority that
regulates LIBOR, announced its intention to stop compelling
banks to submit rates for the calculation of LIBOR after 2021.
The Alternative Reference Rates Committee (‘ARRC’), a group
of private-market participants convened by the Federal Reserve
Board and the Federal Reserve Bank of New York to help
ensure a successful transition from U.S. dollar LIBOR (‘USD-
LIBOR’) to a more robust reference rate, proposed that the
Secured Overnight Financing Rate (‘SOFR’) represents the best
alternative to USD-LIBOR for use in derivatives and other
financial contracts that are currently indexed to USD-LIBOR.
ARRC has proposed a transition plan with specific steps and
timelines designed to encourage the adoption of SOFR and
guide the transition to SOFR from USD-LIBOR. The Financial
Conduct Authority in the United Kingdom and other regulatory
bodies have issued statements encouraging cessation of new
transactions referencing USD LIBOR after December 31, 2021,
while supporting extension of the publication of major USD-
LIBOR tenors to mid-2023 to allow additional legacy contracts
to mature on their existing terms. Organizations are currently
working on industry-wide and company-specific transition plans
related to derivatives and cash markets exposed to USD-LIBOR.

After December 31, 2021, banks ceased publishing most GBP-
LIBOR rates. In response, in October 2021, noteholders of
obligations linked to GBP-LIBOR and insured by Ambac UK
consented to the replacement of GBP-LIBOR references with
compounded Sterling Overnight Index Average ("SONIA") plus
a credit adjustment spread effective on the first interest payment
date in 2022. Ambac therefore no longer insures any obligations
linked to Non-USD LIBOR.

As of December 31, 2021, the Company has exposure to LIBOR
in the following areas: (i) the financial guarantee insured
portfolio, (ii) the Sitka AAC Note (as defined in Note 1.
Background and Business Description to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-
K) included in long-term debt, (iii) certain invested assets and
interest rate derivatives.

| Ambac Financial Group, Inc. 31 2021 FORM 10-K |

Ambac has reviewed its financial guarantee portfolio to identify
insured transactions that it believes may be impacted by the
transition from LIBOR. The review focused on insured issues
that were scheduled or projected to have an outstanding
principal balance as of December 31, 2021. The Company
reviewed the governing documents' provisions for the setting of
interest rates in the event LIBOR is unavailable ("fallback
language"). The Company has initiated a dialogue with relevant
trustees, calculation agents, auction agents, servicers and other
parties responsible for implementing the rate change in these
transactions. Most have not yet committed to specific courses of
action, but the passage of legislation in New York State and the
expectation that similar federal legislation will be enacted
should facilitate greater clarity for those transactions that do not
have clear fallback language.

The Sitka AAC Note is referenced to 3-month USD-LIBOR and
has a final maturity of July 6, 2026. The Sitka AAC Note
includes specific fallback language that addresses both the
calculation of interest using a replacement reference rate to 3-
month USD-LIBOR and the circumstances that would trigger
use of the replacement rate.

instruments' fallback

investments, we are working with our

Ambac's
investment and derivative portfolios have been
evaluated to assess the risk of LIBOR unavailability based on
the respective
language and parties
responsible for implementing the alternative rates. Investments
that are Ambac-insured securities are being addressed through
efforts on the financial guarantee portfolio described above. For
other
investment
managers to ensure LIBOR indexed positions in our portfolio
contain unambiguous fallback language or will be governed by
relevant legislation. Ambac's centrally cleared interest rate
swaps are expected to follow LIBOR transition steps outlined by
the International Swaps and Derivatives Association, Inc.
("ISDA"). Our non-cleared interest rate swaps are all governed
by New York law and either have offsetting LIBOR exposure
with a single counterparty that serves as calculation agent
responsible for rate changes or have Ambac as the calculation
agent.

Given the uncertainty of the ultimate timing of the LIBOR
sunset, as well as the lack of clarity on decisions that parties
responsible for calculating interest rates will make and the
reaction of impacted parties as well as the unknown level of
interest rates when the change occurs, the Company cannot at
this time predict the impact of the discontinuance of LIBOR, if it
occurs, on every obligation the Company guarantees or on its
other LIBOR
instruments. For more
financial
information, see the the risk factor "Uncertainties regarding the
expected discontinuance of the London Inter-Bank Offered Rate
or any other interest rate benchmark could have adverse
consequences" found in Part I, Item 1A of this Form 10-K.

indexed

CRITICAL ACCOUNTING POLICIES
AND ESTIMATES

Ambac's Consolidated Financial Statements have been prepared
in accordance with GAAP. This section highlights accounting
estimates management views as critical because they are most
important to the portrayal of the Company's financial condition;
and require management to make difficult and subjective

judgments regarding matters that are inherently uncertain and
subject to change. These estimates are evaluated on an on-going
basis considering historical developments, political events,
market conditions, industry trends and other information. There
can be no assurance that actual results will conform to estimates
and that reported results of operations will not be materially
adversely affected by the need to make future accounting
adjustments to reflect changes in these estimates from time to
time.

(iii) valuation of deferred

Management has identified the following critical accounting
policies and estimates: (i) valuation of financial guarantee loss
and loss expense reserves, (ii) valuation of certain financial
instruments and
tax assets.
Management has discussed each of these critical accounting
policies and estimates with the Audit Committee, including the
reasons why they are considered critical and how current and
anticipated
those determinations.
Additional information about these policies can be found in
Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements included in
Part II, Item 8 in this Form 10-K.

future events

impact

Valuation of Financial Guarantee Losses and
Loss Expense Reserves (including Subrogation
Recoverables)
The loss and loss expense reserves and subrogation recoverable
assets (collectively defined as "loss reserves") discussed in this
section relate only
to Ambac’s non-derivative financial
guarantee insurance policies issued to beneficiaries, including
unconsolidated VIEs. A loss reserve is recorded on the balance
sheet on a policy-by-policy basis at the present value ("PV") of
expected net claim cash outflows or expected net recovery cash
inflows, discounted at risk-free rates. The estimate for future net
cash flows consider the likelihood of all possible outcomes that
may occur from missed principal and/or interest payments on
the insured obligation. This estimate also considers future
recoveries related to breaches of contractual representations and
warranties by RMBS
remediation
transaction
strategies, excess spread and other contractual or subrogation-
related cash flows. Ambac’s approach to resolving disputes
involving contractual breaches by transaction sponsors or other
third parties has included negotiations and/or pursuing litigation.
Ambac does not estimate recoveries for litigations where its sole
claim is for fraudulent inducement, since any remedies under
such claims would be non-contractual. Nor does Ambac include
potential recoveries attributable to pre-judgment interest in the
estimate of subrogation recoveries.

sponsors,

The evaluation process for expected future net cash flows is
subject to certain estimates and judgments regarding the
probability of default by the issuer of the insured security,
probability of negotiation or settlement outcomes (which may
include commutation, litigation and other settlements, and/or a
refinancing), probability of a restructuring outcome (which may
include payment moratoriums, debt haircuts and/or subsequent
recoveries) and the expected loss severity of credits for each
insurance contract.

As the probability of default for an individual credit increases
and/or the severity of loss given a default increases, our loss
reserve for that insured obligation will also increase. Political,

| Ambac Financial Group, Inc. 32 2021 FORM 10-K |

economic, credit or other unforeseen events could have an
adverse impact on default probabilities and loss severities. The
loss reserves for many transactions are derived from the issuer’s
creditworthiness. For public finance issuers, loss reserves will
consider not only creditworthiness but also political dynamics
and economic status and prospects. The loss reserves for
transactions which have no direct issuer support, such as most
structured finance exposures, including RMBS and student loan
exposures, are derived from the default activity and the
estimated loss given default of the underlying collateral
supporting the transactions. In addition, many transactions have
a combination of issuer/entity and collateral support. Loss
reserves reflect our assessment of the transaction’s overall
structure, support and expected performance. Loss reserve
volatility will be a direct result of the credit performance of our
insured portfolio, including the number, size, bond types and
quality of credits included in our loss reserves; our ability to
execute workout strategies and commutations; economic and
market conditions; and management's judgments with regards to
the current performance and future developments within the
insured portfolio. The number and severity of credits included in
our loss reserves depend to a large extent on transaction specific
attributes, but will generally
increase during periods of
economic stress and decline during periods of economic
prosperity. Reinsurance contracts mitigate our loss reserves but
since Ambac currently has minimal exposure ceded to reinsurers
on credits with loss reserves, the existing reinsurance contracts
are unlikely to have a significant effect on loss reserve volatility.
Loss reserve volatility will also be materially impacted by
changes in interest rates from period to period.

The table below indicates the gross par outstanding and gross
loss reserves (including loss expenses) related to policies in
Ambac’s Financial Guarantee loss and loss expense reserves at
December 31, 2021 and 2020:

Gross Par
Outstanding
(1) (2)

Gross Loss and
Loss Expense
Reserves
(1) (3) (4)

December 31, 2021

Structured Finance .....................
Domestic Public Finance ...........
Other ..........................................
Loss expenses ............................
Totals
December 31, 2020
Structured Finance .....................
Domestic Public Finance ...........
Other ..........................................
Loss expenses ............................
Totals

2,371 $
2,742
1,189
—
6,302 $

2,945 $
3,016
1,612
—
7,573 $

(1,178)
562
17
45
(554)

(1,212)
724
23
68
(397)

(1) Ceded par outstanding on policies with loss reserves and ceded
loss and loss expense reserves are $784 and $24 respectively, at
December 31, 2021, and $739 and $33, respectively at
December 31, 2020. Ceded loss and loss expense reserves are
included in Reinsurance recoverable on paid and unpaid losses.

(2) Gross Par Outstanding includes 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
bond.

(3) Loss and Loss Expense reserves at December 31, 2021, of $(554)
are included in the balance sheet in the following line items: Loss
and loss expense reserves: $1,538 and Subrogation recoverable:
(2,092). Loss and Loss Expense reserves at December 31, 2020, of
$(397) are included in the balance sheet in the following line
items: Loss and loss expense reserves: $1,759 and Subrogation
recoverable: $2,156.

(4) Ambac records as a component of its loss and loss expense
reserves, estimated recoveries related to securitized loans in RMBS
transactions that breached certain representations and warranties.
Ambac has recorded gross estimated recoveries of $1,730 and
$1,751 at December 31, 2021 and 2020, respectively.

See Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements, included in
Part II, Item 8 in this Form 10-K for a description of the cash
flow and statistical methodologies used to develop loss reserves.
The majority of our large loss reserves utilize the cash flow
method of reserving. Various cash flow scenarios are developed
to represent the range of possible outcomes and resultant future
claim payments and timing. Scenarios and probabilities of each
are adjusted regularly to reflect changes in status, outlook and
our analysis and views. Significant judgment is used to develop
the cash flow assumptions and related probabilities, and there
can be no certainty that the scenarios or probabilities will not
deviate materially from ultimate outcomes.

include

the modeling of an

• In some cases, such as RMBS and student loans, cash flow
projections
issuer or
transaction’s future revenues and expenses to determine the
resources available to pay debt service on our insured
obligations. Key assumptions impacting RMBS cash flow
models include projected home price appreciation and
interest rates A component of our RMBS loss reserve
to
estimate
securitized loans in such transactions that breached certain
representations and warranties ("R&W"). Key assumptions
impacting student loan cash flow models include projected
loan defaults, recoveries and interest rates.

includes subrogation

recoveries

• In other cases, such as many public finance exposures, we
consider the issuer's overall ability and willingness to pay
as it relates to the existing fiscal, economic, legal,
restructuring and/or political framework relevant to a
particular exposure or group of exposures. We then
develop multiple scenarios where issuer debt service is
paid, missed and/or haircut with claims paid then modeled
for any recovery amount (and potential variability of the
recovery amount) and timing. There is no certainty our
assumptions as to scenarios or probabilities will not be
subject to material changes as developments occur.

• In estimating loss reserves, we also incorporate scenarios
which represent the potential outcome of remediation
include (i) a
strategies. Remediation scenarios may
potential refinancing of the transaction by the issuer;
(ii) the issuer’s ability to redeem outstanding securities at a
discount, thereby increasing the structure’s ability to absorb
future losses; and (iii) our ability to terminate, restructure
or commute the policy in whole or in part. The remediation
scenarios and the related probabilities of occurrence vary
by policy depending on ongoing and expected discussions
and negotiations with issuers and/or investors. In addition
to commutation negotiations that are underway with
in various forms, our reserve
various counterparties

| Ambac Financial Group, Inc. 33 2021 FORM 10-K |

estimates may also include scenarios which incorporate our
ability and/or expectation to commute additional exposure
with other counterparties.

Valuation of Certain Financial Instruments
The Fair Value Measurement Topic of the ASC requires
financial instruments to be classified within a three-level fair
value hierarchy. The fair value hierarchy,
the financial
instruments classified within each level, our valuation methods,
inputs, assumptions and the review and validation procedures
over quoted and modeled pricing are further detailed in Note 5.
Fair Value Measurements
the Consolidated Financial
to
Statements included in Part II, Item 8 in this Form 10-K.

The level of judgment in estimating fair value is largely
dependent on the amount of observable market information
available to fair value a financial instrument, which is also
determinative of where the financial instrument is classified in
the fair value hierarchy. Level 3 instruments are valued using
models which use one or more significant inputs or value drivers
that are unobservable and therefore require significant judgment.
Level 3 financial instruments which are material include certain
invested assets, uncollateralized
interest rate swaps and
investments and loan receivables of consolidated VIEs. Model-
derived valuations of Level 3 financial instruments incorporate
estimates of the effects of Ambac's own credit risk and/or
counterparty credit risk, which can be complex and judgmental.
Furthermore, Level 3 investments and loan receivables of
consolidated VIEs incorporate estimates of Ambac's financial
guarantee cash flows, including future premiums and losses.
Such cash
regarding
prepayments of VIE debt, loss probabilities and loss severities,
all of which are inherently uncertain.

flow estimates

judgments

require

All models and related assumptions are continuously re-
evaluated by management and enhanced, as appropriate, based
on improvements in information and modeling techniques. The
re-evaluation process includes a quarterly meeting of senior
Finance personnel to review and approve changes to models and
key assumptions.

As a result of the significant judgment for the above-described
instruments, the actual trade value of the financial instrument in
the market, or exit value of the financial instrument owned by
Ambac, may be significantly different from its recorded fair
value.

Valuation of Deferred Tax Assets
Our provision for taxes is based on our income, statutory tax
rates and tax planning opportunities available to us in the
jurisdictions in which we operate. Tax laws are complex and
subject to different interpretations by the taxpayer and respective
governmental
is
taxing authorities. Significant
required in determining our tax expense and in evaluating our
tax positions. We review our tax positions quarterly and adjust
the balances as new information becomes available. Deferred tax
assets arise because of temporary differences between the
financial reporting and tax bases of assets and liabilities, as well
as from net operating loss ("NOL"). More specifically, deferred
tax assets represent a future tax benefit that results from losses
recorded under GAAP in a current period which are only

judgment

deductible for tax purposes in future periods and NOL carry
forwards.

Valuation allowances are established to reduce deferred tax
assets to an amount that “more likely than not” will be realized.
On a quarterly basis, management identifies and considers all
available evidence, both positive and negative, in making the
determination with significant weight given to evidence that can
be objectively verified. Positive evidence includes removal of
the going concern independent auditor opinion in 2018, the
Segregated Account's February 12, 2018
from
rehabilitation, Everspan's receipt of an 'A-'' Financial Strength
Rating from AM Best, the launch of a specialty program
property and casualty insurance business, and AFG's acquisition
of a majority interest in an MGA/U business. Negative evidence
includes the potential for unrecognized future insurance tax
losses; cumulative pre-tax losses in recent years; uncertainty
regarding timing and magnitude of RMBS R&W litigation
recoveries; and no new financial guarantee business.

exit

The level of deferred tax asset recognition is influenced by
management’s assessment of future expected taxable income,
which depends on the existence of sufficient taxable income
within the carry forward periods available under the tax law. As
a result of the above-described risks and uncertainties associated
with future operating results, management believes it is more
likely than not that the Company will not generate sufficient
taxable income to recover the U.S. federal deferred tax asset and
therefore has a full valuation allowance. To the extent such risks
and uncertainties are resolved, Ambac may have the ability to
establish a history of making reliable estimates of future income
which could ultimately result in a reduction to the deferred tax
asset valuation allowance. See Note 16. Income Taxes to the
Consolidated Financial Statements, included in Part II, Item 8 in
this Form 10-K for additional information on the Company's
deferred income taxes.

FINANCIAL GUARANTEES IN FORCE
($ in millions)

Financial guarantee products were sold in three principal
markets: U.S. public finance, U.S. structured finance and
international finance. The following table provides a breakdown
of guaranteed net par outstanding by market at December 31,
2021 and 2020. 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
(“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 or pre-
refunded and excludes exposure of the policies insuring the
Sitka Senior Secured Notes and LSNI Secured Notes as defined
in Note 1. Background and Business Description to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K.

insuring variable

interest entities

| Ambac Financial Group, Inc. 34 2021 FORM 10-K |

December 31,
Public Finance (1) (2)
Structured Finance ........................................

International Finance ....................................

2021

2020

4,904

10,756

6,337

12,054

...................................... $ 12,360 $ 15,497

Total net par outstanding

$ 28,020 $ 33,888

(1)

Includes $5,490 and $5,575 of Military Housing net par
outstanding at December 31, 2021 and 2020, respectively.

(2) Includes $1,054 and $1,070 of Puerto Rico net par outstanding at

December 31, 2021 and 2020, respectively.

Below we will discuss the significant exposures in our insured
portfolio relating to each of the three markets. See Note 6.
Financial Guarantees in Force to the Consolidated Financial
Statements, included in Part II, Item 8 in this Form 10-K for
exposures by bond type.

U.S. Public Finance Insured Portfolio

Ambac’s portfolio of U.S. public finance exposures is $12,360
in net par outstanding, representing 44% of Ambac’s net par
outstanding as of December 31, 2021, and a 20% reduction from
the amount outstanding at December 31, 2020. This reduction in
reinsurance acquired,
to additional
exposure was due
restructuring
transactions, scheduled paydowns, and early
terminations (calls, refundings and pre-refundings). While
Ambac’s U.S. public finance portfolio consists predominantly of
municipal bonds such as general obligation, revenue, and lease
and tax-backed obligations of state and local government
entities, the portfolio also includes several non-municipal types
of bonds, such as financings for not-for-profit entities and
transactions with public and private elements, which generally
finance infrastructure, housing and other public interests.

Municipal bonds are generally supported directly or indirectly
by the issuer’s taxing authority or by public sector fees and
assessments which may or may not be specifically pledged. Risk
factors in these transactions derive from the municipal issuer,
including its fiscal management, politics, and economic position,
as well as its ability and willingness to continue to pay its debt
service. Municipal bankruptcies and similar proceedings, while
still relatively uncommon, have occurred, exposing Ambac to
the risk of liquidity claims and ultimate losses if issuers cannot
successfully adjust their liabilities without impairing creditors.

Public/private transactions are generally structured to achieve
their targeted public interest objective without direct support
from the public sector. Some examples of this type of financing
include affordable housing, private education, privatized
military housing and student housing. Protections within these
financings provided to Ambac usually include the strength of the
financed asset’s essentiality and public purpose and may include
financial covenants, collateral and control rights. Risk factors
include financial underperformance, event risk and a shift in the
asset’s mission or essentiality. One example of this type of
financing is U.S. military housing.

• Ambac insures approximately $5,490 net par of privatized
military housing debt. The debt was issued to finance the
construction and/or renovation of housing units for military
personnel and their families on domestic U.S. military
bases. Debt service is not directly paid or guaranteed by the
U.S. Government. Rather, the bonds are serviced from the

cash flow generated in most cases by rental payments
deposited by the military directly into lockbox accounts as
part of each service personnel’s Basic Allowance for
Housing (BAH). In typically small percentages, rental
payments can also come from civilians, including retired
service personnel and US Department of Defense
contractors living on a particular base. Collateral for these
transactions includes the BAH payments as well as an
interest in the ground lease. Risk factors affecting these
transactions include ongoing base essentiality, military
deployments, the U.S. government’s commitment to fund
the BAH, marketability/attractiveness of
the on-base
housing units versus off-base housing, construction
completion, environmental remediation, utility and other
operating costs and housing management. Ambac's
exposure to privatized military housing debt is a growing
concentration given the long-dated maturity profile of the
exposure relative to faster run-off of other parts of Ambac's
insured portfolio. As of December 31, 2021, privatized
military housing represented approximately 20% of net par
outstanding.

U.S. Structured Finance Portfolio

Ambac’s portfolio of U.S. structured finance exposures is
$4,904 in net par outstanding, representing 18% of Ambac’s net
par outstanding as of December 31, 2021, and a 23% reduction
from the amount outstanding at December 31, 2020. This
reduction in exposure was primarily related to (i) residential
mortgage-backed securities ("RMBS") policies, which continued
to prepay as well as incur claims and (ii) quota share reinsurance
of a structured insurance credit.

Current insured exposures primarily include securitizations of
mortgage loans, home equity loans and student loans, in each
case where the majority of the underlying collateral risk is
situated in the United States. At December 31, 2021, RMBS
represented approximately 10% of net par outstanding.

Structured finance securitization exposures generally entail three
forms of risk: (i) asset risk, which relates to the amount and
quality of the underlying assets; (ii) structural risk, which relates
to the extent to which the transaction’s legal structure and credit
support provide protection from loss; and (iii) servicer risk,
which is the risk that poor performance at the servicer or
manager level contributes to a decline in cash flow available to
the transaction. AAC seeks to mitigate and manage these risks
through its risk management practices.

International Finance Insured Portfolio

Ambac’s portfolio of international finance insured exposures is
$10,756 in net par outstanding, representing 38% of Ambac’s
net par outstanding as of December 31, 2021, and a 11%
reduction from the amount outstanding at December 31, 2020.
This reduction in exposure was primarily the result of scheduled
maturities within investor-owned utilities, commutations and a
strengthening of the US dollar versus the British pound and the
Euro. Ambac’s international finance insured exposures include a
wide array of obligations in the international markets, including
infrastructure financings, utility obligations, whole business
securitizations (e.g., securitizations of substantially all of the
operating assets of a corporation) and sub-sovereign credits. At
December 31, 2021, sub-sovereign and investor-owned and
public utilities represented approximately 18% and 12% of net

| Ambac Financial Group, Inc. 35 2021 FORM 10-K |

par outstanding, respectively. Ambac has no insured exposure
related to emerging markets.

When underwriting transactions in the international markets,
Ambac considered the specific risks related to the particular
country and region that could impact the credit of the issuer.
These risks include the legal and political environment, capital
markets dynamics, foreign exchange issues and the degree of
governmental support. Ambac continues to assess these risks
through its ongoing risk management.

Ambac UK, which is regulated in the United Kingdom (“UK”),
had been AAC’s primary vehicle for directly issuing financial
guarantee policies in the UK and the European Union with
$10,292 net par outstanding at December 31, 2021. The
portfolio of insured exposures underwritten by Ambac UK is

Largest Insured Exposures:

financially supported exclusively by the assets of Ambac UK
and no capital support arrangements are in place with any other
Ambac affiliate.

Ambac's international net par exposures are principally in the
United Kingdom ($9,255); however, we also have exposures
with credit risk based in various EU member states, including
Austria, France, Germany and Italy ($1,284). Italy, with net par
exposure of $718 in particular has experienced economic, fiscal
and political strains since the 2008 global financial crisis such
that the likelihood of default on an insured sub-sovereign
obligation in that country is higher than when the policy was
underwritten. Ambac does not guarantee any sovereign bonds
of the above EU countries.

The table below shows Ambac’s ten largest exposures, by repayment source, as a percentage of total financial guarantee net par
outstanding at December 31, 2021 (in millions):

AUK

Risk Name
Capital Hospitals plc (2)
Anglian Water

AUK
AUK Mitchells & Butlers Finance plc-UK Pub

Securitisation

AUK
AUK
AUK

Aspire Defence Finance plc
National Grid Gas
Posillipo Finance II S.r.l

IF
IF
IF

AAC

New Jersey Transportation Trust Fund
Authority - Transportation System

IF
IF

AUK
AUK

AUK

National Grid Electricity Transmission
RMPA Services plc

Catalyst Healthcare (Manchester) Financing
plc (2)

Country-Bond
Type
UK-Infrastructure

Ambac
Ratings (1)
A-

UK-Utility

UK-Asset
Securitizations

UK-Infrastructure
UK-Utility
Italy-Sub-Sovereign

US-Lease and Tax-
backed Revenue

UK-Utility
UK-Infrastructure

UK-Infrastructure

A-

BBB

A-
BBB+
BIG

BBB-

BBB+
BBB+

BBB-

Ultimate
Maturity
Year

Net Par
Outstanding

% of Total
Net Par
Outstanding

2046

2035

2033 $

2040
2037
2035

2036

2036
2038

2040

925

905

892

836
835
661

623

557
550

541

3.3 %

3.2 %

3.0 %
3.0 %
2.4 %

2.2 %

2.0 %
2.0 %

1.9 %

Total
PF = Public Finance, SF = Structured Finance, IF = International Finance
AAC = Ambac Assurance, AUK = Ambac UK

7,325

26.2 %

(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.

(2) A portion of this transaction is insured by an insurance policy issued by AAC. AAC has issued a policy for this transaction that will only pay in the

event that Ambac UK does not pay under its insurance policies (“second to pay policy")

Net par related to the top ten exposures reduced $394 from
December 31, 2020. Exposures are impacted by changes in
foreign exchange rates, certain indexation rates, scheduled and
unscheduled paydowns and the purchase of quota share
reinsurance. As a result of recent increases in inflation, such
indexation 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) increased slightly to 26.2% at
December 31, 2021 from 22.9% at December 31, 2020.
National Grid Gas had an Ambac rating downgrade since
December 31, 2020, Excluding the top ten exposures, the
remaining insured portfolio of financial guarantees has an
average net par outstanding of $32 per single risk, with insured

exposures ranging up to $455 and a median net par outstanding
of $5.

Given that Ambac has not written any new insurance policies
since 2008, the risk exists that the insured portfolio becomes
increasingly concentrated to large and/or below investment
grade exposures.

Puerto Rico
We continue to experience stress in our exposure to Puerto Rico
(the "Commonwealth") that consists of several different issuing
entities (all below investment grade) with total net par exposure
of $1,054 as of December 31, 2021. Each issuing entity has its
own credit risk profile attributable to, as applicable, discrete
revenue sources, direct general obligation pledges and/or general

| Ambac Financial Group, Inc. 36 2021 FORM 10-K |

obligation guarantees. Refer to Part I, Item 1 in this Annual
Report on Form 10-K for additional information regarding the
different issuing entities that encompass Ambac's exposures to
Puerto Rico.

Commonwealth Plan of Adjustment (Title III Case)

On November 3, 2021, the Financial Oversight and Management
Board for Puerto Rico ("Oversight Board"), as representative of
the Commonwealth of Puerto Rico, the Puerto Rico Public
Buildings Authority, and the Employees Retirement System of
the Government of the Commonwealth of Puerto Rico, filed the
Eighth Amended Title III Joint Plan of Adjustment of the
Commonwealth of Puerto Rico, et al. ("Eighth Amended POA").
restructure
The Eighth Amended POA proposed
approximately $33,000 of debt across various Commonwealth
instrumentalities, including obligations insured by AAC, and
approximately $50,000 in pension obligations.

The Eighth Amended POA, among other things, incorporated
the settlement reflected in the PRIFA Related Plan Support
Agreement (“PRIFA PSA”) that was signed on July 27, 2021, by
the Oversight Board, as representative of the Commonwealth of
Puerto Rico, AAC, FGIC, and other holders of bonds issued by
PRIFA. The Eighth Amended POA also incorporated the
settlements reflected
the PRHTA/CCDA Related Plan
Support Agreement (“PRHTA/CCDA PSA”) dated May 5,
2021, and the Amended and Restated Plan Support Agreement
the
with
Commonwealth of Puerto Rico, PBA, and the Employee
Retirement System of the Government of the Commonwealth of
Puerto Rico ("Amended and Restated GO / PBA PSA") dated as
of July 12, 2021. The plan consideration to be made available to
creditors under these plan support agreements is described
below.

the Oversight Board, as

representative of

A hearing to confirm the Commonwealth’s plan of adjustment
was held over several days between November 8, 2021. On
January 10, 2022, Judge Laura Taylor Swain, U.S. District Court
for the District of Puerto Rico, entered an order requesting
certain changes to the Eighth Amended POA and related
materials. None of the requested changes would substantively
impact the contemplated recovery to Ambac and holders of
AAC-insured bonds under the Eighth Amended POA. The
Oversight Board filed a revised version of the plan and
corresponding materials shortly thereafter. On January 18, 2022,
Judge Swain confirmed the Eighth Amended POA. The Eighth
Amended POA, together with the qualifying modifications for
PRIFA and CCDA discussed below, are expected to have an
effective date on before March 15, 2022. Certain parties have
appealed from the order confirming the Eighth Amended POA
and have sought a stay pending this appeal; if the stay is granted,
the effective date may be delayed.

The successful consummation of the Eighth Amended POA and
qualifying modifications for PRIFA and CCDA on the effective
date will represent a significant step towards resolution of
AAC's remaining Puerto Rico exposure.

PRIFA/CCDA Qualifying Modifications (Title VI
Cases)

The PRIFA PSA and PRHTA/CCDA PSA contain provisions
requiring the parties thereto to support the terms of Title VI

Qualifying Modifications for PRIFA and CCDA. On October 8,
2021, the Oversight Board commenced Title VI proceedings and
filed applications for approval of
the proposed PRIFA
Qualifying Modification ("PRIFA QM") and CCDA Qualifying
Modification ("CCDA QM"). The PRIFA QM and CCDA QM
proposed to restructure about $1,900 and $384 of debt,
respectively, including obligations insured by AAC.

The hearing to consider approval of the PRIFA QM and the
CCDA QM was held contemporaneously with the confirmation
hearing in the Commonwealth’s Title III proceedings in
November 2021. On January 20, 2022, Judge Swain approved
the PRIFA QM and CCDA QM. The PRIFA QM and CCDA
QM will share the same effective date as the Eighth Amended
POA, which is expected to occur on or prior to March 15, 2022.
As discussed above, this date may be delayed if a stay is granted
pending the appeal of the Eighth Amended POA.

PRHTA Plan of Adjustment (Title III Case)

The Oversight Board, as Title III representative of the Puerto
Rico Highways and Transportation Authority ("PRHTA"), is
expected to file a Title III Plan of Adjustment for PRHTA
("PRHTA POA") prior to March 31, 2022. A confirmation
hearing for the PRHTA POA is expected to follow later in 2022.

Bondholder Elections: GO, PBA, PRIFA, and CCDA

As outlined in the Election Notice for Ambac Bond Holders
with Claims in Class 19 (the “GO Election Notice”) and the
Election Notice for Ambac Bond Holders with Claims in
Classes 4 and 26 (the “PBA Election Notice”), GO and PBA
bondholders were each permitted to choose between two
different treatment options for the satisfaction of their claims.
The first option allows the bondholders to elect commutation of
their insurance policies (the “Ambac Insurance Policies”). Under
this option, bondholders will receive: 1) their respective shares
of certain consideration available under the Commonwealth
Plan, and 2) cash from Ambac. Ambac’s obligations to the
bondholders under the Ambac Insurance Policies who elected
this option will be deemed fully satisfied. Under the second
option, bondholders who failed to elect commutation will
receive payment, in cash, of the outstanding principal amount of
the bondholders’ insured bonds plus the accrued and unpaid
the effective date (the “Ambac
interest
Acceleration Price.”), as adjusted for any payments already
made by Ambac on account of the applicable Ambac Insurance
Policies. Pursuant to this option, bondholders will receive the
Ambac Acceleration Price in full and final discharge of Ambac’s
obligations under the Ambac Insurance Policies.

thereon as of

As outlined in the Election Notice for Holders of Ambac Insured
PRIFA Bond Claims in Connection with Certain Capital
Appreciation Bonds (the “PRIFA CABs Election Notice”), the
Election Notice for Holders of Ambac Insured PRIFA Bond
Claims in Connection with Certain Current Interest Bonds (the
“PRIFA CIBs Election Notice”), and the Election Notice for
Holders of Ambac Insured CCDA Bond Claims (the “CCDA
Election Notice”), PRIFA and CCDA bondholders were each
permitted to choose between two different treatment options for
the satisfaction of their claims. The first option allows the
bondholders to elect commutation of their Ambac Insurance
Policies. Under the first option, bondholders will receive: 1)
their respective shares of certain consideration available under

| Ambac Financial Group, Inc. 37 2021 FORM 10-K |

the Commonwealth Plan and the PRIFA QM, or CCDA QM, as
applicable and 2) cash from Ambac. Bondholders who elected
this option will receive this consideration in full and final
discharge of Ambac’s obligations under the Ambac Insurance
Policies. Under the second option, the bondholders’ respective
shares of consideration available under the Commonwealth Plan
and the PRIFA QM, or CCDA QM, as applicable, will be
deposited into a trust. Those bondholders are expected to receive
scheduled payments from this trust, unless Ambac elects, in its
sole discretion, to pay all or a portion of the outstanding par
amounts of the Ambac-insured bonds in such trust. The
accelerated payments will satisfy Ambac's obligations under the
applicable Ambac Insurance Policies. On the plan effective
date, about 39% and 19% of the outstanding par of the Ambac-
insured PRIFA and CCDA bonds, respectively, will be
commuted with the remainder deposited into the trusts.

Plan Support Agreements

PRIFA PSA

The PRIFA PSA reflects a July 14, 2021, agreement between the
Oversight Board, AAC and FGIC to resolve claims related to
bonds issued by PRIFA. Under the PRIFA PSA, PRIFA
creditors will receive, on account of approximately $1,900 of
allowed claims arising from PRIFA bonds, consideration in the
form of (i) $193.5 cash and (ii) a contingent value instrument
("CVI") premised on outperformance of general fund rum tax
collections relative to the certified 2021 Commonwealth Fiscal
Plan's projections (the "Rum Tax CVI"). The Rum Tax CVI is
subject to a lifetime nominal cap of about $1,300, and is also
subject to various permitted rum tax waterfall deductions and
caps on distributions, including the lesser of (a) 40% of
cumulative outperformance (net of waterfall deductions),
starting on July 1, 2021, less Rum Tax CVI payments made to
PRIFA creditors in previous years, (b) 50% of annual rum tax
outperformance (net of waterfall deductions), and (c) $30
annually. The Rum Tax CVI will be deposited into a master trust
(the "CVI Master Trust") and into a sub trust (the "PRIFA CVI
Sub Trust") within the CVI Master Trust for the benefit of
PRIFA bondholders (the "PRIFA Trust"); the PRIFA CVI Sub
Trust will also be funded with a share (approximately 27%) of
the Clawback CVI, described below. The lifetime sum of the
Rum Tax CVI and the Clawback CVI cannot exceed the $1,300
lifetime nominal cap (75% of allowed PRIFA claim) under the
Eighth Amended POA. Further, under the PRIFA PSA, AAC
and other creditors may also receive fees in connection with
negotiating the PRIFA PSA and supporting the restructuring
agreement reflected therein. The value of the PRIFA CVI Sub
Trust is highly uncertain given the contingent, outperformance-
driven structure of the CVIs coupled with the likely back-ended
nature of most of the potential cash flows. Changes in our
assumed values of the PRIFA CVI Sub Trust or the actual
performance of the CVIs could cause an adverse change in our
reserves which could be material. As a result, a decrease in our
assumed values of the PRIFA CVI Sub Trust could have a
material adverse impact on our results of operations and
financial condition.

PRHTA/CCDA PSA

AAC signed a joinder to the PRHTA/CCDA PSA on July 15,
2021. The PRHTA/CCDA PSA, originally executed on May 5,
2021, provides for certain consideration for holders of bonds

from

("Clawback"

such bonds

issued by certain Commonwealth instrumentalities, PRHTA, and
CCDA on account of their claims against the Commonwealth
arising
claims). This
consideration consists of a contingent value instrument tied to
the outperformance of the Commonwealth's sales and use tax
("SUT") relative to the certified 2020 Commonwealth Fiscal
Plan's projections (the "Clawback CVI"). For years one through
30, a portion of the Clawback CVI consideration reflects a 40%
share of cumulative outperformance, starting July 1, 2021,
subject to a combined 95% outperformance limit with the
subsequently described amounts subject to a waterfall. The other
portion of the Clawback CVI receives, on an annual basis, the
lesser of (i) 50% of cumulative outperformance, less payments
previously made, and (ii) 75% of annual outperformance, and is
subject to a waterfall. The waterfall provides that, in years one
through 22, (a) holders of general obligation ("GO") bonds will
receive the first $100 of outperformance; (b) the Clawback
creditors will receive the next $11.1; and (c) any amounts
received thereafter will be split 90%/10% between GO creditors
and Clawback creditors. In years 23 through 30, subject to the
limits in (i) and (ii) above, 100% of the outperformance goes to
the Clawback creditors. Overall, Clawback CVI recoveries are
subject to a lifetime cap of 75% of allowed claim amounts under
the Eighth Amended POA. PRHTA creditors will receive an
approximately 69% share of the Clawback CVI, subject to a
lifetime nominal cap of about $3,700, and subject to a PRHTA-
specific waterfall: holders of PRHTA ’68 bonds will receive the
first dollars of Clawback CVI, followed by holders of PRHTA
’98 bonds. CCDA bondholders will receive a 4% share of the
Clawback CVI, subject to a lifetime nominal cap of about $217.
The value of the Clawback CVI is highly uncertain, given the
contingent, outperformance-driven structure of the instrument
coupled with the likelihood that cash flows in later years (years
23 through 30) will significantly exceed those in earlier years.
Changes in our assumed values of the Clawback CVI or in the
actual performance of the Clawback CVI could cause an adverse
change in our reserves which could be material. As a result, a
significant decrease in our assumed values of the Clawback CVI
could have a material adverse impact on our results of
operations and financial condition. For example, a 1% change in
the estimated value of the Clawback CVI plan consideration
related to the AAC-insured PRIFA, CCDA and PRHTA bonds
would have an impact of about $2 on reserves.

Under the PRHTA/CCDA PSA, PRHTA bondholders will also
receive new PRHTA bonds with a face amount of $1,245,
maturities of up to 40 years and an average interest rate of 5.0%.
Of the $1,245 in new bonds, approximately $646.4 will be
allocated to holders of PRHTA '68 bonds and approximately
$598.6 will be allocated to holders of PRHTA '98 bonds.
PRHTA creditors will also share $389 of cash proceeds,
including a $264 interim distribution, payable at the effective
date of the Eighth Amended POA. In addition, certain restriction
fees and consummation costs are payable at the effective date of
the PRHTA POA. AAC will receive directly the pro rata share
of the CW/PRHTA clawback recovery and interim PRHTA
distributions allocable to its owned or insured PRHTA bonds. Of
the $264 interim cash distribution, $184.8 would be allocated to
holders of PRHTA ’68 bonds and $79.2 would be allocated to
holders of PRHTA ’98 bonds. Claim recovery expectations for
PRHTA creditors under the PRHTA/CCDA PSA are uncertain
the aforementioned
and subject

interpretation due

| Ambac Financial Group, Inc. 38 2021 FORM 10-K |

uncertainty related to the value of and/or the actual performance
of the Clawback CVI.

Under the PRHTA/CCDA PSA, CCDA creditors will receive
$112 of cash, inclusive of up to $15 related to restriction fees
and consummation costs payable at the effective date of the
Eighth Amended POA.

Amended and Restated GO / PBA PSA

On July 27, 2021, Ambac joined the July 12, 2021, Amended
and Restated Plan Support Agreement with the Oversight Board,
as representative of the Commonwealth of Puerto Rico, PBA,
and the Employee Retirement System of the Government of the
Commonwealth of Puerto Rico ("Amended and Restated GO /
PBA PSA"). In general, this PSA follows the Second Amended
GO/PBA PSA, originally signed on February 23, 2021. Under
the Amended GO/PBA PSA, creditors will receive up to $7,024
of cash, of which up to $350 was contingent upon FY2021
revenue outperformance exceeding $350 on a dollar-for-dollar
basis, $6,683 of new GO current interest bonds, $443 of new
GO 5.375% capital appreciation bonds, $288 of new GO 5.00%
capital appreciation bonds, and GO Bond CVI, subject to a
lifetime cap of about $3,500. The GO Bond CVI is intended to
provide creditors with additional returns tied to outperformance
of the SUT against the certified 2020 Commonwealth Fiscal
Plan's projections. The value of the GO Bond CVI is highly
uncertain, given the contingent, outperformance-driven structure
of the instrument Recovery derived from fixed consideration
(i.e., excluding GO Bond CVI) is estimated to vary between
approximately 67% and 77% (as of the petition date) for GO
creditors, and between approximately 75% and 80% (as of the
petition date) for PBA creditors.

Under the Amended and Restated GO/PBA PSA, in exchange
for executing the agreement and agreeing to its terms and
conditions, creditors that were authorized to vote their claim will
receive a PSA restriction fee of 1.32% of their claim amount at
the effective date of the Eighth Amended POA.

The Amended and Restated GO/PBA PSA was further amended
to allow for additional time to consummate the Eighth Amended
POA (i.e., relevant deadlines therein extended from January 31,
2022 to March 15, 2022).

Plan of Adjustment and Qualifying Modification
Considerations

The Eighth Amended POA has been confirmed, and the PRIFA
QM and the CCDA QM have been approved. All are expected to
become effective on or before March 15, 2022. However,
uncertainty remains as to (i) whether the effective date will be
stayed pending the appeal of the order confirming Eighth
Amended POA; (ii) the result of the pending First Circuit appeal
of the order confirming the Eighth Amended POA; (iii) the
value or perceived value of the consideration provided by or on
behalf of the debtors under the Eighth Amended POA, PRIFA
QM, and CCDA QM; (iv) the extent to which exposure

management strategies, such as commutation and acceleration,
will be executed; (v) the tax treatment of the consideration
provided by or on behalf of the debtors under the Eighth
Amended POA, PRIFA QM, and CCDA QM; (vi) whether and
when the PRHTA POA will be confirmed; and (vii) other
factors, including market conditions such as interest rate
movements, credit spread changes on the new GO and CVI
instruments, and liquidity for the new GO and CVI instruments.
Ambac’s loss reserves may prove to be understated or
overstated, possibly materially, due to favorable or unfavorable
developments or results with respect to these factors. Refer to
Management's Discussion and Analysis of Financial Condition
and Results of Operations - Balance Sheet to the Unaudited
Consolidated Financial Statements included in Part I, Item 2 in
this Form 10-Q for the possible increase in loss reserves under
stress or other adverse conditions. There can be no assurance
that losses may not exceed such estimates.

Ambac Title III Litigation Update

AAC is party to a number of litigations related to its Puerto Rico
exposures, and actively participates in the Commonwealth’s
Title III proceedings before the United States District Court for
the District of Puerto Rico. In connection with the July 27, 2021
PRIFA PSA, Ambac filed an urgent motion to stay various
pending matters related to outstanding litigation in connection
with the Commonwealth's Title III proceedings. On August 3,
2021, the Court entered an order staying the requested matters.
While confirmation of the Eighth Amended POA and approval
of the PRIFA QM and CCDA QM resolve many of the issues
raised in the pending matters, the Court’s order confirming the
Eighth Amended POA are now subject to appeal.

AAC continues to actively participate in PRHTA’s Title III
proceedings.

Refer to Note 19. Commitments and Contingencies to the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K for further information about Ambac's litigation
relating to Puerto Rico.

Summary

Ambac has considered these developments and other factors in
evaluating its Puerto Rico loss reserves. While management
believes its reserves are adequate to cover losses in its Public
Finance insured portfolio, there can be no assurance that Ambac
may not incur additional losses in the future, particularly given
the developing economic, political, and legal circumstances in
Puerto Rico. Such additional losses may have a material adverse
effect on Ambac’s results of operations and financial condition.
Due to uncertainty regarding numerous factors, described above,
that will ultimately determine the extent of Ambac's losses, it is
also possible that favorable developments and results with
respect to such factors may cause losses to be lower than current
reserves, possibly materially.

| Ambac Financial Group, Inc. 39 2021 FORM 10-K |

The following table outlines Ambac's insured exposure to each Commonwealth of Puerto Rico issuer.

($ in millions)

Range of
Maturity

Ambac
Ratings (1)

Net Par
Outstanding

Net Par
and Interest
Outstanding (2)(4)

Ever-to-Date
Net Claims
Paid (3)

PR Infrastructure Financing Authority (Special Tax
Revenue) .................................................................................

PR Highways and Transportation Authority (1998
Resolution - Senior Lien Transportation Revenue) ................

PR Convention Center District Authority (Hotel Occupancy
Tax) ........................................................................................

PR Public Buildings Authority - Guaranteed by the
Commonwealth of Puerto Rico ..............................................

PR Sales Tax Financing Corporation - Senior Sales Tax
Revenue (COFINA) ...............................................................

2023-2044

2022-2042

2028-2031

2022-2035

2047-2054

Commonwealth of Puerto Rico - General Obligation Bonds .

2022-2023

PR Highways and Transportation Authority (1968
Resolution - Highway Revenue) ............................................

2022-2027

Total Net Exposure to The Commonwealth of
Puerto Rico and Related Entities

BIG

403 $

872 $

394

620

123

139

648

202

164

1,054 $

2,423 $

652

(1)

(2) Net Par and Interest Outstanding ("P&I") represent the total insured future debt service remaining over the lifetime of the bonds. P&I for capital

appreciation bonds does not represent the accreted amount but rather the amount due at respective maturity dates.

(3)

In addition to ever-to-date net claims paid, Ambac made net claim payments of $23 in January 2022.

(4) Net Par and Interest Outstanding excludes the effects of a 10% current interest rate on $60 net par of PR Public Buildings Authority ("PBA") bonds
with a maturity date of July 1, 2035, resulting from the absence of a remarketing. Should a remarketing not occur before the maturity of the bonds, the
Net Par and Interest Outstanding for PBA exposure would increase by $37.

Additional Insured Portfolio Information
Average Life of Insured Portfolio

Ambac estimates that the average life of its guarantees on par in
force at December 31, 2021 is approximately 10 years. The
average life is determined by applying a weighted average
calculation, using the remaining years to expected maturity of
each guaranteed bond, and weighting them on the basis of the
remaining net par guaranteed. Except for RMBS policies, no
assumptions are made for non-contractual reductions, refundings
or terminations of insured issues. RMBS policies incorporate
assumptions on expected prepayments over the remaining life of
the insured obligation.

The following table depicts amortization of existing guaranteed
net par outstanding:

Net Par Outstanding Amortization (1)
($ in millions)

Estimated Net
Amortization

2022 ...........................................................................

2023 ...........................................................................

2024 ...........................................................................

2025 ...........................................................................

2026 ...........................................................................

2022-2026 .................................................................

2027-2031 .................................................................

2032-2036 .................................................................

2037-2041 .................................................................

After 2041 .................................................................

2,395

1,584

1,814

1,468

1,385

8,646

6,131

6,817

3,544

2,882

Total

28,020

(1) Depicts amortization of existing guaranteed portfolio, assuming no
Expected
advance refundings, as of December 31, 2021.
from contractual maturities because
maturities will differ
borrowers may have the right to call or prepay guaranteed
obligations.

| Ambac Financial Group, Inc. 40 2021 FORM 10-K |

Exposure Currency

The table below shows the distribution by currency of Ambac's
existing guaranteed net par outstanding as of December 31,
2021:

(1)

Currency
($ in millions)

Net Par
Amount
Outstanding
in Base
Currency

Net Par
Amount
Outstanding
in U.S.
Dollars

Percentage
of Net Par
Amount
Outstanding

U.S. Dollars ............... $

17,497 $

17,497

British Pounds ........... £

Euros ......................... €

Australian Dollars ..... A$

6,690

1,113

279

9,054

1,267

202

62 %

32 %

5 %

1 %

Internal credit ratings are provided solely
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.

indicate

Summary of Below Investment Grade Exposure:

Bond Type ($ in millions)

December 31,

Public Finance:

Net Par Outstanding

2021

2020

Total

28,020

100 %

Puerto Rico ............................................. $

1,054 $

1,070

See Note 6. Financial Guarantees in Force to the Consolidated
Financial Statements, included in Part II, Item 8 included in this
Form 10-K, for geographic detail by location of risk as of
December 31, 2021.

Ratings Distribution

The following charts provide a rating distribution of existing net
par outstanding based upon internal Ambac credit ratings(1) at
December 31, 2021 and 2020 and a distribution of Ambac's
below
("BIG") net par exposures at
December 31, 2021 and 2020. BIG is defined as those exposures
with an internal credit rating below BBB-:

investment grade

December 31, 2021

BIG: 19%

AA: 7%

A
35%

Military Housing .....................................

Other .......................................................

Total Public Finance

Structured Finance:

RMBS ......................................................

Student loans ...........................................

Total Structured Finance

International Finance:

370

317

1,741

2,170

302

2,472

Sovereign/sub-sovereign .........................
Transportation .........................................
Other ........................................................

Total International Finance
Total

774
389
62
1,225
5,438 $

308

1,057

2,435

2,800

512

3,312

742
760
72
1,574
7,321

The net decline in below investment grade exposures is
primarily due to de-risking activities.

Below investment grade exposures could increase as a relative
proportion of the guarantee portfolio given that 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 continue to increase in the
future.

BBB: 39%

Ceded Reinsurance

AAC has reinsurance in place pursuant to surplus share treaties
and facultative agreements. As a primary financial guarantor,
AAC is required to honor its obligations to its policyholders
whether or not its reinsurers perform their obligations under
these reinsurance agreements. As of December 31, 2021, the
aggregate amount of insured par ceded by AAC to reinsurers
under reinsurance agreements was $6,102, with the largest
reinsurer accounting for $2,695 or 7.9% of gross par outstanding
at December 31, 2021.

December 31, 2020

BIG: 22%

AA: 7%

A
37%

BBB: 34%

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

| Ambac Financial Group, Inc. 41 2021 FORM 10-K |

The following table shows the distribution, by bond type, of
AAC’s ceded guaranteed portfolio at December 31, 2021:

Bond Type
($ in millions)

December 31,

Public Finance:

Lease and tax-backed revenue ........ $

General obligation ...........................

Housing revenue .............................

Transportation revenue ...................

Other ...............................................

Total Public Finance

Structured Finance:

Structured insurance ........................

Investor-owned utilities ..................

Other ...............................................

Total Structured Finance

Total Domestic

International Finance:

Ceded Par Amount
Outstanding

2021

2020

1,618

1,458

922

749

612

5,359

313

222

185

720

1,156

1,327

934

586

509

4,512

115

224

280

619

6,079

5,131

Total International Finance

Total

6,102

5,182

Percentage of Gross Par Ceded

18 %

13 %

A summary of our financial results is shown below:

($ in millions)
Year Ended December 31,

Revenues:

2021

2020

2019

Net premiums earned ............. $

47 $

54 $

139

122

227

Net investment income ..........
Net investment gains
(losses), including
impairments ............................

Net gains (losses) on
derivative contracts ................

Net realized gains (losses) on
extinguishment of debt ...........
Other income (expense) (1)
Income (loss) on variable
interest entities .......................

.....

Expenses:

Losses and loss expenses
(benefit) ..................................
Intangible amortization ..........

Operating expenses ................

Interest expense ......................

Provision (benefit) for
income taxes ...........................
Net income (loss) ...................

(88)

126

187

18
(16)

(50)

—

225

222

(3)
(437)

—

134

295

103

269

32
(216)

RESULTS OF OPERATIONS ($ in millions)

Net income (loss) attributable
to common stockholders

(17) $

(437) $

(216)

The following discussion should be read along with the financial
statements included in this Form 10-K, as well as Part II, "Item
7, Management's Discussion and Analysis's of Financial
Condition and Results of Operations" of our Form 10-K for the
year ended December 31, 2020, which provides additional
information on comparisons of years 2020 and 2019.

Net loss attributable to common stockholders for the year ended
December 31, 2021, was $17 compared to a net loss attributable
to common stockholders of $437 for the year ended December
31, 2020. The decrease in losses was primarily driven by: (i)
lower loss and loss expenses, (ii) net gains on derivative
contracts, (iii) a $33 net gain on extinguishment of debt in 2021,
(iv) higher investment income and (v) lower interest expense,
partially offset by higher operating and tax expenses.

(1)

2019 includes proceeds received in connection with an SEC action
against Citigroup Global Markets Inc. in the amount of $142.

income) and

Ambac's 2020 results of operations and financial position were
adversely impacted by the COVID-19 pandemic's effect on the
global economy and financial markets. Significant interest rate
declines during the first quarter of 2020 contributed materially
to a net increase in loss reserves and losses on interest rate
derivative contracts for the year ended December 31, 2020.
Financial market disruptions were reflected through lower
valuations of certain fixed maturity securities (recorded through
other comprehensive
the majority of other
investments (recorded through net investment income). During
the second half of 2020 and into 2021, valuations recovered
(favorably
impacting counterparty credit adjustments on
derivative assets and valuations of investment securities). The
scope, duration and magnitude of the direct and indirect effects
of COVID-19 are evolving in ways that are difficult or
impossible to anticipate. As a result, it is possible that Ambac's
results of operations and financial condition may be further
adversely affected by the evolving effects of the COVID-19
pandemic. For additional information on the risks posed by
COVID-19, refer to “Part I, Item 1A-Risk Factors” in this Form
10-K.

| Ambac Financial Group, Inc. 42 2021 FORM 10-K |

The following paragraphs describe the consolidated results of
operations of Ambac for 2021 and 2020.

Net Premiums Earned. Net premiums earned for the
year ended December 31, 2021, decreased by $7 or 13% as
the year ended
compared
December 31, 2020. The decline was driven by reductions in
FG premiums earned partially offset by $1 of specialty property
and casualty net premiums earned.

to net premiums earned for

Net premiums earned for FG were impacted by the runoff of the
financial guarantee
through
insured portfolio,
transaction terminations, calls and scheduled maturities, which
reduce current and future net premiums earned and were also
impacted by the following:

including

• Changes to the allowance for credit losses on the premium
receivable asset. The impact on net premiums earned
related to credit losses amounted to $6 and $(5) for the for
the years ended December 31, 2021 and 2020.

• Accelerated financial guarantee premium earnings as a
result of calls and other accelerations on insured obligations
largely due to de-risking activity of $1 and $12 for the for
the years ended December 31, 2021 and 2020.

• New financial guarantee ceded reinsurance which reduces
normal net premiums earned over the remaining period of
the related ceded policies.

• The strengthening or weakening of the U.S. dollar relative
to the British Pound since Ambac's wholly-owned UK
subsidiary, Ambac UK, operates in the United Kingdom
and the British Pound is its functional currency.

Net

investment

Net Investment Income.
income
primarily consists of interest and net discount accretion on fixed
maturity securities classified as available-for-sale, 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
Consolidated Balance Sheets. For further information about
investment funds held, refer to Note 4. Investments to the
Consolidated Financial Statements, included in this Annual
Report on Form 10-K.

investment

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

income

($ in millions)
Year Ended December 31,
Securities available-for-sale:
Ambac-insured (including
LSNI and Sitka Senior Secured
Notes) ........................................ $
Securities available-for-sale
and short-term other than
Ambac-insured ..........................

Other investments (includes
trading securities) ......................
Net investment income

2021

2020

2019

45 $

62 $

121

139 $

122 $

227

Net investment income increased $18 for the year ended
December 31, 2021, compared to 2020. As described further
below, the variance was primarily driven by 2020 pricing
volatility within fund investments resulting from the impact of
the COVID-19 pandemic on financial markets and the impact of
the LSNI Secured Note redemption in July 2021.

• Investment

income

from Ambac-insured

securities
decreased $17 in 2021, compared to 2020, due to lower
income on LSNI Secured Notes. As described in Note 1.
Background and Business Description, to the Consolidated
Financial Statements, included in this Annual Report on
Form 10-K, on July 6, 2021, the LSNI Secured Notes were
fully redeemed, including those held in Ambac's investment
portfolio. Investment income from other Ambac-insured
securities, primarily consisting of RMBS and Puerto Rico
bonds, was flat compared to 2020.

• Net investment income from available-for-sales securities
other than Ambac-insured securities decreased $12 in 2021,
compared to the prior year, reflecting a smaller asset base
and lower average yields. Portfolio repositioning during
2021 and 2020, resulted in a higher allocation of pooled
funds and Ambac-insured Puerto Rico bonds, while
reinvestment in non-insured available-for-sale securities
were generally at lower yields. Short term rates also
remained
impacting
investment income. Additionally, the use of cash for early
debt redemptions and operating cash needs contributed to
the smaller asset base.

throughout 2021, adversely

low

• Other investments income increased $47 in 2021, compared
to the prior year. The increase resulted from overall
positive performance in 2021 and additional investments,
particularly in hedge and equity funds. Relatively low
returns in 2020 were driven by adverse changes in fair
values as a consequence of the initial economic and
financial market impact of the COVID-19 pandemic in the
first quarter, offset by a generally strong market recovery in
subsequent quarters of 2020.

| Ambac Financial Group, Inc. 43 2021 FORM 10-K |

Investment Gains

including
Net
Impairments. The following table provides a breakdown of
net investment gains, for the periods presented:

(Losses),

($ in millions)
Year Ended December 31,

2021

2020

2019

Net realized gains on securities
sold or called ............................. $

11 $

26 $

Foreign exchange gains
(losses) ......................................
Credit impairment .....................

Intent / requirement to sell
impairments ...............................

Total net investment gains,
including impairments

(5)

—

(4)

—

7 $

22 $

—

Net investment gains on securities sold or called during the year
ended December 31, 2021, included a gain of $4 realized on the
sale of AFG's equity interest in the Corolla Trust in connection
with the Corolla Exchange Transaction. Other net realized gains
on securities sold or called in 2021 and 2020 are primarily from
sales in connection with routine portfolio management.

Impairments are reported through earnings if management
intends to sell securities or it is more likely than not that the
Company will be required to sell before recovery of amortized
cost. Credit impairments are recorded in earnings only to the
extent management does not intend to sell, and it is not more
likely than not that the Company will be required to sell the
securities, before recovery of their amortized cost. When credit
impairments are recorded, any non-credit related impairment
amounts on the securities are recorded in other comprehensive
income.

Net Gains (Losses) on Derivative Contracts. Net
gains (losses) on derivative contracts includes result from the
Company's interest rate derivatives portfolio and its runoff credit
derivative portfolio. The interest rate derivatives portfolio is
positioned to benefit from rising rates as a partial economic
hedge against interest rate exposure in the financial guarantee
and investment portfolios. Net gain (loss) on interest rate
derivatives generally 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.
Results from credit derivatives were not significant to the
periods presented.

• Net gains on interest rate derivatives for the year ended
December 31, 2021, were $22, compared to a net losses of
$50 for the year ended December 31, 2020. The net gain
for the year ended December 31, 2021, resulted from the
impact of rising interest rates and gains related to
counterparty credit adjustments partially offset by the
carrying cost of maintaining the economic hedge position.
The net loss for the year ended December 31, 2020, reflects
significant declines in forward interest rates, triggered by
the COVID-19 pandemic, and losses from the application
of counterparty credit adjustments, described further below.

• Counterparty credit adjustments are generally applicable
for uncollateralized derivative assets that may not be offset
by derivative liabilities under a master netting agreement.
the
Inclusion of counterparty credit adjustments

valuation of interest rate derivatives resulted in gains
(losses) within Net gains (losses) on derivative contracts of
$5 and $(6) for the years ended December 31, 2021 and
the year ended
2020, respectively.
The gain for
December 31, 2021, resulted from
in
the decrease
underlying net asset values as interest rates increased. The
loss in 2020 was driven by wider credit spreads reflecting
the credit rating downgrade of a derivative counterparty by
Ambac during the first quarter, simultaneous with an
increase in the underlying asset values as interest rates
declined.

Other Income (Expense). Other
income (expense)
includes commission revenues of Xchange, ceding fees from the
specialty property and casualty business, various financial
guarantee fees and foreign exchange gains / (losses) unrelated to
investments or loss reserves. For the year ended December 31,
2021, other
includes Xchange revenues of $26.
Xchange pays commissions to sub-producers which are included
in operating expenses.

income

Net Realized Gains on Extinguishment of Debt.
Net realized gains on extinguishment of debt was $33 for the
year ended December 31, 2021, resulting from the first quarter
2021 exchanges of junior surplus notes below their carrying
values. Refer to Note 1. Background and Business Description
to the Consolidated Financial Statements, included in this
Annual Report on Form 10-K, for further discussion of the 2021
Surplus Notes Exchanges.

Income (Loss) on Variable Interest Entities.
Included within Income (loss) on variable interest entities are
income statement amounts relating to 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 VIEs during the periods
reported. Generally, the Company’s consolidated VIEs are
entities for which Ambac has provided financial guarantees on
all of or a portion of its assets or liabilities. In consolidation,
assets and liabilities of the VIEs are initially reported at fair
value and the related insurance assets and liabilities are
eliminated. However, the amount of VIE net assets (liabilities)
that remain in consolidation generally result from the net
positive (negative) projected cash flows from (to) the VIEs
which are attributable to Ambac’s insurance subsidiaries in the
form of financial guarantee insurance premiums, fees and losses.
In the case of VIEs with net negative projected cash flows, the
net liability is generally to be funded by Ambac’s insurance
subsidiaries through insurance claim payments. Differences
between the net carrying value of the insurance accounts under
the Financial Services—Insurance Topic of the ASC and the
carrying value of the consolidated VIE’s net assets or liabilities
are recorded through income at the time of consolidation.
Additionally, terminations or other changes to Ambac's financial
guarantee insurance policies that impact projected cash flows
between a consolidated VIE and Ambac could result in gains or
losses, even
in
deconsolidation of the VIE.

if such policy changes do not result

Income (loss) on variable interest entities was $7 and $5 for the
years ended December 31, 2021 and 2020, respectively. Results
for the year ended December 31, 2021, were driven by the

| Ambac Financial Group, Inc. 44 2021 FORM 10-K |

higher valuation of net assets on VIEs, together with realized
gains of $2 on sales of assets from the COFINA Trust. Results
for the year ended December 31, 2020, were due to realized
gains of $8 on sales of assets from the COFINA Trust partially
offset by the lower valuation of net assets on a VIE impacted by
COVID-19.

Refer to Note 11. Variable Interest Entities to the Consolidated
Financial Statements included in this Annual Report on Form
10-K for further information on the accounting for VIEs.

Losses and Loss Expenses (Benefit). Losses and loss
expenses include the financial guarantee and specialty property
and casualty businesses.

loan

Ambac records as a component of its loss reserve estimate
subrogation recoveries related to securitized loans in RMBS
transactions with respect to which AAC is pursuing claims for
breaches of representations and warranties. Ambac does not
include potential recoveries attributed solely to fraudulent
inducement claims in our litigations in our estimate of
subrogation recoveries. Nor does Ambac include potential
recoveries attributable to pre-judgment interest in the estimate of
subrogation recoveries. Generally, the sponsor of an RMBS
transaction provided representations and warranties with respect
to the securitized loans, including representations with respect to
the
borrower
misrepresentations in the underlying loan pools or other
misconduct in the origination process and attesting to the
compliance of loans with the applicable underwriting guidelines.
Ambac has recorded R&W subrogation recoveries, net of
reinsurance, of $1,704 and $1,725 at December 31, 2021 and
2020, respectively. The decrease in these recoveries was
primarily driven by lower projected losses. Refer to Note 2.
Basis of Presentation and Significant Accounting Policies to the
Consolidated Financial Statements included in Part II, Item 8 in
this Annual Report on Form 10-K for more information
regarding
for R&W subrogation
recoveries.

the estimation process

characteristics,

absence

the

The following table provides details, by bond type, for losses
and loss expenses (benefit) incurred for the periods presented:

($ in millions)
Year Ended December 31,
Structured Finance (1)
Domestic Public Finance ..........
Other (2)
.....................................
Totals (3)

2021

2020

(20) $
(73)
4
(88) $

(52) $
256
21
225 $

2019
(111)
250
(127)
13

(1) The loss and loss expense (benefit) associated with changes in
estimated representation and warranties for the year ended
December 31, 2021, 2020 and 2019 was $20, ($23) and $42,
respectively.

(2) Includes specialty property and casualty loss and loss expenses
incurred of less than $1 for the year ended December 31, 2021.

(3) Includes loss expenses incurred of $55, $103 and $78 for the year

ended December 31, 2021, 2020 and 2019, respectively.

Losses and loss expenses for 2021 were largely driven by
favorable
in domestic public finance,
primarily related to Puerto Rico, and structured finance,
primarily related to improved credit in RMBS, partially offset by

loss development

the negative impact of discount rates, and loss expenses
incurred.

Losses and loss expenses for 2020 were driven by higher
projected losses in domestic public finance, largely Puerto Rico;
partially offset by improved Structured Finance losses as a result
of the positive impact of lower interest rates on excess spread,
reduced by lower discount rates and expected losses from
COVID-19 related delinquencies.

Insurance

Intangible Amortization.
intangible
amortization was $52 and $57 for the years ended December 31,
2021 and 2020, respectively. The decrease in amortization for
the year ended December 31, 2021, compared to 2020, is
primarily due to run-off of the insured portfolio and de-risking
activity. Other intangible amortization for the year ended
December 31, 2021 was $3.

Operating Expenses. Operating expenses consist of gross
reinsurance commissions. The
operating expenses plus
following table provides a summary of operating expenses for
the periods presented:

($ in millions)
Year Ended December 31,

Compensation ........................... $
Non-compensation ....................
Gross operating expenses ..........
Reinsurance commissions, net ..
Total operating expenses

2021

2020

2019

62 $
64
126
—

126 $

51 $
41
92
—
92 $

58
44
103
—
103

Gross operating expenses for the year ended December 31, 2021
are $126, an increase of $34 from gross operating expenses for
the year ended December 31, 2020. The increase was primarily
due to the following:

• Higher compensation costs primarily due to: (i) hiring in
connection with the launch of Everspan offset by continued
right sizing of staff levels, (ii) inclusion of Xchange costs
of $4 and (iii) the impact of performance factors on
incentive compensation.

• Higher non-compensation costs primarily due to: (i)
inclusion of Xchange costs of $16, mainly from producer
commissions of $15, (ii) launch of Everspan, and (iii)
increased legal fees.

Legal and consulting services provided for the benefit of OCI
were flat at $2 during the years ended December 31, 2021 and
2020.

Interest Expense.
Interest expense includes accrued
interest on the LSNI Ambac Note (as defined in Note 1.
Background and Business Description to the Consolidated
Financial Statements included in Part II, Item 8 in this Form 10-
K), Sitka AAC Note, Tier 2 Notes, 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:

| Ambac Financial Group, Inc. 45 2021 FORM 10-K |

($ in millions)
Year Ended December 31,
Surplus Notes (1)
LSNI Ambac Note ....................

........................ $

Sitka AAC Note ........................

Tier 2 Notes ...............................

Other .........................................

2021

2020

2019

77 $

85 $

107

—

143

—

Total interest expense

187 $

222 $

269

(1)

Includes interest on Junior Surplus Notes that were acquired and
retired in 2021.

for

interest expense

The decrease
the year ended
December 31, 2021, compared to the year ended December 31,
2020, reflects the impacts of the Secured Note Refinancing and
2021 Surplus Note Exchanges, described further in Note 1.
Background and Business Description to the Consolidated
Financial Statements, included in this Annual Report on Form
10-K. These transactions resulted in lower debt outstanding
and a lower coupon interest rate on the Sitka AAC Note relative
to the LSNI Ambac Note. Interest expense for 2021 also
declined as a result of the Tier 2 Note fully accreting through
interest expense by December 31, 2020. These benefits were
partially offset by the effects of interest compounding on surplus
notes and the Tier 2 Notes.

Surplus Note principal and interest payments require the
approval of OCI. In May 2021, OCI declined the request of
AAC to pay the principal amount of the Surplus Notes, plus all
accrued and unpaid interest thereon, on the scheduled payment
date of June 7, 2021. As a result, the scheduled payment date for
interest, and the scheduled maturity date for payment of
principal of the Surplus Notes, was extended and shall continue
to be extended until OCI grants approval to make the 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 will
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. The interest on the outstanding Surplus Notes
were 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 to third parties
were $576 at December 31, 2021. 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 Surplus Note principal and interest
payments will be made, if ever. If OCI does not approve regular
payments on Surplus Notes within the next several years, the
total amount due for Surplus Notes may exceed AAC's financial
resources and holders of Surplus Notes may not ever be paid in
full.

Provision for Income Taxes. The provision for income
taxes for the year ended December 31, 2021 and 2020, was a
expense of $18 and a benefit of $3, respectively. Income taxes
for the year ended December 31, 2021 and 2020, includes
provisions for income tax due in respect of Ambac UK of $16
and $(3), respectively.

At December 31, 2021, the Company had approximately $3,744
of U.S. Federal net ordinary operating loss carryforwards,
including approximately $1,596 at AFG and $2,148 at AAC.

LIQUIDITY AND CAPITAL RESOURCES
($ in millions)

Liquidity is a measure of a company’s ability to generate
sufficient cash to meet the cash requirements of its business
operations and to satisfy general corporate obligations.

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. AFG’s liquidity is primarily dependent on its
net assets, excluding its equity investments in subsidiaries,
totaling $269 as of December 31, 2021, of which $142 is
considered highly liquid, and secondarily on distributions and
expense sharing payments
its subsidiaries. AFG's
investments include securities directly and indirectly issued and/
or insured by AAC, some of which are eliminated
in
consolidation. Securities issued or insured by AAC and certain
other of AFG's investments are generally less liquid than
investment grade and highly traded investments.

from

• During 2021, AFG received distributions from Xchange of

$6.

• 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 for 2020
expenses was approved (by OCI) and paid (by AAC) in
April 2021.

It is highly unlikely that AAC will be able to make dividend
payments to AFG for the foreseeable future or that Everspan
will be able to make dividend payments to AFG for several
years, and therefore cash and investments, payments under the
intercompany cost allocation agreement and distributions from
Xchange will be AFG’s principal sources of liquidity in the near
term. Refer to Part I, Item 1, “Insurance Regulatory Matters —
Dividend Restrictions, Including Contractual Restrictions” in
this Annual Report on Form 10-K, and Note 8. Insurance
Regulatory Restrictions
the Consolidated Financial
Statements included in Part II, Item 8, in this Annual Report on
Form 10-K, for more information on dividend payment
restrictions.

The principal uses of liquidity are the payment of operating
expenses, including costs to explore opportunities to grow and
diversify Ambac; the making of strategic investments, which
may include illiquid investments; and capital investments to
acquire, grow and/or capitalize new and/or existing businesses.
AFG may also provide short-term financial support, primarily in
the form of loans, to its operating subsidiaries to support their
operating requirements. Contingencies could cause material
liquidity strains.

• AFG supported the development of the Specialty P&C
business, and its acquisitions, by contributing capital to

| Ambac Financial Group, Inc. 46 2021 FORM 10-K |

Everspan Indemnity of approximately $92 and $6 in 2021
and the first quarter of 2022, respectively.

In the opinion of the Company’s management the net assets of
AFG are
liquidity
requirements. However, events or circumstances could arise
that may cause AFG to seek additional capital.

to meet AFG’s current

sufficient

Operating Companies' Liquidity
Insurance:

the Company’s

liquidity requirements of

The
insurance
subsidiaries are met primarily by funds generated from
premiums; recoveries on claim payments, including RMBS
representation and warranty subrogation recoveries (AAC only);
reinsurance recoveries; fees; investment income and maturities
and sales of investments.

• Our ability to realize RMBS representation and warranty
subrogation recoveries is subject to significant uncertainty,
including risks inherent in litigation, such as adverse
rulings or decisions in our cases or in litigations to which
AAC is not a party that set precedents or resolve questions
of law that impact our own claims; collectability of such
their respective
amounts from counterparties (and/or
parents and affiliates); timing of receipt of any such
recoveries, including uncertainty due to delays in court
proceedings; intervention by the OCI, which could impede
our ability to take actions required to realize such
recoveries; and uncertainty inherent in the assumptions
used in estimating the amount of such recoveries. The
amount of these subrogation recoveries is significant and if
AAC is unable to recover any amounts or recovers
its future
materially
available liquidity to pay claims, debt service and meet
other obligations would be materially adversely impacted.
See Part I, Item 1A. Risk Factors in this Annual Report on
Form 10-K for more information about risks relating to
RMBS R&W subrogation recoveries.

than estimated recoveries,

less

• See Note 7. Insurance Contracts to the Consolidated
Financial Statements included in Part II, Item 8, in this
Annual Report on Form 10-K 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, debt service on outstanding debt (AAC only), operating
expenses, reinsurance payments and purchases of securities and
other investments that may not be immediately converted into
cash.

• Although AAC has not yet experienced incremental claim
payments as a result of the impact of COVID-19, such
claims may occur in the future as issuers, particularly those
with revenues that have been interrupted by the effects of
the pandemic, may not have sufficient resources to pay debt
service on insured debt. Refer to "Executive Summary" in
this Management's Discussion and Analysis for further
discussion of the potential impact of the COVID-19
pandemic. See below within this Management Discussion

and Analysis in the section titled "Balance Sheet" for the
expected future financial guarantee claim payments, gross
of expected recoveries.

• Interest and principal payments on surplus notes are subject
to the approval of OCI, which has full discretion over
payments regardless of the liquidity position of AAC. Any
such payment on surplus notes would require either
payment or collateralization of a portion of the Tier 2 Notes
under the terms of the Tier 2 Note indenture. As discussed
more fully in "Results of Operations" above in this
Management's Discussion and Analysis, OCI declined
AAC's request to pay the principal amount of the surplus
notes, plus all accrued and unpaid interest thereon, on June
7, 2021. See Note 12. Long-term Debt to the Consolidated
Financial Statements, included in Part II, Item 8 in this
Form 10-K for further discussion of the payment terms and
conditions of the Tier 2 Notes as well as the aggregate
annual maturities of all debt outstanding. In addition to
principal amounts of $2,334 as of December 31, 2021 with
various maturities as described in Note 12. Long-term Debt
to the Consolidated Financial Statements, included in Part
II, Item 8 in this Form 10-K, AAC's future interest
obligations include $62 annually on the Sitka AAC Note
through maturity on July 6, 2026, $605 of accrued and
unpaid interest that would be payable on surplus notes if
approved by OCI on the next scheduled payment date of
June 7, 2022, and Tier 2 Note interest that may be paid-in-
kind until maturity on February 12, 2055 at which time
$5,060 would be due.

• Ambac is the lessee in operating leases for corporate
offices, a data center and various equipment. See Note 18.
Leases to the Consolidated Financial Statements included
in Part II, Item 8, in this Annual Report on Form 10-K, for
a scheduled future undiscounted lease payments, gross of
sublease receipts.

including on AAC’s

• AAC lends its wholly-owned subsidiary, Ambac Financial
Services ("AFS") cash to support its operations. AFS uses
interest rate derivatives (primarily interest rate swaps and
US Treasury futures) as a partial economic hedge against
the effects of rising interest rates elsewhere in the
Company,
financial guarantee
exposures. AFS's derivatives also include interest rate
swaps previously provided to asset-backed issuers and
other entities in connection with their financings. AAC
loans cash and securities to AFS as needed to fund
payments under
these derivative contracts, collateral
expenses.
and
posting
Intercompany loans are governed by an established lending
agreement with defined borrowing limits that has received
non-disapproval from OCI.

requirements

operating

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.

Managing General Agent / Underwriting (MGA/U):

The liquidity requirements of the MGA/U subsidiary are met
primarily by funds generated from commission receipts (both

| Ambac Financial Group, Inc. 47 2021 FORM 10-K |

base and profit commissions) from insurance carriers. 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, distributions to its
members (including AFG) and operating expenses.

Consolidated Cash Flow Statement Discussion
The following table summarizes the net cash flows for the
periods presented.

($ in million)
Year Ended December 31,

Cash provided by (used in):

2021

2020

2019

Operating activities ............... $

(131) $

(175) $

(311)

Investing activities ................

Financing activities ...............

Effect of foreign exchange
on cash and cash equivalents .

776

(657)

432

(303)

1,000

(691)

Net cash flow

(12) $

(46) $

—

(2)

Operating activities

The following represents the significant cash operating activities
during the years ended December 31, 2021 and 2020:

• Debt service on the LSNI Ambac Note was $51 and $107
for the years ended December 31, 2021 and 2020,
respectively.

• Debt service on the Sitka AAC Note was $30 for the year

ended December 31, 2021.

• Cash provided from financial guarantee premiums were
$35 and $47 for the years ended December 31, 2021 and
2020. Cash provided from specialty property and casualty
premiums were $8 for the year ended December 31, 2021.

• Payments related to (i) operating expenses were $83 and
$76 for the years ended December 31, 2021 and 2020,
respectively, (ii) reinsurance premiums were $26 and $2
for the years ended December 31, 2021 and 2020,
respectively, and (iii) interest rate derivatives were $(1) and
$20 for the years ended December 31, 2021 and 2020,
respectively.

• Interest, dividends and other distributed income from the
investment portfolio was $80 and $104 for the years ended
December 31, 2021 and 2020, respectively.

• Net loss and loss expenses paid, including commutation

payments are detailed below:

($ in million)
Year Ended December 31,
Net losses paid ................................. $
Net subrogation received ................
Net loss expenses paid .....................
Net cash flow

2021
103 $
(121)

77
59 $

2020
159 $
(118)

108
149 $

2019
416
(168)

70
318

Future operating cash flows will primarily be impacted by
interest payments on outstanding debt, claim and expense
payments, subrogation recoveries, investment income receipts
and premium collections.

Investing Activities

Cash provided for investing activities in both 2021 and 2020
were to (i) provide liquidity for operating activities; (ii) diversify
the investment portfolio from fixed maturity to other assets
(total fair value of pooled investments of $683 at December 31,
2021) and (iii) support strategic initiatives, including AFG's
purchase 80% of Xchange for $74 in 2020, net of cash acquired.

Financing Activities

Financing activities for the year ended December 31, 2021,
include paydowns of the LSNI Ambac Note of $1,641,
paydowns/maturities of VIE debt obligations of $170, partially
offset by the proceeds from the Sitka AAC Note issuance of
1,163.

Financing activities for the year ended December 31, 2020,
include paydowns of the LSNI Ambac Note of $121 and
paydowns of VIE debt obligations of $178.

Collateral

AFS hedges a portion of the interest rate risk in the financial
guarantee and investment portfolio, along with legacy customer
interest rate swaps with standardized derivative contracts,
including financial futures contracts, which contain collateral or
margin requirements. Under these hedge agreements, AFS is
required to post collateral or margin to its counterparties and
futures commission merchants to cover unrealized losses. In
addition, AFS is required to post collateral or margin in excess
of the amounts needed to cover unrealized losses. All AFS
derivative contracts containing ratings-based downgrade triggers
that could result in collateral or margin posting or a termination
have been triggered. If terminations were to occur, AFS would
be required to make termination payments but would also
receive a return of collateral or margin in the form of cash or
U.S. Treasury obligations with market values equal to or in
excess of market values of the swaps and futures contracts. AFS
may look to re-establish hedge positions that are terminated
early, resulting in additional collateral or margin obligations.
The amount of additional collateral or margin posted on
derivatives contracts will depend on several variables including
the degree to which counterparties exercise their termination
rights (or agreements terminate automatically) and the terms on
which hedges can be replaced. All collateral and margin
obligations are currently met. Collateral and margin posted by
AFS totaled a net amount of $133 (cash and securities collateral
of $13 and $120 respectively), including independent amounts,
under these contracts at December 31, 2021.

Ambac Credit Products LLC (“ACP”) is not required to post
collateral under any of
its outstanding credit derivative
contracts.

BALANCE SHEET ($ in millions)

approximately $917

assets decreased by

Total
from
December 31, 2020 to $12,303 at December 31, 2021, primarily
due to the impacts of the Corolla Trust Exchange and Secured
Note Refinancing described in Note 1. Background and
Business Description in this Annual Report on Form 10-K
located in Part II. Item 8, payment of loss and loss expenses,
interest and operating expenses, lower subrogation recoverables,
lower consolidated VIE assets from paydowns of consolidated

| Ambac Financial Group, Inc. 48 2021 FORM 10-K |

VIE liabilities, lower derivative assets caused by rising interest
rates and lower premium receivables and intangible assets from
the continued runoff of the financial guarantee insurance
portfolio.

from
liabilities decreased by approximately $886
Total
December 31, 2020, to $11,187 as of December 31, 2021,
primarily due to lower loss reserves, and the payment of loss and
loss expenses, lower VIE and non-VIE long-term debt (from the
transactions and Secured Note
surplus note exchange
Refinancing) and lower derivative liabilities caused by rising
interest rates.

As of December 31, 2021, total stockholders’ equity was
$1,098, compared with total stockholders’ equity of $1,140 at
December 31, 2020. This decrease was primarily due to a Total
Comprehensive Loss during 2021 and a $14 increase to the
carrying value of redeemable NCI which is offset directly
against retained earnings. The Comprehensive Loss was
primarily driven by the net loss attributable to common
stockholders for the year ended December 31, 2021, of $17,
unrealized losses on investments of $12 and translation losses on
the consolidation of AFG's foreign subsidiaries.of $8.

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

Refer to Note 4. Investments to the Consolidated Financial
Statements in this Annual Report on Form 10-K located in Part
information about Ambac's consolidated
II. Item 8 for
investment portfolio.
investment polices and
objectives do not apply to the assets of VIEs consolidated as a
result of
insurance
subsidiaries.

financial guarantees written by

Ambac's

its

The following table summarizes the composition of Ambac’s
investment portfolio, excluding VIE investments, at carrying
value at December 31, 2021 and 2020:

($ in millions)
December 31,
Fixed maturity securities .................................. $
Short-term ........................................................
Other investments .............................................
Securities pledged as collateral ........................
Total investments (1)

2021

2020

1,730 $

2,317

414
690
120

492
595
140

2,955 $

3,544

(1)

Includes investments denominated in non-US dollar currencies
with a fair value of £341 ($462) and €38 ($43) as of December 31,
2021 and £317 ($434) and €39 ($48) as of December 31, 2020.

Ambac invests in various asset classes in its fixed maturity
securities portfolio. Other investments include diversified
equity interests in pooled funds. Refer to Note 4. Investments to
the Consolidated Financial Statements in this Annual Report on
Form 10-K located in Part II. Item 8 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
December 31, 2021 and 2020.

December 31, 2021

AAA
19%

NR (2)
22%

BIG (2)
14%

BBB
12%

A
15%

December 31, 2020

AAA
15%

NR (2)
23%

BIG (2)
22%

AA
18%

BBB
9%

A
13%

(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
represented 32% and 41% of the 2021 and 2020 combined fixed
maturity investment portfolios, respectively. The decrease is
primarily due to the impact of the Secured Note Refinancing
described in Note 1. Background and Business Description to the
Consolidated Financial Statements in this Annual Report Form
10-K located in Part II. Item 8.

Premium Receivables.
Ambac's premium
at
December 31, 2021, from $370 at December 31, 2020. As
further discussed in Note 7. Insurance Contracts to the
Consolidated Financial Statements, in this Annual Report Form
10-K located in Part II. Item 8, the decrease is due to premium

receivables decreased

to $323

| Ambac Financial Group, Inc. 49 2021 FORM 10-K |

receipts and adjustments for changes in expected and contractual
cash flows on financial guarantee insurance contracts, partially
offset by decreases to the allowance for credit losses, accretion
of the financial guarantee premium receivable discount and
premium receivables on the Specialty P&C business.

Premium receivables by payment currency were as follows:

Currency
(Amounts in millions)

Premium
Receivable in
Payment
Currency

Premium
Receivable in
U.S. dollars

U.S. Dollars .........................................

British Pounds .....................................

Euros ....................................................

€

Total

199 $

199

108

323

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). For
reinsurance
counterparties that do not currently post collateral, Ambac’s
reinsurers are well capitalized, highly rated, authorized capacity
providers. Ambac benefited from letters of credit and collateral
amounting to approximately $111 from its reinsurers at
December 31, 2021. As of December 31, 2021 and 2020,
reinsurance recoverable on paid and unpaid losses were $55 and
$33, respectively. The increase was primarily a result of
reinsurance recoverables of $30 added in connection with the
PWIC transaction, offset by favorable development in financial
guarantee insured exposures.

those

Intangible Assets.
Intangible assets includes (i) an insurance intangible asset that
was established at AFG's emergence
from bankruptcy,
representing the difference between the fair value and aggregate
insurance and
carrying value of
reinsurance assets and
intangible assets
liabilities,
established as part of the acquisition of Xchange on December
31, 2020 and (iii) an
intangible assets
established as part of the acquisition of PWIC. Refer to Note 3.
Business Combination to the Consolidated Financial Statements,

the financial guarantee

indefinite-lived

(ii)

in this Annual Report Form 10-K located in Part II. Item 8 for
further information relating to the Xchange acquisition.

As of December 31, 2021 and 2020 the net intangible asset was
$362 and $409, respectively. The decline is driven by
the
translation gains
amortization
consolidation of Ambac's foreign subsidiary (Ambac UK),
partially offset by the indefinite-lived asset established in 2021.

(losses)

from

and

Derivative Assets and Liabilities.
The interest rate derivative portfolio is positioned to benefit
from rising rates as a partial hedge against interest rate exposure
in the financial guarantee and investment portfolios. Derivative
assets and liabilities on the balance sheet primarily reflect the
portion of the portfolio that is not subject to daily cash variation
margin payments. Derivative assets decreased from $93 at
December 31, 2020, to $76 as of December 31, 2021.
Derivative liabilities decreased from $114 at December 31,
2020, to $95 as of December 31, 2021. The decreases resulted
primarily from higher interest rates during the year ended
December 31, 2021, with the decline in assets partially offset by
lower counterparty credit adjustments.

issued

to beneficiaries,

insurance policies

Loss and Loss Expense Reserves and Subrogation
Recoverable.
Loss and loss expense reserves are based upon estimates of the
ultimate aggregate losses inherent in the non-derivative portfolio
including
for
unconsolidated 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"
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 7.
Insurance Contracts,
respectively, to the Consolidated Financial Statements included
in Part II, Item 8 in this Annual Report on Form 10-K, for
further information on loss and loss expenses.

“Results of Operations”

and

loss and

loss expense reserves net of subrogation
The
recoverables and before reinsurance as of December 31, 2021
and 2020 were $(522) and $(397), respectively. Loss and loss
expense reserves are included in the Consolidated Balance
Sheets as follows:

| Ambac Financial Group, Inc. 50 2021 FORM 10-K |

($ in millions)
Balance Sheet Line Item

December 31, 2021:

Present Value of Expected
Net Cash Flows

Claims and
Loss
Expenses

Recoveries (1)

Unearned
Premium
Revenue

Gross Loss
and Loss
Expense
Reserves (2)

Loss and loss expense reserves ....................................................................................... $

1,781 $

(155) $

(56) $

Subrogation recoverable .................................................................................................

(2,180)

—

Totals

December 31, 2020:

1,869 $

(2,335) $

(56) $

Loss and loss expense reserves ...................................................................................... $

2,060 $

(229) $

(72) $

Subrogation recoverable ................................................................................................

100

(2,256)

—

Totals

2,160 $

(2,485) $

(72) $

(1) Present value of future recoveries include R&W subrogation recoveries of $1,730 and $1,751 at December 31, 2021 and 2020, respectively.

1,570

(2,092)

(522)

1,759

(2,156)

(397)

(2) Loss and loss expense reserves at December 31, 2021 includes financial guarantee and specialty P&C of $1,538 and $32, respectively. Subrogation
recoverable includes financial guarantee and specialty P&C of $(2,092) and $—, respectively. All balances at December 31, 2020 relate to the
financial guarantee business

Financial Guarantee:

Ambac has exposure to various bond types issued in the debt capital markets. Our experience has shown that, for the majority of bond
types, we have not experienced significant claims. 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 93% of our ever-to-date insurance claims recorded with RMBS comprising 74%.

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 December 31, 2021 and 2020:

($ in millions)

Present Value of Expected
Net Cash Flows

Gross Par
Outstanding (1)(2)

Claims and
Loss
Expenses

Recoveries

Unearned
Premium
Revenue

Gross Loss
and Loss
Expense
Reserves (1)(2)

December 31, 2021:
Structured Finance ........................................................................ $
Domestic Public Finance ..............................................................
Other .............................................................................................
Loss expenses ...............................................................................
Totals

December 31, 2020:
Structured Finance ........................................................................ $
Domestic Public Finance ..............................................................
Other .............................................................................................
Loss expenses ...............................................................................
Totals

2,371 $
2,742
1,189
—
6,302 $

2,945 $
3,016
1,612
—
7,573 $

852 $
905
35
45
1,837 $

940 $

1,112
40
68
2,160 $

(2,018) $
(312)
(5)
—
(2,335) $

(2,136) $
(349)
—
—
(2,485) $

(12) $
(31)
(13)
—
(56) $

(16) $
(39)
(17)
—
(72) $

(1,178)
562
17
45
(554)

(1,212)
724
23
68
(397)

(1) Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves are $784 and $24, respectively, at December 31, 2021
and $739 and $33, respectively at December 31, 2020. Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and
unpaid losses.

(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.

The table below reflects the timing of expected financial guarantee claim payments based on deal specific cash flows, excluding expected
recoveries. These deal specific cash flows are based on the expected cash flows of the underlying transactions. The timing of expected
claim payments for credits with reserves that were established using our statistical loss reserve method is determined based on the weighted
average expected life of the exposure. Refer to the Loss Reserves section in Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements included in Part II, Item 8 in this Form 10-K for further discussion of our statistical loss
reserve method. The timing of these payments may vary significantly from the amounts shown above, especially for credits that are based
on our statistical loss reserve method.

| Ambac Financial Group, Inc. 51 2021 FORM 10-K |

($ in millions)

Payments Due by Period

Total

Less Than
1 Year

1 - 3 Years

3 - 5 Years

More Than
5 Years

Claim payments ....................................................................... $

2,095 $

422 $

119 $

109 $

1,445

Variability of Expected Losses and Recoveries

Ambac’s management believes loss reserves (present value of
expected cash flows, net of recoveries) are adequate to cover
future claim payments, 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, such as COVID-19.
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 December 31, 2021, 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 of this Form 10-K as well as the
descriptions of "Structured Finance Variability," "Public
Finance Variability," and "Other Credits, including Ambac UK,
Variability," below for further discussion of the risks relating to
future losses and recoveries that could result in more highly
stressed outcomes appearing below.

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 debt 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

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 effect of a weakened
economy characterized by growing unemployment and wage
pressures. We utilize a model to project losses in our RMBS
exposures and changes to reserves, either upward or downward,
are not unlikely if we used a different model or methodology to
project losses. In the case of both first and second-lien
exposures, the possible stress case assumes a lower housing

price appreciation projection, which in turn drives higher
defaults and severities.

We established a representation and warranty subrogation
recovery as further discussed in Note 7. Insurance Contracts to
the Consolidated Financial Statements included in this Annual
Report on Form 10-K. Our ability
realize RMBS
representation and warranty recoveries is subject to significant
uncertainty, including risks inherent in litigation, collectability
of such amounts from counterparties (and/or their respective
parents and affiliates), delays in realizing such recoveries,
including delays in getting to trial due to court closures caused
by COVID-19 or other events, intervention by the OCI, which
could impede our ability to take actions required to realize such
recoveries, and uncertainty inherent in the assumptions used in
estimating such recoveries. Additionally, our R&W actual
subrogation recoveries could be significantly lower than our
estimate of $1,704, net of reinsurance, as of December 31, 2021,
if the sponsors of these transactions: (i) fail to honor their
obligations to repurchase the mortgage loans, (ii) successfully
dispute our breach findings or claims for damages, (iii) no
longer have the financial means to fully satisfy their obligations
under the transaction documents, or (iv) our pursuit of
recoveries is otherwise unsuccessful due to any of the factors
described in this Form 10-K in Part I, Item 1A Risk Factors -
Risks Related to Capital, Liquidity and Markets. Failure to
realize R&W subrogation recoveries for any reason or the
realization of R&W subrogation recoveries materially below the
amount recorded on Ambac's consolidated balance sheet would
have a material adverse effect on our results of operations and
financial condition.

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 COVID-19 related
economic impact. Such factors may 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 December 31, 2021, could be
approximately $25. Combined with the absence of any R&W
subrogation recoveries, a possible increase in loss reserves for
structured finance credits could be approximately $1,729. A
loss of this magnitude may render AAC insolvent. Additionally,
loss payments are sensitive to changes in interest rates,
increasing as interest rates rise. For example, an increase in
interest rates of 0.50% could increase our estimate of expected
losses by approximately $45. There can be no assurance that
the
losses may not exceed such amounts. Additionally,

| Ambac Financial Group, Inc. 52 2021 FORM 10-K |

structured finance portfolio is sensitive to the COVID-19 related
forbearances and delinquencies caused by the general economic
downturn. Due to the uncertainties related to the economic
effects of the COVID-19 pandemic and other risks associated
with structured finance credits, there can be no assurance that
losses may not exceed our stress case estimates.

Public Finance

Ambac’s U.S. public finance portfolio predominantly 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 financings for not-for-
profit entities and transactions with public and private elements,
which generally finance infrastructure, housing and other public
purpose facilities and interests.

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 continuing effects of COVID-19
pandemic. The COVID-19 related economic downturn put a
strain on municipal issuers, particularly those dependent upon
narrow sources of revenues or dedicated taxes to support debt
service, such as hotel occupancy taxes, parking revenues, tolls,
etc. While the economy has been in recovery since mid-2020,
the lingering impact of the pandemic continues to negatively
impact certain of these municipal issuers that are dependent
upon narrow sources of revenue. A further prolonged recovery
from the COVID-19 pandemic could put additional stresses on
these issuers and result in increased defaults and potential
additional losses for Ambac.

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 the 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 significant
exposure, such as Chicago's school district, the State of New
Jersey and many 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.

Ambac’s exposures to the Commonwealth of Puerto Rico across
various instrumentalities and issuers are all now subject to plan
support agreements and plans of adjustment or qualifying
modifications. The Eighth Amended POA has been confirmed,
and the PRIFA QM and the CCDA QM have been approved. All
are expected to become effective on or before March 15, 2022.
However, uncertainty remains as to (i) whether the effective date
will be stayed pending the appeal of the order confirming Eighth
Amended POA; (ii) the result of the pending First Circuit appeal
of the order confirming the Eighth Amended POA; (iii) the
value or perceived value of the consideration provided by or on
behalf of the debtors under the Eighth Amended POA, PRIFA
QM, and CCDA QM; (iv) the extent to which exposure
management strategies, such as commutation and acceleration,
will be executed; (v) the tax treatment of the consideration
provided by or on behalf of the debtors under the Eighth
Amended POA, PRIFA QM, and CCDA QM; (vi) whether and
when the PRHTA POA will be confirmed; and (vii) other
factors, including market conditions such as interest rate
movements, credit spread changes on the new GO and CVI
instruments, and liquidity for the new GO and CVI instruments.
Losses may exceed current reserves in a material manner due to
favorable or unfavorable developments or results with respect to
these factors. See Note 19. Commitments and Contingencies to
the Consolidated Financial Statements in Part II, Item 8 and
"Financial Guarantees in Force" section of Management’s
Discussion and Analysis of Financial Condition and Results of
Operations included in Part II, Item 7 in this Annual Report on
Form 10-K for further updates relating to Puerto Rico.

Material additional losses on our public finance credits caused
by the aforementioned factors, including the possibility of a
protracted recovery related to the COVID-19 crisis would have a
material adverse effect on our results of operations and financial
condition. For the public finance credits, including Puerto Rico,
for which we have an estimate of expected loss at December 31,
2021,
loss reserves could be
approximately $355 and there can be no assurance that losses
may not exceed our stress case estimates.

the possible

increase

| Ambac Financial Group, Inc. 53 2021 FORM 10-K |

Other Credits, including Ambac UK, Variability

ACCOUNTING STANDARDS

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 $370
greater
loss reserves at December 31, 2021.
Additionally, our loss reserves may be under-estimated as a
result of the ultimate scope, duration and magnitude of the
effects of COVID-19. There can be no assurance that losses
may not exceed our stress case estimates.

than

the

Long-term Debt.
Long-term debt consists of surplus notes issued by AAC, the
Sitka AAC Note (which refinanced the LSNI Ambac Note), the
Tier 2 Notes issued in connection with the Rehabilitation Exit
Transactions (as defined in Note 1. Background and Business
Description to the Consolidated Financial Statements included
in Part II, Item 8 of this Form 10-K), and Ambac UK debt issued
in connection with the 2019 commutation of its exposure with
respect to Ballantyne Re plc. The carrying value of each of these
as of December 31, 2021 and 2020 is below:

($ in millions)
December 31,
Surplus Notes (1)
..........................................
LSNI Ambac Note ......................................
Sitka AAC Note ..........................................
Tier 2 Notes ................................................
Ambac UK Debt .........................................
Total Long-term Debt

2021

2020

729 $

—
1,154
333
15
2,230 $

778
1,641
—
306
14
2,739

(1)

Includes Junior Surplus Notes as of December 31, 2020. All Junior
Surplus Notes were retired in 2021.

The decrease in long-term debt from December 31, 2020
resulted from the impact of the Secured Note Refinancing and
2021 Surplus Note Exchanges, described further in Note 1.
Background and Business Description to the Consolidated
Financial Statements, included in this Annual Report on Form
10-K, partially offset by issuances of surplus notes from AFG
sales, accretion on the carrying value of surplus notes and
Ambac UK debt and paid-in-kind interest on Tier 2 Notes.

Subject to internal and regulatory guidelines, market conditions
and other constraints, Ambac may opportunistically purchase or
sell surplus notes and/or other Ambac issued securities, and may
consider opportunities to exchange securities issued by it from
time to time (including newly issued securities) for other
securities issued by it.

Redeemable Noncontrolling Interest. The increase during 2021
was the result of the remeasurement of the redemption value of
the put option provided to the minority owners (noncontrolling
interest holders) of Xchange as if it were exercisable on
December 31, 2021. Refer to Note 3. Business Combination for
further information relating to this acquisition.

The following accounting standards have been issued, but have
not yet been adopted. We do not expect these accounting
standards to have a consequential impact on Ambac's financial
statements.

Equity-classified Written Call Options
In May 2021, the FASB issued ASU 2021-04, Issuer's
for Certain Modifications or Exchanges of
Accounting
Freestanding Equity-Classified Written Call Options. The ASU
clarifies and reduces diversity in practice for an issuer's
accounting for modifications or exchanges of equity-classified
written call options (e.g. warrants) that remain equity-classified
after the modification or exchange. The ASU requires an issuer
to account for the modification or exchange based on the
economic substance of the transaction. For example, if the
modification or exchange is related to the issuance of debt or
equity, any change in the fair value of the written call option
would be accounted for as part of the debt issuance cost in
accordance with the debt guidance or equity issuance cost in
accordance with the equity guidance, respectively. The ASU is
effective for fiscal years beginning after December 15, 2021,
with early adoption permitted. Ambac will adopt this ASU on
January 1, 2022.

Convertible Instruments and Contracts in an
Entity's Own Equity
In August 2020, the FASB issued ASU 2020-06, Accounting for
Convertible Instruments and Contracts in an Entity's Own
Equity. The ASU i) simplifies the accounting for convertible
debt and convertible preferred stock by reducing the number of
accounting models, and amends certain disclosures, ii) amends
and simplifies the derivative scope exception guidance for
contracts in an entity's own equity, including share-based
compensation, and iii) amends the diluted earnings per share
calculations for convertible instruments and contracts in an
entity's own equity. The ASU is effective for fiscal years ending
after December 15, 2021, with early adoption permitted. Ambac
will adopt this ASU on January 1, 2022.

Please refer to Note 2. Basis of Presentation and Significant
Accounting Policies to the Consolidated Financial Statements,
included in Part II, Item 8 in this Annual Report Form 10-K for
the year ended December 31, 2021, for a discussion of the
impact of other recent accounting pronouncements on Ambac’s
financial condition and results of operations.

U.S. STATUTORY BASIS FINANCIAL
RESULTS ($ in millions)

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
Note 8. Insurance Regulatory Restrictions to the Consolidated

| Ambac Financial Group, Inc. 54 2021 FORM 10-K |

Financial Statements included in Part II, Item 8 in this Annual
Report Form 10-K.

Ambac Assurance Corporation
AAC’s statutory policyholder surplus and qualified statutory
capital (defined as the sum of policyholders surplus and
mandatory contingency reserves) were $757 and $1,322 at
December 31, 2021, respectively, as compared to $865 and
$1,413 at December 31, 2020, respectively. As of December 31,
2021, statutory policyholder surplus and qualified statutory
capital included $853 principal balance of surplus notes
outstanding and $138 liquidation preference of preferred stock
outstanding. These surplus notes (including related accrued
interest of $625 that is not recorded under statutory basis
accounting principles); preferred stock; and all other liabilities,
including insurance claims, $1,175 principal balance of Sitka
AAC Notes (refinanced the LSNI Ambac Note as described in
Note 1. Background and Business Description
the
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K) and $333 principal balance of Tier 2 Notes 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 significant drivers to the net decrease in policyholder
surplus were statutory net losses of $127 for the year ended
December 31, 2021 and contributions to contingency reserves of
$17, partially offset by an increase in the fair value of pooled
investments of $35.

AAC’s statutory surplus is sensitive to multiple factors,
including: (i) loss reserve development, (ii) payments on surplus
notes, if approved by OCI, (iii) on-going interest costs
associated with the Sitka AAC Note and Tier 2 Notes, including
changes to the interest rates as the Sitka AAC Note is a floating
rate obligation, (iv) deterioration in the financial position of
AAC subsidiaries that have their obligations guaranteed by
AAC, (v) first time payment defaults of insured obligations,
which increase statutory loss reserves, (vi) commutations of
insurance policies or credit derivative contracts 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) settlements of
representation and warranty breach claims at amounts that differ
from amounts recorded, including failures to collect such
amounts, (x) realized gains and losses, including losses arising
from other than temporary impairments of investment securities,
and (xi) future changes to prescribed SAP practices by the OCI.

The significant differences between GAAP and SAP are that
under SAP:

• Loss reserves are only established for losses on guaranteed
obligations that have experienced a payment default in an
amount that is sufficient to cover the present value of the
anticipated defaulted debt service payments over the
expected period of default, less estimated recoveries under
subrogation rights (5.1% as prescribed by OCI). Under
GAAP, in addition to the establishment of loss reserves for
defaulted obligations, loss reserves are established (net of
GAAP basis unearned premium revenue) for obligations

that have experienced credit deterioration, but have not yet
defaulted using a weighted-average risk-free discount rate,
currently at 1.2%.

• Mandatory contingency reserves are required based upon
the type of obligation insured, whereas GAAP does not
require such a reserve. Releases of the contingency reserves
are generally subject to OCI approval and relate to a
determination that the held reserves are deemed excessive.

• Investment grade fixed maturity investments are stated at
amortized cost and certain below investment grade fixed
maturity investments are reported at the lower of amortized
cost or fair value. Under GAAP, all fixed maturity
investments are reported at fair value.

• Wholly owned subsidiaries are not consolidated; rather, the
equity basis of accounting is utilized and the carrying
values of these investments are subject to admissibility
tests.

• Variable interest entities ("VIE") are not required to be
assessed for consolidation. Under GAAP, a reporting entity
that has both the following characteristics is required to
consolidate the VIE: a) the power to direct the activities of
the VIE that most significantly impact the VIE’s economic
performance and b) the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE that could
potentially be significant to the VIE. AAC generally has the
obligation to absorb losses of VIEs that could potentially be
significant to the VIE as the result of its guarantee of
insured obligations issued by VIEs. For certain VIEs AAC
has the power to direct the most significant activities of the
VIE and accordingly consolidates the related VIEs under
GAAP.

• All payments of principal and interest on the surplus notes
are subject to the approval of the OCI. Unpaid interest due
on the surplus notes is expensed when the approval for
payment of interest has been granted by the OCI. Under
GAAP, interest on surplus notes is accrued regardless of
OCI approval.

• Upfront premiums written are earned on a basis
proportionate to the remaining scheduled debt service to the
original total principal and interest insured. Installment
premiums are reflected in income pro-rata over the period
covered by the premium payment. Under GAAP, premium
revenues for both upfront and installment premiums are
earned over the life of the financial guarantee contract in
proportion to the insured principal amount outstanding at
each reporting date.

• Insurance

intangibles

that arose as a result of

the
implementation of Fresh Start reporting are not a concept
within SAP. This insurance intangible asset is amortized as
an expense on a level yield basis over the life of the related
insurance risks.

• Unearned premiums and loss reserves are presented net of
ceded amounts, while under GAAP, they are reflected gross
of ceded amounts.

Everspan Indemnity Insurance Company
Everspan
statutory
Insurance Company’s
policyholder surplus was $106 at December 31, 2021, as
compared to $26 at December 31, 2020.

Indemnity

| Ambac Financial Group, Inc. 55 2021 FORM 10-K |

The significant drivers to the increase in policyholder surplus for
the year ended December 31, 2021 were capital contributions of
$92 partially offset by operating expenses and changes in
investment in subsidiaries, primarily due to a limitation on the
amount of goodwill that may be admitted in accordance with
SAP.

The significant differences between GAAP and SAP are that
under SAP:

• Wholly owned subsidiaries are not consolidated; rather, the
equity basis of accounting is utilized and the carrying
values of these investments are subject to admissibility
tests.

• The acquisition of PWIC was recorded as an equity method
investment, which
includes a goodwill component
representing the acquisition cost in excess of PWIC's
statutory surplus. Goodwill will be amortized over a period
not to exceed ten years. Under GAAP, the acquisition of
PWIC was recorded as an asset acquisition, which requires
i) all net assets to initially be recorded at fair value and ii)
the acquisition cost in excess of the fair value of net assets
to be allocated to the bases of certain types of assets based
on their relative fair values, if applicable. No goodwill is
recorded for asset acquisitions.

AMBAC UK FINANCIAL RESULTS
UNDER UK ACCOUNTING PRINCIPLES
(£ in millions)

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 £444 at December 31, 2021, as compared
to £412 at December 31, 2020. At December 31, 2021, the
carrying value of cash and investments was £500, a increase
from £481 at December 31, 2020. The increase in shareholders’
funds and cash and investments was primarily due to the
continued receipt of premiums and investment income, partially
offset by loss expenses, foreign exchange losses within Ambac
UK's investment portfolio, operating expense and tax payments.

The significant differences between US GAAP and UK GAAP
are that under UK GAAP:

• Loss reserves are only established for losses on guaranteed
obligations when, in the judgment of management, a
monetary default in the timely payment of debt service is
likely to occur, which would result in Ambac UK incurring
a loss. A loss provision is established in an amount that is
sufficient to cover the present value of the anticipated
defaulted debt service payments over the expected period
of default, less estimated recoveries under subrogation
rights. The discount rate is equal to the lower of the rate of
return on invested assets for either the current year or the
period covering the current year plus the four previous
years, currently at 4.7%. Under U.S. GAAP, loss reserves
are established (net of US GAAP basis unearned premium

revenue) for obligations that have experienced credit
deterioration, but have not yet defaulted using a weighted-
average risk-free discount rate.

• Investments in fixed maturity securities are stated at
to an other-than-temporary
amortized cost, subject
impairment evaluation. Under US GAAP, all bonds are
reported at fair value.

• VIEs are not required to be assessed for consolidation.
Under US GAAP, as noted under AAC Statutory Basis
Financial Results above, VIE's with certain characteristics
are required to be consolidated. For several VIEs Ambac
UK has the power to direct the most significant activities of
the VIE and accordingly consolidates the related VIEs
under U.S. GAAP.

• Upfront premiums written are earned on a basis
proportionate to the remaining scheduled debt service to the
total principal and interest insured. Installment premiums
are reflected in income pro-rata over the period covered by
the premium payment. Under US GAAP, premium
revenues for both upfront and installment premiums are
earned over the life of the financial guarantee contract in
proportion to the insured principal amount outstanding at
each reporting date.

• Insurance

intangibles

that arose as a result of

the
implementation of Fresh Start reporting is not a concept
within UK GAAP. Under US GAAP, this insurance
intangible asset is amortized as an expense on a level yield
basis over the life of the related insurance risks.

• Unearned premiums and loss reserves are presented net of
ceded amounts, while under GAAP, they are reflected gross
of ceded amounts.

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. The calculation of capital
resources, regulatory capital requirements and regulatory capital
surplus / deficit under Solvency II at December 31, 2021, will be
published on Ambac's website during March 2022. Final annual
Solvency II data and Ambac UK's annual Solvency and
Financial Condition Report will be published on Ambac's
website during April 2022.

Available capital resources under Solvency II were a surplus of
£245 at September 30, 2021, the most recently published
position, of which £237 are eligible to meet solvency capital
requirements. This is an increase from December 31, 2020,
when available capital resources were a surplus of £196 of
which £184 were eligible to meet solvency capital requirements.
Eligible capital
resources at September 30, 2021 and
December 31, 2020, are in comparison to regulatory capital
requirements of £247 and £256, respectively. Therefore, Ambac
UK was in a deficit position in terms of compliance with
applicable regulatory capital requirements by £10 at September
30, 2021 and was deficient in terms of compliance by £72 at
December 31, 2020. The deficit was reduced as at September
30, 2021, due to the combined impact of (i) the increase in long
term interest rates, which resulted in a decrease in technical
provision liabilities and hence an increase in eligible own funds
and (ii) a decrease in capital requirements for non-life risk due
to the maturity and de-risking of certain policies, together with

| Ambac Financial Group, Inc. 56 2021 FORM 10-K |

natural run-off of the insured portfolio in the year. The
regulators are fully aware of the deficiency in capital resources
as compared to capital requirements as at September 30, 2021
and dialogue between Ambac UK management and
its
regulators remains ongoing with respect
to options for
strengthening the capital position further.

NON-GAAP FINANCIAL MEASURES
($ in millions)

In addition to reporting the Company's financial results under
GAAP, the Company currently reports two non-GAAP financial
measures: adjusted earnings and adjusted book value. The most
directly comparable GAAP measures are net income attributable
to common stockholders for adjusted earnings and Total Ambac
Financial Group, Inc. stockholders’ equity for adjusted book
value. A non-GAAP financial measure is a numerical measure
of financial performance or financial position that excludes (or
includes) amounts that are included in (or excluded from) the
most directly comparable measure calculated and presented in
accordance with GAAP. We are presenting these non-GAAP
financial measures because they provide greater transparency
and enhanced visibility into the underlying drivers of our
business. Adjusted earnings and adjusted book value 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.

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 and other
considerations, we utilized a 0% effective tax rate for non-
GAAP adjustments; which is subject to change.

The following paragraphs define each non-GAAP financial
measure and describe why it is useful. A reconciliation of the
non-GAAP financial measure and the most directly comparable
GAAP financial measure is also presented below.

Adjusted Earnings (Loss). Adjusted earnings (loss) is defined as
net income (loss) attributable to common stockholders, as
reported under GAAP, adjusted on an after-tax basis for the
following:

• Non-credit impairment fair value (gain) loss on credit
derivatives: Elimination of the non-credit impairment fair
value gains (losses) on credit derivatives, which is the
amount in excess of the present value of the expected
estimated credit losses. Such fair value adjustments are
affected by, and in part fluctuate with changes in market
factors such as interest rates and credit spreads, including
the market’s perception of Ambac’s credit risk (“Ambac
CVA”), and are not expected to result in an economic gain
or loss. These adjustments allow for all financial guarantee
contracts to be accounted for consistent with the Financial
Services – Insurance Topic of ASC, whether or not they are
subject to derivative accounting rules. This adjustment has
become negligible and we will discontinue reporting it
beginning in the first quarter of 2022.

• Insurance intangible amortization: Elimination of the
amortization of the financial guarantee insurance intangible
asset that arose as a result of Ambac’s emergence from
implementation of Fresh Start
bankruptcy and
reporting. This adjustment ensures
that all financial
guarantee contracts are accounted for consistent with the
provisions of the Financial Services – Insurance Topic of
the ASC.

the

• Foreign exchange (gains) losses: Elimination of the foreign
exchange gains (losses) on the re-measurement of assets,
liabilities and transactions in non-functional currencies.
This adjustment eliminates the foreign exchange gains
(losses) on all assets, liabilities and transactions in non-
functional currencies, which enables users of our financial
statements to better view the results without the impact of
fluctuations
in foreign currency exchange rates and
facilitates period-to-period comparisons of Ambac's
operating performance.

The following table reconciles net income attributable to common stockholders to the non-GAAP measure, Adjusted Earnings on a total
dollar amount and per diluted share basis, for all periods presented:

($ in millions, except per share data)
Year Ended December 31,

$ Amount

Per Diluted
Share

$ Amount

Per Diluted
Share

$ Amount

Per Diluted
Share

Net income (loss) attributable to common stockholders ....... $

(17) $

(0.61) $

(437) $

(9.47) $

(216) $

(4.69)

2021

2020

2019

Adjustments:

Non-credit impairment fair value (gain) loss on credit
derivatives ..........................................................................

Insurance intangible amortization ......................................

Foreign exchange (gains) losses .........................................

—

1.12

0.15

—

1.23

0.06

(1)

295

(12)

Adjusted Earnings (Loss) (1)

43 $

0.66 $

(378) $

(8.19) $

66 $

(0.03)

6.43

(0.26)

1.44

(1) Adjusted earnings per diluted share is calculated as adjusted earnings less the change in the redemption value of redeemable noncontrolling interest,

divided by the GAAP weighted average number of diluted shares outstanding.

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:

• Non-credit

impairment

losses on credit
derivatives: Elimination of the non-credit impairment fair
value loss on credit derivatives, which is the amount in
excess of the present value of the expected estimated

fair value

| Ambac Financial Group, Inc. 57 2021 FORM 10-K |

economic credit loss. GAAP fair values are affected by,
and in part fluctuate with, changes in market factors such as
interest rates, credit spreads, including Ambac’s CVA that
are not expected to result in an economic gain or loss.
These adjustments allow for all financial guarantee
contracts to be accounted for within adjusted book value
consistent with the provisions of the Financial Services—
Insurance Topic of the ASC, whether or not they are
subject to derivative accounting rules. This adjustment has
become negligible and we will discontinue reporting it
beginning in the first quarter of 2022.

emergence

• Insurance intangible asset: Elimination of the financial
guarantee insurance intangible asset that arose as a result of
Ambac’s
the
from
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.

bankruptcy

and

• 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.

Income: Elimination of

• Net unrealized investment (gains) losses in Accumulated
Other Comprehensive
the
unrealized gains and losses on the Company’s investments
that are recorded as a component of accumulated other
comprehensive income (“AOCI”). The AOCI component
of the fair value adjustment on the investment portfolio
may differ from realized gains and losses ultimately
recognized by the Company based on the Company’s
investment strategy. This adjustment only allows for such
gains and losses in adjusted book value when realized.

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 per share data) December 31,

$ Amount

Per Share

$ Amount

Per Share

Total Ambac Financial Group, Inc. stockholders’ equity ......................................................... $

1,038 $

22.42 $

1,080 $

23.57

2021

2020

Adjustments:

Non-credit impairment fair value losses on credit derivatives ...............................................

Insurance intangible asset .......................................................................................................

Net unearned premiums and fees in excess of expected losses ..............................................

Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income
(Loss) ......................................................................................................................................

—

(320)

310

0.01

(6.91)

6.68

(154)

(3.32)

—

(373)

378

(166)

Adjusted Book Value

874 $

18.88 $

919 $

0.01

(8.14)

8.24

(3.63)

20.05

The decrease in Adjusted Book was primarily attributable to the
$10 reduction to retained earnings from the increase to the
carrying value of redeemable NCI, the impact on expected
future premiums from reinsurance and de-risking transactions
partially offset by Adjusted earnings for the year ended
December 31, 2021 (excluding earned premium previously
included in Adjusted Book Value).

Factors that impact changes to Adjusted Book Value include
many of the same factors that impact Adjusted Earnings,
including the majority of revenues and expenses, but generally
exclude components of premium earnings since they are
embedded in prior period's Adjusted Book Value through the net
unearned premiums and fees in excess of expected losses
adjustment. Net unearned premiums and fees in excess of
expected losses will affect Adjusted Book Value for (i) changes
to future premium assumptions (e.g. expected term, interest
rates, foreign currency rates, time passage) and (ii) changes to
expected losses for policies which do not exceed their related
unearned premiums and (iii) new reinsurance transactions.

Item 7A. Quantitative and Qualitative

Disclosures about Market Risk
($ in millions)

Market risk represents the potential for loss due to adverse
changes in the fair value of financial instruments, as a result of
changes in market rates and prices, such as interest rates
(inclusive of credit spreads), foreign currency exchange rates
and other relevant market rate or price changes. Market risk is,
in part, a function of the markets in which the underlying assets
are traded. The Company’s market risk sensitive financial
instruments are primarily entered into for purposes other than
trading. As discussed further below, the Company’s primary
market risk exposures include those from changes in interest
rates, foreign currency exchange rates and equity values of
limited partnership and other alternative investments.

• The primary market risks for fixed maturity investment
securities are interest rate risk and foreign exchange rate
risk. Ambac’s fixed maturity investment portfolio includes

| Ambac Financial Group, Inc. 58 2021 FORM 10-K |

securities denominated both in U.S. dollars and foreign
currencies, which are sensitive to changes in interest rates
and foreign currency exchange rates. Our fixed maturity
investments are classified as available for sale, with the
effect of market movements recognized
immediately
through Other comprehensive income, or through Net
income when securities are sold or when an impairment
charge is recorded.

• Ambac also invests in limited partnerships and other
alternative investments, primarily consisting of diversified
pooled investment funds, which are reported as Other
investments. These funds are subject to equity value
changes driven primarily by changes to their respective net
asset value (“NAV”). Ambac’s share of the changes of the
equity value of the funds is reported through Net income.
For additional information about Ambac’s investments, see
Note 4. Investments in this Annual Report on Form 10-K
located in Part II. Item 8.

• The interest rate derivatives portfolio is managed as a
partial hedge against the effects of rising interest rates
elsewhere in the Company, including on Ambac's financial
guarantee exposures. Changes in fair value of interest rate
derivatives are recognized
through Net
income. For additional information about Ambac’s interest
rate derivatives, see Note 9. Derivative Instruments to the
Consolidated Financial Statements included in Part II, Item
8 in this Form 10-K.

immediately

• Although our long-term debt obligations are reported at
amortized cost and not adjusted for fair value changes,
changes in interest rates could have a material impact on
their fair value, though with no direct impact on our
consolidated
additional
information about Ambac’s debt obligations, see Note 12.
Long-Term Debt to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K.

statements.

financial

For

risk

Fixed maturity investment securities that are distressed Ambac-
insured bonds have market risk characteristics that behave
inversely to those associated with future financial guarantee
claim payments. Accordingly, such securities are excluded from
the market
sensitivity measures below. Financial
instruments of VIEs that are consolidated as a result of Ambac
financial guarantees are also excluded from Ambac's measures
of market risk. Ambac’s exposure to such consolidated VIEs is
generally limited to financial guarantees outstanding on the
VIEs’ liabilities or assets. See Note 11. Variable Interest
Entities to the Consolidated Financial Statements included in
Part II, Item 8 in this Form 10-K for further information about
VIEs consolidated as a result of Ambac’s financial guarantees.

Ambac utilizes various systems, models and sensitivity
scenarios to monitor and manage market risk. These models
include estimates, made by management, which utilize current
and historical market information. This market information is
considered in management’s judgments about adverse sensitivity
scenarios that are reasonably possible to occur in the near-term.
The impact of these scenarios do not consider the possible
simultaneous movement in other market rates or prices, actions
of management or other factors that could lessen or worsen
actual results. For these reasons, the valuation results from these
models could differ materially from amounts actually realized in
the market.

Market Risk Sensitivities
Interest Rate Risk

interest

long-term debt and

Financial instruments for which fair value may be affected by
changes in interest rates consist primarily of fixed maturity
rate
investment securities,
derivatives. Increases to interest rates would result in declines
in the fair value of our fixed maturity investment portfolio.
Interest rate increases would also have a negative economic
impact on expected future claim payments within the financial
guarantee portfolio, primarily related to RMBS and student loan
policies. Conversely, interest rate increases would generally
result in fair value gains on interest rate derivatives and lower
the fair value of our debt obligations. Ambac performs scenario
testing to measure the potential for losses in volatile markets.
These scenario tests include parallel and non-parallel shifts in
the benchmark interest rate curve. We also monitor our interest
rates exposure through periodic reviews of projected cash flows
and durations of our asset and liability positions.

The following table summarizes the estimated change in fair
value of our fixed maturity
investment portfolio of a
hypothetical immediate increase in interest rates of 100 basis
points across the yield curve as of December 31, 2021 and 2020:

December 31,
Fair value of fixed maturity investment (1)
Pre-tax impact of 100 basis point increase in
interest rates

....

2021
$ 1,656

2020
$ 2,329

Decrease in dollars .....................................
As a percent of fair value ............................

(50)

(69)

3 %

(1) Excludes investments in distressed Ambac-insured securities and
securities held by VIEs consolidated as a result of Ambac’s
financial guarantees

The following table presents the impact on the fair value of our
long-term debt obligations and interest rate derivatives of a
hypothetical immediate decrease in interest rates of 100 basis
points across the yield curve as of December 31, 2021 and 2020:

December 31,

2021

2020

Fair value of long-term debt including
accrued interest (1)
Pre-tax impact of 100 basis point decrease
in interest rates

..........................................

$ (2,598)

$ (3,071)

Increase in dollars .......................................
As a percent of fair value ............................

(55)

(58)

2 %

Fair value of interest rate derivative net
assets (liabilities) (1)
Pre-tax impact of 100 basis point decrease
in interest rates

.......................................

Pre-tax loss from change in fair value in
dollars .........................................................

(19)

(21)

(51)

(8)

(1) Excludes long-term debt and derivative instruments of VIEs

consolidated as a result of Ambac’s financial guarantees

Foreign Currency Risk

Ambac has fixed maturity investments and investments in
pooled funds denominated in currencies other than the U.S.
dollar, primarily British pounds sterling and Euro. These
financial instruments are primarily invested assets of Ambac UK

| Ambac Financial Group, Inc. 59 2021 FORM 10-K |

and are held in consideration of non-U.S. dollar exposure in the
financial guarantee insurance portfolio and operations of Ambac
UK. The adverse fair value impact of a stronger U.S. dollar
relative to other currencies on investment holdings would be
directionally offset by the economic benefits to non-U.S. dollar
financial guarantees and other risk exposures. The following
table summarizes the estimated decrease in fair value of these
financial instruments assuming immediate 20% strengthening of
the U.S. dollar relative to the foreign currencies as of
December 31, 2021 and 2020:

December 31,

2021

2020

Fair value of investments denominated in
currencies other than the U.S. dollar (1)
Pre-tax impact of 20% strengthening of the
U.S. dollar ......................................................

.........

478 $

453

(96) $

(91)

(1) Excludes investments in distressed Ambac-insured securities and
securities held by VIEs consolidated as a result of Ambac’s
financial guarantees

Equity Sensitivity

Ambac’s investment portfolio includes equity and partnership
interests in pooled funds with diverse asset holdings and
strategies. The table below summarizes the decrease in fair
value of Ambac’s pooled fund investments that would occur
assuming an immediate and uniform 10% decline in NAV of the
funds. The selection of a 10% fair value stress is made only as
an illustration of the hypothetical impact of adverse market
movements on Ambac’s
investments with equity value
sensitivity. Actual market shocks could have materially different
aggregate results and would likely not have a uniform impact on
all funds given the diversity of the funds’ holdings and
strategies.

December 31,
Fair value of investments in pooled funds .....

Pre-tax impact of 10% decline in NAV of
the funds ........................................................

2021

2020

683 $

544

(68) $

(54)

| Ambac Financial Group, Inc. 60 2021 FORM 10-K |

Item 8. Financial Statements and Supplementary Data

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Account Firm KPMG LLP, New York, NY, PCAOB ID 185

Consolidated Financial Statements

Consolidated Balance Sheets ..................................................

65 Consolidated Statements of Stockholders’ Equity .................

Consolidated Statements of Total Comprehensive Income

(Loss) ..................................................................................

66 Consolidated Statements of Cash Flows ................................

Notes to Consolidated Financial Statements

Note 1. Background and Business Description ...................

69 Note 11. Variable Interest Entities .......................................

113

Note 2. Basis of Presentation and Significant Accounting
Policies ....................................................................

71 Note 12. Long-term Debt .....................................................

117

Note 3. Business Combination .............................................

84 Note 13. Revenues From Contracts with Customers ...........

119

Note 4. Investments .............................................................

85 Note 14. Comprehensive Income .........................................

120

Note 5. Fair Value Measurements .......................................

91 Note 15. Net Income Per Share ............................................

121

Note 6. Financial Guarantees in Force .................................

98 Note 16. Income Taxes .........................................................

121

Note 7. Insurance Contracts .................................................

99 Note 17. Employment Benefit Plans ....................................

123

Note 8. Insurance Regulatory Restrictions

107 Note 18. Leases ....................................................................

125

Note 9. Derivative Instruments ...........................................

111 Note 19. Commitments and Contingencies ..........................

126

Note 10. Intangible Assets .....................................................

113

| Ambac Financial Group, Inc. 61 2021 FORM 10-K |

Report of Independent Registered Public Accounting Firm

Definition and Limitations of Internal Control Over Financial
Reporting

A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

New York, New York
February 24, 2022

To the Stockholders and Board of Directors
Ambac Financial Group, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Ambac Financial Group, Inc. and
subsidiaries' (the Company) internal control over financial
reporting as of December 31, 2021, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2021, based on criteria established
in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of
December 31, 2021 and 2020, the related consolidated
statements of total comprehensive income (loss), stockholders’
equity, and cash flows for each of the years in the three-year
period ended December 31, 2021, and the related notes and
financial statement schedules I, II and IV (collectively, the
consolidated financial statements), and our report dated
February 24, 2022 expressed an unqualified opinion on those
consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.

We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial
reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

| Ambac Financial Group, Inc. 62 2021 FORM 10-K |

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Ambac Financial Group, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets
of Ambac Financial Group, Inc. and subsidiaries (the Company)
as of December 31, 2021 and 2020, the related consolidated
statements of total comprehensive income (loss), stockholders’
equity, and cash flows for each of the years in the three-year
period ended December 31, 2021, and the related notes and
financial statement schedules I, II and IV (collectively, the
consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of
December 31, 2021 and 2020, and the results of its operations
and its cash flows for each of the years in the three-year period
ended December 31, 2021, in conformity with U.S. generally
accepted accounting principles.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial
reporting as of December 31, 2021, based on criteria established
in Internal Control — Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 24, 2022 expressed
an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. We
believe that our audits provide a reasonable basis for our
opinion.

Critical Audit Matter

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

communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of a
critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are
not, by communicating the critical audit matter below, providing
a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.

Estimate of loss and loss expense reserves and subrogation
recoverable

As described in Notes 2 and 7 to the consolidated financial
statements, the Company estimates financial guarantee loss
and loss expense reserves and subrogation recoverable (loss
reserves) on a policy-by-policy basis based upon the present
value of expected net claim cash outflows or expected net
recovery cash inflows, discounted at risk-free rates. Expected
net claim cash outflows represent the present value of
expected claim cash outflows, less the present value of
expected recovery cash inflows. For such policies, a loss and
loss expense reserves liability is recorded for the present
value of expected net claim cash outflows in excess of the
related unearned premium revenue. Expected net recovery
cash inflows represent the present value of expected recovery
cash inflows, less the present value of expected claim cash
outflows. For such policies, a subrogation recoverable asset is
recorded. As of December 31, 2021, the Company recorded
loss and loss expense reserves of $1,538 million and
subrogation recoverable of $2,092 million.

We identified the evaluation of loss reserves as a critical audit
matter. The evaluation encompassed the assessment of the
loss reserves methodologies, including those methods used to
estimate the following assumptions: (1) credit worthiness of
the issuer of the insured security, (2) the likelihood of
possible outcomes regarding the probability of default by the
issuer of the insured security, (3) the expected loss severity
for each insurance policy, (4) the probability of remediation,
settlement and restructuring outcomes, and (5) the probability
of successful litigation or related settlement outcomes, as well
as the percentage of the breach rates of representations and
warranties underlying certain insured residential mortgage
backed securities. The evaluation of the methods and the
impact of these assumptions required specialized skills and
subjective and complex auditor judgment due to a high level
of estimation uncertainty.

The following are the primary procedures we performed to
address this critical audit matter. With the involvement of
professionals with specialized industry knowledge and
experience, when necessary, we evaluated the design and
tested the operating effectiveness of certain internal controls
related to the Company's estimation of loss reserves. This
included controls related to the determination of the sources
of data and assumptions and the analysis of the loss reserves
and historical trends. We inquired of internal and external

| Ambac Financial Group, Inc. 63 2021 FORM 10-K |

legal counsel and read letters received directly from the
Company’s internal and external legal counsel regarding the
status of litigation underlying certain insurance policies. We
involved credit risk professionals with specialized skills and
knowledge, who assisted in assessing the individual issuer
ratings and credit classifications for certain policies by
evaluating the financial performance of the issuer of the
insured security and underlying collateral. We involved
forensics professionals with specialized skills and knowledge,
who assisted in inspecting underwriting documentation for
certain mortgage loans underlying insured residential
mortgage backed securities, which were examined by the
Company’s consultants engaged to determine breach rates of
representations and warranties. We also involved valuation
professionals with specialized skills and knowledge, who
assisted in:

• evaluating the methods used to estimate loss reserves for
compliance with U.S. generally accepted accounting
principles

• evaluating, for certain policies, the sources of data and
assumptions used in the calculation of loss reserves by
comparing to internal experience and related historical
and industry trends

• developing, for certain policies, an independent estimate
of the loss reserves and comparing it to the recorded
estimate.

/s/ KPMG LLP

We have served as the Company’s auditor since 1985.

New York, New York
February 24, 2022

| Ambac Financial Group, Inc. 64 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

(Dollars in millions, except share data) December 31,
Assets:
Investments:

Fixed maturity securities, at fair value (amortized cost of $1,605 and $2,175) ....................................................................... $
Fixed maturity securities pledged as collateral, at fair value (amortized cost of $15 and $15) ...............................................
Short-term investments, at fair value (amortized cost of $415 and $492) ...............................................................................
Short-term investments pledged as collateral, at fair value (amortized cost of $105 and $125) .............................................
Other investments (includes $683 and $544 at fair value) .......................................................................................................
Total investments (net of allowance for credit losses of $0 and $0) .....................................................................................
Cash and cash equivalents ...........................................................................................................................................................
Restricted cash ............................................................................................................................................................................
Premium receivables (net of allowance for credit losses of $9 and $17) ....................................................................................
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 and $0) ......................................
Deferred ceded premium .............................................................................................................................................................
Subrogation recoverable ..............................................................................................................................................................
Derivative assets ..........................................................................................................................................................................
Intangible assets ..........................................................................................................................................................................
Goodwill ......................................................................................................................................................................................
Other assets .................................................................................................................................................................................
Variable interest entity assets: .....................................................................................................................................................
Fixed maturity securities, at fair value .....................................................................................................................................
Restricted cash .........................................................................................................................................................................
Loans, at fair value ..................................................................................................................................................................
Derivative assets .......................................................................................................................................................................
Other assets ..............................................................................................................................................................................

Total assets
Liabilities and Stockholders’ Equity:
Liabilities:
Unearned premiums .................................................................................................................................................................... $
Loss and loss expense reserves ...................................................................................................................................................
Ceded premiums payable ............................................................................................................................................................
Long-term debt ............................................................................................................................................................................
Accrued interest payable .............................................................................................................................................................
Derivative liabilities ....................................................................................................................................................................
Other liabilities ............................................................................................................................................................................
Variable interest entity liabilities: ...............................................................................................................................................
Long-term debt (includes $4,056 and $4,324 at fair value) .....................................................................................................
Derivative liabilities .................................................................................................................................................................

Total liabilities
Commitments and contingencies (See Note 19)
Redeemable noncontrolling interest ............................................................................................................................................
Stockholders’ equity:

Preferred stock, par value $0.01 per share; 20,000,000 shares authorized shares; issued and outstanding shares—none ......
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 46,477,068 and 45,865,081 .......
Additional paid-in capital .........................................................................................................................................................
Accumulated other comprehensive income .............................................................................................................................
Retained earnings .....................................................................................................................................................................
Treasury stock, shares at cost: 172,929 and 55,942 .................................................................................................................
Total Ambac Financial Group, Inc. stockholders’ equity ....................................................................................................
Nonredeemable noncontrolling interest ...................................................................................................................................

Total stockholders’ equity
Total liabilities, redeemable noncontrolling interest and stockholders’ equity

See accompanying Notes to Consolidated Financial Statements

2021

2020

1,730 $
15
414
105
690
2,955
17
5
323
55
90
2,092
76
362
46
68

3,455
2
2,718
38
2
12,303 $

395 $

1,570
33
2,230
576
95
133

4,216
1,940
11,187

2,317
15
492
125
595
3,544
20
13
370
33
70
2,156
93
409
46
68

3,354
2
2,998
41
2
13,220

456
1,759
27
2,739
517
114
135

4,493
1,835
12,074

—
—
257
58
726
(3)
1,038
60
1,098
12,303 $

—
—
242
79
759
(1)
1,080
60
1,140
13,220

| Ambac Financial Group, Inc. 65 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Loss)

(Dollars in millions, except share data) Year Ended December 31,
Revenues:

2021

2020

2019

Net premiums earned .................................................................................................................................... $
Net investment income ..................................................................................................................................

Net investment gains (losses), including impairments ..................................................................................

Net gains (losses) on derivative contracts .....................................................................................................

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

Other income .................................................................................................................................................

Income (loss) on variable interest entities .....................................................................................................

Total revenues

Expenses:

Losses and loss expenses (benefit) ................................................................................................................

Intangible amortization .................................................................................................................................

Operating expenses .......................................................................................................................................

Interest expense .............................................................................................................................................

Total expenses

Pre-tax income (loss) ........................................................................................................................................

Provision (benefit) for income taxes ................................................................................................................

Net income (loss) .............................................................................................................................................

Less: net (gain) loss attributable to noncontrolling interest .............................................................................

47 $

54 $

139

282

(88)

126

187

281

(16)

(1)

122

(50)

—

156

225

222

596

(440)

(3)

(437)

—

Net income (loss) attributable to common stockholders

Other comprehensive income (loss), after tax:

(17) $

(437) $

227

(50)

—

134

496

295

103

269

680

(183)

(216)

—

(216)

(16) $

(437) $

(216)

Net income (loss) ............................................................................................................................................. $
Unrealized gains (losses) on securities, net of income tax provision (benefit) of $(2), $1 and $(8) ...............

Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $—, $— and $— ...
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $—, $—
and $— .............................................................................................................................................................

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

Total other comprehensive income (loss), net of income tax

Total comprehensive income (loss) .................................................................................................................

Less: comprehensive (loss) gain attributable to the noncontrolling interest: ...................................................

Net gain (loss) ..................................................................................................................................................

(12)
(8)

(1)

(21)

(38)

(1)

Total comprehensive income (loss) attributable to common stockholders

Net income (loss) per share attributable to common stockholders:

(38) $

(400) $

Basic ............................................................................................................................................................... $
Diluted ........................................................................................................................................................... $
Weighted average number of common shares outstanding:

(0.61) $

(9.47) $

Basic ...............................................................................................................................................................

Diluted ...........................................................................................................................................................

46,535,001

46,147,062

45,954,908

46,535,001

46,147,062

45,954,908

See accompanying Notes to Consolidated Financial Statements

| Ambac Financial Group, Inc. 66 2021 FORM 10-K |

15
23

(3)

65
26

—

(1)

(400)

(125)

—

(125)

(4.69)

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity

Total

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Preferred
Stock

Common
Stock

Additional
Paid-in
Capital

Treasury
Stock,
at Cost

Nonredeemable
Noncontrolling
Interest

Ambac Financial Group, Inc.

1,633 $

1,421 $

(49) $

— $

219 $

— $

($ in Millions)
Balance at January 1, 2019

Total comprehensive income
(loss) .........................................

Stock-based compensation .......
Cost of shares (acquired)
issued under equity plan ...........

Re-issuance of Ambac
Assurance auction market
preferred shares ........................
Balance at December 31, 2019 .. $

Total comprehensive income
(loss) .........................................

Adjustment to initially apply
ASU 2016-13 ...........................

Stock-based compensation .......
Cost of shares (acquired)
issued under equity plan ...........
Balance at December 31, 2020 .. $

Total comprehensive income
(loss) ........................................

Stock-based compensation .......
Cost of shares (acquired)
issued under equity plan ..........

Changes to Redeemable
noncontrolling interest .............

Balance at December 31, 2021

(125)
12

(216)
—

(3)

91
—

—

—
—

—

—
—

—

19
1,536 $

—
1,203 $

—
42 $

—
— $

(400)

(437)

(4)
11

(4)
—

—
—

—

—
—

—

—
—

(3)
1,140 $

(2)
759 $

—
79 $

—
— $

(38)
14

(6)

(17)
—

(4)

(21)
—

—

—
—

—

—
—

—

(12)
1,098 $

(12)
726 $

—
58 $

—
— $

—
12

—

232 $

—

—
11

—

242 $

—
14

—

257 $

—
—

—

—
— $

—

—
—

(1)
(1) $

—
—

(2)

—
(3) $

—
—

—

19
60

—

—
—

—
60

—
—

—

—
60

See accompanying Notes to Consolidated Financial Statements

| Ambac Financial Group, Inc. 67 2021 FORM 10-K |

2021

2020

2019

(17) $
(1)
(16)

(437) $
—
(437)

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

($ in millions) Year Ended December 31,
Cash flows from operating activities:
Net income (loss) attributable to common stockholders .................................................................................. $
Redeemable noncontrolling interest .................................................................................................................
Net income (loss) .............................................................................................................................................
Adjustments to reconcile net income to net cash used in operating activities: ................................................
Depreciation and amortization ......................................................................................................................
Amortization of bond premium and discount ...............................................................................................
Share-based compensation ............................................................................................................................
Deferred income taxes ..................................................................................................................................
Current income taxes ....................................................................................................................................
Unearned premiums, net ...............................................................................................................................
Losses and loss expenses, net .......................................................................................................................
Ceded premiums payable ..............................................................................................................................
Premium receivables .....................................................................................................................................
Accrued interest payable ...............................................................................................................................
Amortization of intangible assets ................................................................................................................
Net realized investment gains .......................................................................................................................
(Gain) loss on extinguishment of debt ..........................................................................................................
Variable interest entity activities ..................................................................................................................
Derivative assets and liabilities .....................................................................................................................
Other, net ......................................................................................................................................................

Net cash used in operating activities
Cash flows from investing activities:

Proceeds from sales of bonds ........................................................................................................................
Proceeds from matured bonds .......................................................................................................................
Purchases of bonds........................................................................................................................................
Proceeds from sales of other invested assets ................................................................................................
Purchases of other invested assets ................................................................................................................
Change in short-term investments ................................................................................................................
Change in cash collateral receivable .............................................................................................................
Proceeds from paydowns of consolidated VIE assets ..................................................................................
Acquisition of Xchange, net of cash acquired ..............................................................................................
Other, net ......................................................................................................................................................

Net cash provided by investing activities
Cash flows from financing activities:

2
(13)
14
6
(4)
(82)
(147)
6
48
103
55
(7)
(33)
(7)
(23)
(35)
(131)

236
698
(343)
39
(127)
98
9
171
—
(5)
776

Proceeds from issuance of Ambac UK Debt ................................................................................................
Proceeds from issuance of Sitka AAC Note .................................................................................................
Proceeds from issuance of Surplus Notes .....................................................................................................
Paydowns of LSNI Ambac Note ..................................................................................................................
Payments for debt issuance costs ..................................................................................................................
Issuance of auction market preferred shares of Ambac Assurance ..............................................................
Tax payments related to shares withheld for share-based compensation plans ............................................
Distributions to noncontrolling interest holders ...........................................................................................

Payments of consolidated VIE liabilities ......................................................................................................

Net cash used in financing activities
Effect of foreign exchange on cash and cash equivalents
Net cash flow ...................................................................................................................................................
Cash, cash equivalents, and restricted cash at beginning of period .................................................................
Cash, cash equivalents, and restricted cash at end of period

—
1,163
11
(1,641)
(12)
—
(6)

(1)
(170)
(657)
—
(12)
35
23 $

See accompanying Notes to Consolidated Financial Statements

| Ambac Financial Group, Inc. 68 2021 FORM 10-K |

(216)
—
(216)

—
(63)
12
1
35
(132)
(364)
(4)
77
87
295
(81)
—
(38)
(1)
79
(311)

1,212
379
(959)
81
(137)
(218)
100
543
—
(2)
1,000

12
—
—
(178)
—
19
(3)

—
(542)
(691)
—
(2)
83
81

1
(15)
11
(9)
17
(48)
76
(3)
44
93
57
(22)
—
(5)
6
59
(175)

1,109
137
(975)
374
(475)
158
—
178
(74)
1
432

—
—
—
(121)
—
—
(3)

—
(178)
(303)
—
(46)
81
35 $

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

1. BACKGROUND AND BUSINESS

DESCRIPTION

Ambac Financial Group, Inc. (“AFG”), headquartered in New
York City, is a financial services holding company incorporated
in the state of Delaware on April 29, 1991. References to
“Ambac,” the “Company,” “we,” “our,” and “us” are to AFG
and its subsidiaries, as the context requires. Ambac's business
operations include:

• Financial Guarantee ("FG") Insurance — Ambac
Assurance Corporation ("AAC") and its wholly owned
subsidiary, Ambac Assurance UK Limited (“Ambac UK”)
are legacy financial guarantee businesses, both of which
have been in runoff since 2008 (the "Financial Guarantee
Insurance Companies").

• Specialty Property & Casualty Program Insurance
("SPCP") — Currently includes five admitted carriers
(Everspan Insurance Company, Providence Washington
Insurance Company, 21st Century Indemnity Insurance
Company, 21st Century Pacific Insurance Company and
21st Century Auto Insurance Company of New Jersey) and
an excess and surplus lines (“E&S” or “nonadmitted”)
Insurance Company
insurer Everspan
(collectively, “Everspan”). The 21st Century companies
were acquired in 2022. Everspan carriers that are currently
part of the intercompany pooling agreement (Everspan
Indemnity Insurance Company ("Everspan Indemnity") and
Everspan Insurance Company) received an AM Best rating
of 'A-' (Excellent) in February 2021. Everspan launched its
first insurance program in May 2021.

Indemnity

• Managing General Agency / Underwriting ("MGA/U)
— Currently includes Xchange Benefits, LLC and Xchange
Affinity Underwriting Agency, LLC
(collectively,
“Xchange”), a property and casualty Managing General
Underwriter focussed on accident and health products of
which AFG acquired 80% on December 31, 2020. Refer to
Note 3. Business Combination for further information
relating to this acquisition.

While SPCP and MGA/U (together, the "Specialty P&C
Program Insurance Platform") are distinct businesses, they are
currently not material enough to Ambac's operations to warrant
segment presentation. Management evaluates its reportable
segments at least annually and as facts and circumstances
change.

Limitations on Voting and Transfer of Common
Stock
AFG’s Amended and Restated Certificate of Incorporation
limits voting and transfer rights of stockholders in significant
ways. Article IV contains voting restrictions applicable to any
person owning at least 10% of AFG's common stock so that
such person (including any group consisting of such person and
any other person with whom such person or any affiliate or
associate of such person has any agreement, contract,

arrangement or understanding with respect to acquiring, voting,
holding or disposing of AFG’s common stock) shall not be
entitled to cast votes in excess of one vote less than 10% of the
votes entitled to be cast by all common stock holders, except as
otherwise approved by the OCI (as defined below). Article XII
contains substantial restrictions on the ability to transfer AFG’s
common stock. In order to preserve certain tax benefits, subject
to limited exceptions, any attempted transfer of common stock
shall be prohibited and void to the extent that, as a result of such
transfer (or any series of transfers of which such transfer is a
part), either (i) any person or group of persons shall become a
holder of 5% or more of the Company’s common stock or
(ii) the percentage stock ownership interest in AFG of any
holder of 5% or more of the Company’s common stock shall be
increased (a “Prohibited Transfer”). These restrictions shall not
apply to an attempted transfer if the transferor or the transferee
obtains the written approval of AFG’s Board of Directors to
such transfer. A purported transferee of a Prohibited Transfer
shall not be recognized as a stockholder of AFG for any purpose
whatsoever in respect of the securities which are the subject of
the Prohibited Transfer (the “Excess Securities”). Until the
Excess Securities are acquired by another person in a transfer
that is not a Prohibited Transfer, the purported transferee of a
Prohibited Transfer shall not be entitled with respect to such
Excess Securities to any rights of stockholders of AFG,
including, without limitation, the right to vote such Excess
Securities and to receive dividends or distributions, whether
liquidating or otherwise, in respect thereof, if any. Once the
Excess Securities have been acquired in a transfer that is not a
Prohibited Transfer, the securities shall cease to be Excess
Securities. If the Board determines that a transfer of securities
constitutes a Prohibited Transfer then, upon written demand by
AFG, the purported transferee shall transfer or cause to be
transferred any certificate or other evidence of ownership of the
Excess Securities within the purported transferee’s possession or
control, together with any distributions paid by AFG with
respect to such Excess Securities, to an agent designated by
AFG. Such agent shall thereafter sell such Excess Securities and
the proceeds of such sale shall be distributed as set forth in the
Amended and Restated Certificate of Incorporation. If the
purported transferee of a Prohibited Transfer has resold the
Excess Securities before receiving such demand, such person
shall be deemed to have sold the Excess Securities for AFG’s
agent and shall be required to transfer to such agent the proceeds
of such sale, which shall be distributed as set forth in the
Amended and Restated Certificate of Incorporation.

Strategies to Enhance Shareholder Value
The Company's primary goal is to maximize shareholder value
through the execution of key strategies for both its (i) Specialty
P&C Program Insurance Platform and (ii) Financial Guarantee
Insurance companies.

Specialty P&C Insurance Program Platform strategic priorities
include:

• Growing and diversifying Everspan's participatory fronting

platform with existing and new program partners.

| Ambac Financial Group, Inc. 69 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

• Building a leading federation of specialty MGA/U partners
through additional acquisitions and de novo builds,
supported by a centralized business services unit including
core technology solutions.

• Making opportunistic investments that are strategic to the

overall Specialty P&C Program Insurance Platform.

Financial Guarantee Insurance companies’ strategic priorities
include:

• Actively managing, de-risking and mitigating insured

portfolio risk.

• Pursuing loss recovery through active litigation and other
means, particularly residential mortgage back security
representation and warranty litigation.

• Improving operating efficiency and optimizing our asset

and liability profile.

• Exploring, at the appropriate time, strategic options to

further maximize value for AFG.

The execution of Ambac’s strategy to increase the value of its
investment in AAC is subject to the restrictions set forth in the
Settlement Agreement, dated as of June 7, 2010 (the "Settlement
Agreement"), by and among AAC, Ambac Credit Products LLC
("ACP"), AFG and certain counterparties to credit default swaps
with ACP that were guaranteed by AAC; as well as the
Stipulation and Order among the Office of the Commissioner of
Insurance for the State of Wisconsin (“OCI”), AFG and AAC
that became effective on February 12, 2018, as amended (the
“Stipulation and Order”); and the indenture for the Tier 2 Notes
(as defined below), each of which requires OCI and, under
certain circumstances, holders of the debt instruments benefiting
from such restrictions, to approve certain actions taken by or in
respect of AAC. In exercising its approval rights, OCI will act
for the benefit of policyholders, and will not take into account
the interests of AFG.

Opportunities for remediating losses on poorly performing
insured transactions also depend on market conditions, including
the perception of AAC’s creditworthiness, the structure of the
underlying risk and associated policy as well as other
counterparty specific factors. AAC's ability to commute policies
or purchase certain investments may also be limited by available
liquidity.

The Segregated Account and the Rehabilitation
Exit Transactions
In March 2010, AAC established a Segregated Account pursuant
to Wisc. Stat. §611.24 (2) (the “Segregated Account”) to
segregate certain segments of AAC’s liabilities, and the
Wisconsin Insurance Commissioner, acting as rehabilitator (the
"Rehabilitator") commenced rehabilitation proceedings in the
Dane County, Wisconsin Circuit Court (the “Rehabilitation
Court”) with respect to the Segregated Account (the “Segregated
Account Rehabilitation Proceedings”) in order to permit OCI to
facilitate an orderly run-off and/or settlement of the liabilities
allocated to the Segregated Account. On October 8, 2010, OCI
filed a plan of rehabilitation for the Segregated Account (the
“Segregated Account Rehabilitation Plan”) in the Rehabilitation
Court, which was confirmed on January 24, 2011. On June 11,
2014, the Rehabilitation Court approved amendments to the

Segregated Account Rehabilitation Plan and the Segregated
Account Rehabilitation Plan, as amended, became effective on
June 12, 2014.
Policy obligations not allocated to the
Segregated Account remained in the General Account of AAC,
and such policies in the General Account were not subject to
and, therefore, were not directly impacted by the Segregated
Account Rehabilitation Plan.

On February 12, 2018, the rehabilitation of the Segregated
Account was concluded pursuant to an amendment to the
Segregated Account Rehabilitation Plan (the "Second Amended
Plan of Rehabilitation"). The conclusion of the rehabilitation
followed the successful completion of Ambac's surplus note
exchange offers and consent solicitation, which, together with
the satisfaction of all conditions precedent to the effectiveness of
the Second Amended Plan of Rehabilitation, including the
discharge of all unpaid policy claims of the Segregated Account,
including accretion amounts thereon ("Deferred Amounts"),
completed the restructuring transactions (the "Rehabilitation
Exit Transactions"). In connection with the discharge of all
unpaid policy claims, AAC issued the secured notes and the Tier
2 notes. See Note 12. Long-term Debt for additional information
regarding the secured notes and Tier 2 Notes.

Bank Settlement Agreement

As part of the Rehabilitation Exit Transactions, AFG and
AAC received sufficient consents from holders of surplus notes
for a waiver and amendment (the "BSA Waiver and
Amendment") of the Settlement Agreement. After giving effect
to the BSA Waiver and Amendment, the Settlement Agreement
continues to limit certain activities of AAC and its subsidiaries,
such as issuing indebtedness; engaging in mergers and similar
transactions; disposing of assets; making restricted payments;
creating or permitting liens; engaging in transactions with
affiliates; modifying or creating tax sharing agreements; and
taking certain actions with respect to surplus notes (among other
The Settlement Agreement
restrictions and
includes certain allowances with respect to these activities and
generally requires the approval of OCI and, in some cases,
holders of surplus notes issued pursuant to the Settlement
Agreement, for consents, waivers or amendments.

limitations).

Stipulation and Order

Upon consummation of the Rehabilitation Exit Transactions, the
Stipulation and Order became effective. The Stipulation and
Order includes affirmative covenants, as well as restrictions on
certain business activities and transactions, of AFG and AAC.
The Stipulation and Order has no fixed term and may be
terminated or modified only with the approval of OCI. OCI
reserved the right to modify or terminate the Stipulation and
Order in a manner consistent with the interests of policyholders,
creditors and the public generally.

2021 Surplus Note Exchanges
On January 19, 2021, AAC entered into a purchase agreement
(the “Purchase Agreement”) with AFG and certain funds or
accounts (the “Note Holders”), pursuant to which (i) the Note
Holders agreed to sell to AAC all of the individual beneficial
interests (the “Interests”) in the 5.1% senior notes due August
28, 2039 (the “Corolla Notes”), issued by the Corolla Trust, a

| Ambac Financial Group, Inc. 70 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Delaware statutory trust formed by AFG in 2014, (see Note 11.
Variable Interest Entities for a discussion of the establishment
of the Corolla Trust) (ii) AFG agreed to sell to AAC the owner
trust certificate for the Corolla Trust (the “Corolla Certificate”),
which constituted all of the equity interests in the Corolla Trust,
and (iii) AAC agreed to exchange the Interests and the Corolla
Certificate for AAC’s surplus notes (collectively, the “Corolla
Note Exchange”). The Note Holders held 100% of the
outstanding Corolla Notes. Pursuant to the Purchase Agreement,
each $1.00 principal amount of the Corolla Notes (and the
associated amount of accrued and unpaid interest thereon) was
exchanged for $0.9125 principal amount of surplus notes (and
the associated amount of accrued and unpaid interest thereon) on
the date of the consummation of the Corolla Note Exchange (the
“Closing”). In addition, every $1.00 principal amount of the
Corolla Certificate (and the associated amount of accrued and
unpaid interest thereon) was exchanged for $0.64 principal
amount of surplus notes (and the associated amount of accrued
and unpaid interest thereon) on the date of Closing. The Closing
occurred on January 22, 2021. At the Closing AAC issued $267
aggregate principal amount of surplus notes to consummate the
Corolla Note Exchange and acquire all of the interests in the
Corolla Trust. Subsequent to the closing the Corolla Trust was
dissolved and the junior surplus note that had been deposited in
the Corolla Trust by AFG in 2014 was canceled.

In February 2021, AAC entered into a purchase agreement
pursuant to which the holder of $15 principal amount of 5.1%
junior surplus notes issued by AAC agreed to sell such notes to
AAC in exchange for surplus notes (the "JSN Exchange").
Pursuant to the purchase agreement, each $1.00 principal
amount of the junior surplus notes (and the associated amount of
accrued and unpaid interest thereon) was exchanged for $0.8581
principal amount of surplus notes (and the associated amount of
accrued and unpaid interest thereon). The closing of the JSN
Exchange occurred on February 11, 2021 when AAC issued
approximately $13 aggregate principal amount of surplus notes.
Subsequent to the closing of the JSN Exchange the junior
surplus notes were canceled. As a result of the Corolla Note
Exchange and the JSN Exchange, AAC no longer has any junior
surplus notes outstanding.

The surplus notes exchanged pursuant to the Corolla Note
Exchange and the JSN Exchange are part of the same series as,
and rank equally with, the surplus notes previously issued by
AAC. The Company recorded a gain of $33 for the year ended
December 31, 2021, arising from AAC's purchases of junior
surplus notes below their carrying values which is reported
within Net realized gains (losses) on extinguishment of debt in
the Consolidated Statements of Total Comprehensive Income
(Loss). In addition, the Company recorded a gain of $4 for the
year ended December 31, 2021, from the exchange of the
Corolla Certificate held by AFG above its carrying value, which
is reported within Net realized investment gains (losses) in the
Consolidated Statements of Total Comprehensive Income
(Loss).

Secured Note Refinancing
On July 6, 2021, a newly formed variable interest entity and
wholly-owned subsidiary of AFG, Sitka Holdings, LLC
(“Sitka”), issued $1,175 par amount of LIBOR plus 4.5% senior

secured notes due 2026 (the “Sitka Senior Secured Notes”). In
connection with the issuance and sale of the Sitka Senior
Secured Notes, AAC issued a secured note to Sitka in the same
amount and with the same interest rate and maturity date as the
Sitka Senior Secured Notes (the "Sitka AAC Note"). The
proceeds from this offering of $1,163 were used to fund a
portion of the full redemption of the Ambac LSNI Secured
Notes due 2023 (the “LSNI Secured Notes”) and the secured
note issued by AAC concurrently with the issuance of the LSNI
Secured Notes (the "LSNI Ambac Note"). The remaining
balance of the LSNI Secured Notes were redeemed utilizing
other available temporary sources of liquidity. Ambac does not
consolidate Sitka since it does not have a variable interest in the
trust. Accordingly, the Sitka AAC Note is reported within Long-
term debt on the Consolidated Balance Sheet.

2. BASIS OF PRESENTATION AND

SIGNIFICANT ACCOUNTING POLICIES

financial statements

Ambac’s consolidated financial statements have been prepared
on the basis of U.S. generally accepted accounting principles
in
(“GAAP”). The preparation of
conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and disclosures. Such estimates
that are particularly susceptible to change are used in connection
with certain fair value measurements, valuation of financial
guarantee loss reserves for non-derivative insurance policies and
the valuation allowance on the deferred tax asset, any of which
individually could be material.

Consolidation
The consolidated financial statements include the accounts of
AFG and all other entities in which AFG (directly or through its
subsidiaries) has a controlling financial interest, including
variable interest entities (“VIEs”) for which AFG or an AFG
subsidiary is deemed the primary beneficiary in accordance with
the Consolidation Topic of
the Accounting Standards
Codification ("ASC"). All significant intercompany balances
have been eliminated. The usual condition for a controlling
financial interest is ownership of a majority of the voting
interests of an entity. However, a controlling financial interest
may also exist in entities, such as VIEs, through arrangements
that do not involve controlling voting interests. A VIE is an
entity: a) that lacks enough equity investment at risk to permit
the entity to finance its activities without additional subordinated
financial support from other parties; or b) where the group of
equity holders does not have: (1) the power, through voting
rights or similar rights, to direct the activities of an entity that
most significantly impact the entity’s economic performance;
(2) the obligation to absorb the entity’s expected losses; or
(3) the right to receive the entity’s expected residual returns. The
determination of whether a variable interest holder is the
primary beneficiary involves performing a qualitative analysis
of the VIE that includes, among other factors, its capital
structure, contractual terms including the rights of each variable
interest holder, the activities of the VIE, whether the variable
interest holder has the power to direct the activities of a VIE that
most significantly impact the VIE’s economic performance,
whether the variable interest holder has the obligation to absorb

| Ambac Financial Group, Inc. 71 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

losses of the VIE that could potentially be significant to the VIE
or the right to receive benefits from the VIE that could
potentially be significant to the VIE, related party relationships
and the design of the VIE. An entity that is deemed the primary
beneficiary of a VIE is required to consolidate the VIE. Refer to
Note 11. Variable Interest Entities, for a detailed discussion of
Ambac’s involvement in VIEs, Ambac’s methodology for
determining whether Ambac is required to consolidate a VIE
and the effects of VIEs being consolidated.

AFG Unconsolidated Financial Information
Financial information of AFG is presented in Schedule II to this
Form 10-K as of December 31, 2021 and 2020 and for the years
ended December 31, 2021, 2020 and 2019. Investments in
subsidiaries are accounted for using the equity method of
accounting in Schedule II.

Measurement of Credit Losses on Financial
Instruments (CECL)
On January 1, 2020 Ambac adopted ASU 2016-13, Financial
Instruments-Credit Losses (Topic 326) - Measurement of Credit
Losses on Financial Instruments, subsequently amended by
ASU 2018-19, Codification Improvements
to Topic 326,
Financial
- Credit Losses; ASU 2019-04,
Codification Improvements to Topic 326, Financial Instruments
—Credit Losses, Topic 815, Derivatives and Hedging, and Topic
825, Financial
Instruments; ASU 2019-05, Financial
Instruments—Credit Losses (Topic 326): Targeted Transition
Relief; and ASU 2019-11, Codification Improvements to Topic
326, Financial Instruments - Credit Losses (collectively the
Current Expected Credit Loss standard or "CECL").

Instruments

The CECL standard affects how reporting entities measure
credit losses for financial assets that are not accounted for at fair
value through net income. For Ambac, these financial assets
include available-for-sale debt securities and amortized cost
assets,
reinsurance
recoverables and loans. CECL does not apply to subrogation
recoveries of previously paid and unpaid losses on insurance
contracts accounted for under ASC 944 nor does it apply to
equity method investments accounted for under ASC 323.

receivables,

specifically

premium

• For available-for-sale debt securities, credit losses under
CECL are measured similarly to other-than-temporary
impairments under prior GAAP. The updated guidance was
applied prospectively.

• For financial instruments measured at amortized cost,
CECL replaces the "incurred loss" model, which generally
delayed recognition of the full amount of credit losses until
the loss was probable of occurring, with an "expected loss"
model, which reflects an entity's current estimate of all
expected lifetime credit losses. The estimate of expected
lifetime
historical
information, current information, as well as reasonable and
supportable forecasts. Expected lifetime credit losses for
amortized cost assets will be recorded as an allowance for
credit losses, with subsequent increases or decreases in the
allowance reflected in net income each period. The updated
guidance was applied by a cumulative effect adjustment to
the opening balance of retained earnings at January 1,

consider

should

losses

credit

2020. This adjustment was not material to retained earnings
or any individual balance sheet line item. Refer to the
discussion below for each asset type.

As a result of adopting CECL, management revised its policies
and procedures around the credit impairment evaluation process.
CECL also introduced new disclosures related to the credit
impairment process,
including certain accounting policy
elections that Ambac made under the new standard.

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

Ambac’s non-VIE debt investment portfolio is accounted for on
a trade-date basis and consists primarily of investments in fixed
maturity securities that are considered available-for-sale as
defined by the Investments - Debt Securities Topic of the ASC.
Available-for-sale debt securities are reported in the financial
statements at fair value with unrealized gains and losses, net of
deferred taxes, reflected in Accumulated Other Comprehensive
Income (Loss) in Stockholders’ Equity and computed using
amortized cost as the basis. For purposes of computing
amortized cost, premiums and discounts are accounted for using
the effective interest method over a term of the security. For
structured debt securities with a large underlying pool of
homogenous loans, such as mortgage-backed and asset-backed
securities, premiums and discounts are adjusted for the effects
of actual and anticipated prepayments. For other fixed maturity
securities, such as corporate and municipal bonds, discounts are
amortized or accreted over the remaining term of the securities
and premiums are amortized to the earliest call date.

Ambac’s non-VIE investment portfolio also includes equity
interests in pooled investment funds which are accounted for in
accordance with the Investments - Equity Securities Topic of the
ASC and reported as Other investments on the Consolidated
Balance Sheet with income reported through Net investment
income on the Statement of Total Comprehensive Income
(Loss). Equity interests in the form of common stock or in-
substance common stock are classified as trading securities and
reported at fair value while limited partner interests in such
funds are reported using the equity method.

Fair value
is based primarily on quotes obtained from
independent market sources. When quotes for fixed maturity
securities are not available or cannot be
reasonably
corroborated, valuation models are used to estimate fair value.
These models include estimates, made by management, which
utilize current market information. When fair value is not
readily determinable
the
investments are valued using net asset value ("NAV") as a
practical expedient as permitted under
the Fair Value
Measurement Topic of the ASC. Investment valuations could
differ materially from amounts that would actually be realized in
the market. Realized gains and losses on the sale of investments
are determined on the basis of specific identification. Refer to
Note 5. Fair Value Measurements for further description of the

for pooled

investment

funds,

| Ambac Financial Group, Inc. 72 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

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

VIE investments in fixed maturity securities are carried at fair
value as they are either considered as available for sale securities
or under
the fair value option election. For additional
information about VIE investments, including fair value by
asset-type, see Note 11. Variable Interest Entities.

Ambac has a formal credit impairment review process for fixed
maturity available-for-sale securities in its investment portfolio.
Ambac conducts a review each quarter to identify and evaluate
investments that have indications of impairment in accordance
with the Investments - Debt Securities Topic of the ASC.

• Prior to the adoption of CECL, factors considered to
identify and assess securities for other than temporary
impairment included: (i) fair values that have declined by
20% or more below amortized cost; (ii) market values that
have declined by 5% or more but less than 20% below
amortized cost for a continuous period of at least six
months; (iii) recent downgrades by rating agencies; (iv) the
financial condition of the issuer and financial guarantor, as
applicable, and an analysis of projected defaults on the
underlying collateral; (v) whether scheduled
interest
payments are past due; (vi) whether Ambac has the intent
to sell the security; and (vii) whether it is more likely than
not that Ambac will be required to sell a security before the
anticipated recovery of its amortized cost basis. If we
believed a decline in the fair value of a particular
investment is not credit-related, we recorded the decline as
an unrealized loss net of tax in Accumulated Other
Comprehensive Income (Loss) in Stockholders’ Equity on
our Consolidated Balance Sheets. If it was determined that
a credit impairment existed, the credit impairment loss was
recognized in earnings, and the other-than-temporary
amount related to all other factors was recognized in other
comprehensive income. For fixed maturity securities that
had credit impairments in a period, the previous amortized
cost of the security less the amount of the credit impairment
recorded through earnings became the investment’s new
amortized cost basis. Ambac accreted the new amortized
cost basis to par or to the estimated future cash flows to be
recovered over the expected remaining life of the security.

• Under CECL, credit losses are evaluated and measured
similarly, however the recognition of credit impairment
losses for available-for-sale debt securities are recorded as
an allowance for credit losses with an offsetting charge to
net income, rather than as a direct write-down of the
security as was required under prior GAAP. As a result,
improvements to estimated credit losses for available-for-
sale debt securities are recognized immediately in net
income
time.
Furthermore, as required under CECL, Ambac no longer
considers the length of time a security has continuously
been in an unrealized loss in the credit impairment process.

income over

than as

interest

rather

If we believe a decline in the fair value of a particular fixed
maturity available-for-sale investment is not credit impaired, we
record the decline as an unrealized loss net of tax in
in
Accumulated Other Comprehensive

Income

(Loss)

Stockholders’ Equity on our Consolidated Balance Sheets. If
management either: (i) has the intent to sell its investment in a
debt security or (ii) determines that the Company more likely
than not will be required to sell the debt security before its
anticipated recovery of the amortized cost basis less any current
period credit impairment, then an impairment charge is
recognized in earnings, with the amortized cost of the security
being written-down to fair value.

impairment

The evaluation of securities for credit
is a
quantitative and qualitative process, which is subject to risks and
uncertainties and is intended to determine whether, and to what
extent, declines in the fair value of investments should be
recognized
risks and
in current period earnings. The
uncertainties include changes in general economic conditions,
the issuer’s or guarantor’s financial condition and/or future
prospects, the impact of regulatory actions on the investment
portfolio, the performance of the underlying collateral, the
effects of changes in interest rates or credit spreads and the
expected recovery period. With respect to Ambac insured
securities owned, future cash flows used to measure credit
impairment represents the sum of (i) the bond’s intrinsic cash
flows and (ii) the estimated AAC claim payments. Ambac’s
assessment about whether a decline in value is considered a
credit impairment reflects management’s current judgment
regarding facts and circumstances specific to a security and the
factors noted above. If that judgment changes, Ambac may
ultimately record a charge for credit impairment in future
periods.

Ambac has made certain accounting policy elections related to
interest receivable ("AIR") for available-for-sale
accrued
investments under CECL, which are consistent with past
practices under prior GAAP. Elections include: i) not measuring
AIR for credit impairment, instead AIR is written off when it
becomes 90 days past due; ii) writing off AIR by reversing
interest income; iii) presenting AIR separately in Other Assets
on the balance sheet and iv) excluding AIR from amortized cost
balances in required CECL disclosures found in Note 4.
Investments. AIR at December 31, 2021 and 2020 was $10 and
$10, respectively.

Refer to Note 4. Investments for further credit impairment
disclosures.

Premiums
Financial Guarantee:

the cash amount received. For

Gross premiums were received either upfront or in installments.
For premiums received upfront, an unearned premium revenue
(“UPR”) liability was established, which was initially recorded
as
installment premium
transactions, a premium receivable asset and offsetting UPR
liability was initially established in an amount equal to: (i) the
present value of future contractual premiums due (the
“contractual” method) or (ii) if the underlying insured obligation
is a homogenous pool of assets which are contractually
prepayable, the present value of premiums to be collected over
the expected life of the transaction (the “expected” method). An
appropriate risk-free rate corresponding to the weighted average
life of each policy and currency is used to discount the future

| Ambac Financial Group, Inc. 73 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

premiums contractually due or expected to be collected. For
example, U.S. dollar exposures are discounted using U.S.
Treasury rates while exposures denominated in a foreign
currency are discounted using the appropriate risk-free rate for
the respective currency. The weighted average risk-free rate at
December 31, 2021 and 2020, was 2.2%. and 2.2%,
the weighted average period of future
respectively, and
premiums used
the premium receivable at
to estimate
December 31, 2021 and 2020, was 8.0 years and 8.3 years,
respectively.

include

Insured obligations consisting of homogeneous pools for which
Ambac uses expected future premiums to estimate the premium
receivable
residential mortgage-backed securities
("RMBS"). As prepayment assumptions change for homogenous
pool transactions, or if there is an actual prepayment for a
“contractual” method
related
premium receivable and UPR are adjusted in equal and
offsetting amounts with no immediate effect on earnings using
new premium cash flows and the then current risk-free rate
corresponding to the initial weighted average life of the related
policy.

transaction,

installment

the

in proportion

For both upfront and installment premium policies, premium
revenues are earned over the life of the financial guarantee
contract
insured principal amount
the
outstanding at each reporting date (referred to as the level-yield
the premium
installment paying policies,
method). For
receivable discount, equating to the difference between the
undiscounted future installment premiums and the present value
of future installment premiums, is accreted as premiums earned
in proportion to the premium receivable balance at each
reporting date.

transactions, we offset

When a bond issue insured by Ambac has been retired early,
typically due to an issuer call, any remaining UPR is recognized
at that time to the extent the financial guarantee contract is
legally extinguished, causing accelerated premium revenue. For
installment premium paying
the
recognition of any remaining UPR by the reduction of the
related premium receivable to zero (as it will not be collected as
a result of the retirement), which may cause negative accelerated
premium revenue. Certain obligations insured by Ambac have
been legally defeased whereby government securities are
purchased by the issuer with the proceeds of a new bond
issuance, or less frequently with other funds of the issuer, and
held in escrow. The principal and interest received from the
escrowed securities are then used to retire the Ambac-insured
obligations at a future date either to their maturity date (a
refunding) or a specified call date (a pre-refunding). Ambac has
evaluated the provisions in policies issued on these obligations
and determined those insurance policies have not been legally
extinguished. For policies with refunding securities, premium
revenue recognition is not impacted as the escrowed maturity
date is the same as the previous legal maturity date. For policies
with pre-refunding securities, the maturity date of the pre-
refunded security has been shortened from its previous legal
maturity. Although premium revenue recognition has not been
accelerated in the period of the pre-refunding, it results in an
increase in the rate at which the policy's remaining UPR is to be
recognized.

For financial guarantee contracts, the issuer's ability and
willingness to pay its insured debt obligation impacts the
payment of policy losses by Ambac as well as the receipt of
premiums from the issuer. As such, management leverages its
existing loss reserve estimation process to evaluate credit
impairment for premium receivables. Key factors in assessing
credit impairment include historical premium collection data,
internal risk classifications, credit ratings and loss severities. For
involving special purpose
structured finance
entities, we further evaluate the priority of premiums paid to
Ambac within the contractual waterfall, as required by bond
indentures. Ambac has a formal quarterly credit impairment
review process for premium receivables.

transactions

• Prior

the adoption of CECL, Ambac assessed
collectability of premium receivables in accordance with
ASC 944 and recorded an allowance for uncollectible
premiums.

• Under CECL, management utilizes either a discounted cash
flow ("DCF") or probability of default/loss given default
("PD/LGD") approach to estimate credit impairment. The
DCF approach utilizes expected cash flows developed by
Ambac's Risk Management Group using the same (or
similar) models used for estimating loss reserves where
such models can identify shortfalls in premiums. Credit
impairment using the DCF approach is equal to the
difference between amortized cost and the present value of
expected cash flows. Credit impairment under the PD/LGD
approach is the product of (i) the premium receivable
carrying value, (ii) internally developed default probability
(considering internal ratings and average life), and (iii)
internally developed loss severities.

Refer to Note 7. Insurance Contracts for further credit
impairment disclosures.

AAC has reinsurance in place pursuant to surplus share treaty
and facultative reinsurance agreements. Similar
to gross
premiums, premiums ceded to reinsurers were paid either
upfront or in installments. For premiums paid upfront, a deferred
ceded premium asset was established which is initially recorded
as the cash amount paid. For installment premiums, a ceded
premiums payable
liability and offsetting deferred ceded
premium asset were initially established in an amount equal to:
i) the present value of future contractual premiums due or ii) if
the underlying insured obligation is a homogenous pool of
assets, the present value of expected premiums to be paid over
the life of the transaction. An appropriate risk-free rate
corresponding to the weighted average life of each policy and
exposure currency is used to discount the future premiums
contractually due or expected to be collected. Premiums ceded
to reinsurers reduce the amount of premiums earned by Ambac
from its financial guarantee insurance policies. For both upfront
and installment premiums, ceded premiums written are primarily
recognized in earnings in proportion to and at the same time as
the related gross premium revenue is recognized. For premiums
paid to reinsurers on an installment basis, Ambac records the
present value of future ceding commissions as an offset to ceded
premiums payable, using the same assumptions noted above for
installment premiums.

| Ambac Financial Group, Inc. 74 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Specialty P&C:

Gross written premiums on Everspan insurance policies are
recorded at the inception of the policy and can be received on an
upfront basis or an installment basis. Ceded premiums written
are based on contractual terms applied against related gross
written premiums. Premiums, net of reinsurance, are recognized
as revenue on a daily pro-rata basis over the term of the insured
risk. Unearned premiums represents the portion of gross
premiums written that relate to unexpired risk. Deferred ceded
premium represents the portion of ceded premiums written that
relate to unexpired risk.

Premium receivables represent balances currently due and
amounts not yet due from policyholders, managing general
agents or producers issuing insurance policies on Everspan's
behalf. Premium receivables are reported net of an allowance
for expected lifetime credit losses. The allowance is based upon
Everspan's ongoing review of amounts outstanding, including
delinquencies and write-offs, and other relevant factors. Credit
risk is partially mitigated by the managing general agent's ability
to cancel the policy on behalf of Everspan if the policyholder
does not pay the premium, thereby reducing the related policy's
premium written and Everspan's premium receivable.

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

• Loans not held by consolidated VIEs are reported at their
outstanding principal balance less unamortized discount
and are reported within Other assets on the Consolidated
Balance Sheet. Interest income is earned using the effective
interest method based upon interest accrued on the unpaid
principal balance adjusted for accretion of discounts. A
loan is considered impaired when, based on the financial
condition of the borrower, it is probable that Ambac will be
unable to collect all principal and interest due according to
the contractual terms of the loan agreement. Under CECL,
Ambac has a formal quarterly credit impairment review
process for these loans. The key factors in assessing credit
impairment are internal credit ratings and loss severities.
Management utilizes a PD/LGD approach, similar to the
one described above for financial guarantee premium
receivables, which is applied to the loan carrying value.

• Loans held by VIEs consolidated as required under the
Consolidation Topic of the ASC are carried at fair value
under the fair value option election with changes in fair
value recorded in Income (loss) on variable interest entities
on the Consolidated Statements of Total Comprehensive
Income (Loss). Such loans are reported as Loans, at fair
value within the Variable interest entity assets section of
the Consolidated Balance Sheet.

Derivative Contracts
The Company has entered into derivative contracts primarily to
hedge certain economic risks inherent in its asset and liability
portfolios. None of Ambac’s derivative contracts are designated
as hedges under the Derivatives and Hedging Topic of the ASC.
Ambac's derivatives consist primarily of interest rate swaps and
futures contracts.

• Ambac maintains a portfolio consisting primarily of
interest rate swaps and futures contracts to economically
hedge interest rate risk in the financial guarantee and
investment portfolios. While this portfolio also includes
certain legacy interest rate swaps executed in connection
with financial guarantee client financings, the interest rate
derivatives portfolio is managed on the basis of its net
sensitivity to changes in interest rates. Changes in the fair
value of these interest rate derivatives are recorded, along
with changes in fair value of Ambac's remaining credit
derivatives, within Net gains (losses) on derivative
contracts on
the Consolidated Statements of Total
Comprehensive Income (Loss).

• VIEs consolidated under the Consolidation Topic of the
ASC entered into derivative contracts to meet specified
purposes within their securitization structure. Changes in
fair value of consolidated VIE derivatives are included
within Income (loss) on variable interest entities on the
Consolidated Statements of Total Comprehensive Income
(Loss).

All derivatives are recorded on the Consolidated Balance Sheets
at fair value on a gross basis; assets and liabilities are netted by
counterparty only when a legal right of offset exists. Variation
payments on centrally cleared swaps and futures contracts are
considered settlements of the associated derivative balances and
are reflected as a reduction to derivative liabilities or assets on
the Consolidated Balance Sheets. For other derivatives, Ambac
has determined that the amounts recognized for the right to
reclaim cash collateral or the obligation to return cash collateral
may not be used to offset amounts due under the derivative
instruments in the normal course of settlement. Therefore, such
amounts are not offset against fair value amounts recognized for
derivative instruments executed with the same counterparty
under the same master netting arrangement and are included in
Other assets on the Consolidated Balance Sheets. Refer to Note
the
9. Derivative Instruments for further discussion of
Company’s use of derivative instruments and their impact of the
consolidated financial statements. Refer to Note 5. Fair Value
Measurements for further description of the methodologies used
to determine the fair value of derivative contracts, including
model inputs and assumptions where applicable.

including

identifiable

Goodwill
Goodwill of $46 is attributable to the Xchange acquisition,
in Note 3. Business Combination and
further discussed
represents the acquisition cost in excess of the fair value of net
assets acquired,
intangible assets.
Goodwill is assigned at acquisition to the applicable reporting
unit of the acquired entity giving rise to the goodwill. Goodwill
is not amortized but is subject to impairment testing. Goodwill
impairment tests are performed annually or more frequently if
circumstances indicate a possible impairment. Ambac tests
goodwill for impairment as of October 1st of each year. If, after
assessing qualitative factors, management believes it is more
likely than not that the fair value of a reporting unit is less than
its carrying amount, a quantitative impairment evaluation is
performed. Management also has the option to bypass the
qualitative evaluation and proceed directly to the quantitative
evaluation. The quantitative test compares the estimated fair

| Ambac Financial Group, Inc. 75 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

value of the reporting unit with its carrying value (including
goodwill and identifiable intangible assets). An impairment is
recognized for the excess of the carrying amount of the reporting
unit over it estimated fair value. If the reporting unit’s estimated
fair value exceeds its carrying value, goodwill is not impaired.
There have been no accumulated impairment losses since
goodwill was established.

Intangible Assets
Financial Guarantee Insurance intangible:

Upon Ambac's emergence from bankruptcy in 2013, an
insurance intangible asset was recorded which represented the
difference between the fair value and aggregate carrying value
of the financial guarantee insurance and reinsurance assets and
liabilities. The carrying values of our financial guarantee
insurance and reinsurance contracts continue to be reported and
measured in accordance with their existing accounting policies.
Pursuant to the Financial Services-Insurance Topic of the ASC,
the insurance intangible is to be measured on a basis consistent
with the related financial guarantee insurance and reinsurance
contracts. The initial insurance intangible asset was assigned to
groups of insurance and reinsurance contracts with similar
characteristics and has been amortized using a level-yield
method based on par exposure of the related groups.

Finite-lived intangibles:

tests finite-lived acquired

Ambac acquired $36 of identifiable intangible assets attributable
to the Xchange acquisition, further discussed in Note 3. Business
Combination. The intangible assets are primarily related to
distribution relationships, non-compete agreements and trade
names, all of which have finite lives and are amortized over their
estimated useful lives using the straight-line method. The
Company
intangible assets for
impairment if certain events occur or circumstances change
indicating that the carrying amount of the intangible asset may
not be recoverable. The carrying amount of the intangible asset
is not recoverable if it exceeds the projected undiscounted cash
flows expected to result from the use and eventual disposal of
the asset or asset group. If deemed unrecoverable, an
impairment loss is recognized for the excess carrying amount
over the fair value. There have been no accumulated impairment
losses since these finite-lived intangible assets were established.

Indefinite-lived intangibles

its acquisition of Providence Washington

Ambac acquired $9 of identifiable intangible assets attributable
to
Insurance
Company, which was accounted for as an asset acquisition. The
intangible assets relate to insurance licenses which have
indefinite lives and therefore are not amortized. The useful lives
are re-evaluated each period to determine whether facts and
circumstances continue to support an indefinite life. The
Company tests indefinite-lived acquired intangible assets for
impairment annually or more frequently if circumstances
indicate a possible impairment. Ambac tests indefinite-lived
intangibles for impairment as of October 1st of each year. If,
after assessing qualitative factors, management believes it is
more likely than not that the intangible assets are impaired, a
quantitative impairment evaluation is performed. Management
also has the option to bypass the qualitative evaluation and

proceed directly to the quantitative evaluation. The quantitative
test compares the estimated fair value of the intangible asset
with its carrying value. An impairment is recognized for the
excess of the carrying amount of the intangible asset over it
estimated fair value. If the asset’s estimated fair value exceeds
its carrying value, the intangible asset is not impaired. There
have been no accumulated impairment losses since these
indefinite-lived intangible assets were established.

Restricted Cash
Cash that we do not have the right to use for general purposes is
recorded as restricted cash in our consolidated balance sheets.
Restricted cash includes (i) consolidated variable interest entity
cash restricted to support the obligations of the consolidated
VIEs, (ii) cash held by AAC received from its investment in
LSNI Secured Notes and pledged for the benefit of holders of
LSNI Secured Notes (other than AAC) and (iii) fiduciary cash
held by Xchange described below.

Fiduciary Assets and Liabilities:

In Xchange's capacity as an MGU, it collects premiums from
insureds and remits the premiums to the respective insurance
carriers, net of fees to other parties, including its commissions.
Xchange also collects claims or refunds from carriers on behalf
of
insurance premiums and claims
proceeds are held by Xchange in a fiduciary capacity. Since
fiduciary assets are not available for corporate use, they are
shown in the consolidated balance sheets as an offset to
fiduciary liabilities, which are reported in Other liabilities.

insureds. Unremitted

Restricted cash for net uncollected premiums and claims and the
related fiduciary liabilities were $5 and $4 at December 31,
2021 and 2020, respectively.

Loss and Loss Expenses
Financial Guarantee:

The loss and loss expense reserve (“loss reserve”) policy relates
only to Ambac’s non-derivative financial guarantee insurance
business for insurance policies issued to beneficiaries, including
VIEs, for which we do not consolidate the VIE. Losses and loss
expenses are based upon estimates of the ultimate aggregate
losses inherent in the insured portfolio as of the reporting date.
The policy for derivative contracts
the
“Derivative Contracts” section above.

is discussed

A loss reserve is recorded on the balance sheet on a policy-by-
policy basis based upon the present value ("PV") of expected net
claim cash outflows or expected net recovery cash inflows,
discounted at risk-free rates. The estimate for future net cash
flows consider the likelihood of all possible outcomes that may
occur from missed principal and/or interest payments on the
insured obligation. This estimate also considers future recoveries
related to breaches of contractual representations and warranties
by RMBS transaction sponsors, remediation strategies, excess
spread and other contractual or subrogation-related cash flows.
Ambac’s approach to resolving disputes involving contractual
breaches by transaction sponsors or other third parties has
included negotiations and/or pursuing litigation. Ambac does not
estimate recoveries for litigations where its sole claim is for
fraudulent inducement, since any remedies under such claims

| Ambac Financial Group, Inc. 76 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

would be non-contractual. Nor does Ambac include potential
recoveries attributable to pre-judgment interest in the estimate of
subrogation recoveries.

structural element or concern related to the issuer or
transaction or
financial and economic
sustainability.

the overall

• Net claim cash outflow policies represent contracts where
the PV of expected cash outflows are greater than the PV of
expected recovery cash inflows. For such policies, a “Loss
and loss expense reserves” liability is recorded for the
excess of the PV of expected net claim cash outflows over
the unearned premium revenue.

• Net recovery cash inflow policies represent contracts where
the PV of expected recovery cash inflows are greater than
the PV of expected claim cash outflows. For such policies,
a “Subrogation recoverable” asset is recorded.

The evaluation process for determining expected losses is
subject to certain judgments based on our assumptions regarding
the probability of default by the issuer of the insured security,
probability of settlement outcomes (which may
include
commutation settlements, refinancing and/or other settlement
outcomes) and expected severity of credits for each insurance
contract. Ambac’s loss reserves are based on management’s
ongoing review of the financial guarantee credit portfolio.
Active surveillance of the insured portfolio enables Ambac’s
Risk Management Group ("RMG") to track credit migration of
insured obligations from period to period and update internal
classifications and credit ratings for each transaction. Non-
adversely classified credits are assigned a Class I rating while
adversely classified credits are assigned a rating of Class IA
through Class V. The criteria for an exposure to be assigned an
adversely classified credit rating includes the deterioration of an
issuer’s financial condition, underperformance of the underlying
transactions such as
collateral
mortgage-backed or
securitizations), poor
performance by the servicer of the underlying collateral and
other adverse economic events or trends. The servicer of the
underlying collateral of an insured securitization transaction is a
consideration in assessing credit quality because the servicer’s
performance can directly impact the performance of the related
issue.

(for collateral dependent
loan

student

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

CLASS I – “Fully Performing - Meets Ambac Criteria with
Remote Probability of Claim” - Credits that demonstrate
adequate security and structural protection with a strong
capacity to pay interest, repay principal and perform as
underwritten. Factors supporting debt service payment and
performance are considered unlikely to change and any such
change would not have a negative impact upon the fundamental
credit quality. Through ongoing surveillance, Ambac may also
designate Class I credits into one or more of the following
categories:

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

• Watch List - credits that demonstrate the potential for
future material adverse development due to such factors as
long-term uncertainty about a particular sector, a certain

CLASS IA – “Potential Problem with Risks to be Dimensioned”
- Credits that are fully current and monetary default or claims-
payment are not anticipated. The issuer’s financial condition
may be deteriorating or the credits may lack adequate collateral.
A structured financing may also evidence weakness in its
fundamental credit quality as evidenced by
its under-
performance relative to its modeled projections at underwriting,
issues related to the servicer’s ability to perform or questions
about the structural integrity of the transaction. While certain of
these credits may still retain an investment grade rating, they
usually have experienced or are vulnerable to a ratings
downgrade. Further investigation is required to dimension and
correct any deficiencies. A complete legal review of documents
may be required. An action plan should be developed with
triggers for future classification changes upward or downward.

CLASS II – “Substandard Requiring Intervention” - Credits
whose fundamental credit quality has deteriorated to the point
that timely payment of debt service may be jeopardized by
adversely developing trends of a financial, economic, structural,
managerial or political nature. No claim payment is currently
foreseen but the probability of loss or claim payment over the
life of the transaction is now existent (generally 10% or greater
probability). Class II credits may be border-line or below
investment grade (BBB- to B). Prompt and sustained action
must be taken to execute a comprehensive loss mitigation plan
and correct deficiencies.

CLASS III – “Doubtful with Clear Potential for Loss” - Credits
whose fundamental credit quality has deteriorated to the point
that timely payment of debt service has been or will be
jeopardized by adverse
trends of a financial, economic,
structural, managerial or political nature which, in the absence
of positive change or corrective action, are likely to result in a
loss. The probability of monetary default or claims paying over
the life of the transaction is generally 50% or greater. Full
exercise of all available remedial actions is required to avert or
minimize losses. Class III credits will generally be rated below
investment grade (B to CCC).

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

CLASS V – “Fully Reserved” - The credit has defaulted and
payments have occurred. The claim payments are scheduled and
known, reserves have been established to fully cover such
claims, and no claim volatility is expected.

The population of credits evaluated in Ambac’s loss reserve
process are: (i) all adversely classified credits and ii) non-
adversely classified credits which had an internal Ambac rating
downgrade since the transaction’s inception. One of two
approaches is then utilized to estimate losses to ultimately
determine if a loss reserve should be established.

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

| Ambac Financial Group, Inc. 77 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The “base case” statistical expected loss is the product of:
(i) the par outstanding on the credit; (ii) internally
developed default information (taking into consideration
life of an obligation);
internal ratings and average
(iii) internally developed loss severities; and (iv) a discount
factor. The loss severities and default information are based
on rating agency information, are specific to each bond
type and are established and approved by senior RMG
officers. For certain credit exposures, Ambac’s additional
monitoring, loss remediation efforts and probabilities of
potential settlement outcomes may provide information
relevant to adjust this estimate of “base case” statistical
expected losses. Analysts may accept the “base case”
statistical expected loss as the best estimate of expected
loss or assign multiple probability weighted scenarios to
determine an adjusted statistical expected loss that better
reflects management’s view of a given transaction’s
expected losses, as well as the potential for additional
remediation activities (e.g., commutations).

in order

• The second approach entails the use of cash-flow based
models to estimate expected losses (future claims, net of
potential recoveries, expected to be paid to the holder of the
insured financial obligation). Ambac’s RMG group will
consider the likelihood of all possible outcomes and
develop appropriate cash flow scenarios. This approach can
include the utilization of internal or third party models and
tools to project future losses and resultant claim payment
estimates. We utilize cash flow models for RMBS, student
loan, Puerto Rico and other exposures. RMBS and student
loan models use historical performance of the collateral
pools
future performance
then derive
characteristics, such as default and voluntary prepayment
rates, which in turn determine projected future claim
payments. In other cases, such as many public finance
exposures, including our Puerto Rico exposures, we do not
specifically forecast resources available to pay debt service
in the cash flow model itself. Rather, we consider the
issuers’ overall ability and willingness to pay, including the
fiscal, economic, legal and political framework. In this
approach, a probability-weighted expected loss estimate is
developed based on assigning probabilities to multiple
claim payment scenarios and applying an appropriate
discount factor. Additionally, we consider the issuer’s
ability to refinance an insured issue, Ambac’s ability to
execute a potential settlement (i.e., commutation) of the
insurance policy, including the impact on future installment
premiums, and/or other restructuring possibilities in our
scenarios. The commutation scenarios and the related
probabilities of occurrence vary by transaction, depending
on our view of the likelihood of negotiating such a
transaction with issuers and/or investors.

The discount factor applied to the statistical expected loss
approach is based on a risk-free discount rate corresponding to
the remaining expected weighted-average life of the exposure
and the exposure currency. For the cash flow scenario approach,
discount factors are applied based on a risk-free discount rate
term structure and correspond to the date of each respective cash
flow payment or recovery and the exposure currency. Discount

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

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

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

RMBS Expected Loss Estimate

Ambac insures RMBS transactions collateralized by (i) first-lien
mortgages; and (ii) second-lien mortgage loans such as closed-
end seconds and home equity lines of credit. If the borrower
defaults on the payments due under these loans and the property
is subsequently liquidated, the liquidation proceeds are first
utilized to pay off the first-lien loan (as well as other costs) and
any remaining funds are applied to pay off the second-lien loan.
As a result of this subordinate position to the first-lien loan,
second-lien loans may carry a significantly higher severity in the
event of a loss.

(i)

Ambac primarily utilizes a cash flow model (“RMBS cash flow
model”) to develop estimates of projected losses for both our
first and second lien transactions. First, the RMBS cash flow
model projects collateral performance utilizing:
the
loans' characteristics and status,
transaction’s underlying
(“HPA”)
appreciation
price
home
projected
(ii)
and (iii) projected interest rates. Depending on the amount of
collateral information available for each transaction, we project
such performance either at the loan-level or the deal-level. In
the absence of specific loan-level information, the deal-level
approach evaluates a loan pool as if it were a single loan,
selecting certain aggregated deal-level characteristics to then
perform a series of statistical analyses. The deal-level approach
projects performance using a roll-rate that evaluates the possible
future state of a loan based on its current status and three
variables: average FICO (credit score), average current
consolidated loan to value ratio (“CLTV”) and an overall quality
indicator. Observed servicer-level behavior may also have an
impact on projected transaction performance.

We source HPA projections from a market accepted vendor and
interest rate projections are developed from market sources. We
use three HPA projection scenarios to develop a base case as
well as stress and upside cases. The highest probability is
assigned to the base case, with lower probabilities to the stress
and upside cases.

For the liabilities of the transaction which we insure, we
generally utilize waterfall projections generated from a tool
provided by a market accepted vendor. This waterfall tool
allows us to capture the impact of each transaction’s specific
structure (e.g., the waterfall priority of payments, triggers,
redemption priority) to generate our specific projected claims
profile in the base, upside and downside scenarios.

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

| Ambac Financial Group, Inc. 78 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

In our experience, market performance and model characteristics
change and therefore need to be updated and reflected in our
models through time. As such, we conduct regular reviews of
current models, alternative models and the overall approach to
loss estimation.

RMBS Representation and Warranty Subrogation
Recoveries

Ambac records, as a component of its loss reserve estimate,
subrogation recoveries related to securitized loans in RMBS
transactions that breached certain representations and warranties
("R&W") described herein. Generally, the sponsor of an RMBS
transaction provided R&W with respect to the securitized loans,
including R&W with respect to loan characteristics, the absence
of borrower misrepresentations in the underlying loans and other
misconduct in the origination process and attesting to the
compliance of loans with the applicable underwriting guidelines.
In such cases, the sponsor of the transaction is obligated, in
accordance with the underlying contract, to repurchase, cure or
substitute collateral for any loan that breaches the R&W.
Ambac or its counsel engaged consultants with significant
mortgage underwriting experience to review the underwriting
documentation for mortgage loans underlying certain insured
RMBS transactions with significant collateral losses, resulting in
significant claims payments by Ambac, and for which Ambac
believes it has enforceable contractual rights under the relevant
the
transaction documents against
counterparty has the financial ability to honor its contractual
repurchase obligations.

the counterparty and

Generally, subsequent to the forensic exercise of examining loan
files to ascertain whether the loans conformed to the R&W, we
submitted nonconforming loans for repurchase to the contractual
counterparty bearing the repurchase obligation, typically the
transaction sponsor. In certain cases the loans were repurchased
by a sponsor. In such cases the sponsor paid the "repurchase
price" to the securitization trust which holds the loan. Ambac
may also have received payments directly from transaction
sponsors in settlement of their repurchase obligations pursuant
to negotiated settlement agreements or otherwise as a result of
related litigation.

While the obligation of sponsors to repurchase loans with
material breaches is clear, generally the sponsors have not
honored those obligations without actual or threatened litigation.
Ambac has utilized the results of the above-described loan file
examinations to make demands for loan repurchases from
sponsors or their successors and, in certain instances, as a part of
the basis for litigation. Ambac’s approach to resolving these
disputes has included negotiating with individual sponsors at the
transaction level and in some cases at the individual loan level
and has resulted in the repurchase of some loans. Ambac has
initiated and continues to prosecute lawsuits seeking compliance
with the repurchase obligations in the securitization documents.

above-mentioned, detailed
the
Ambac has performed
examinations on a variety of transactions that have experienced
exceptionally poor performance. However,
loan file
examinations and related estimated recoveries we have reviewed
and recorded to date have been limited to only those transactions
whose sponsors (or their successors) are subsidiaries of large

the

financial institutions, all of which carry an investment grade
rating from at least one nationally recognized rating agency, or
are otherwise deemed to have the financial wherewithal to live
up to their repurchase obligations. While our contractual
recourse is generally to the sponsor/subsidiary, rather than to the
parent, each of these large institutions has significant financial
resources and may have an ongoing interest in mortgage finance,
and we therefore believe that the financial institution/parent
would ultimately assume financial responsibility for these
obligations if the sponsor/subsidiary is unable to honor its
contractual obligations or pay a judgment that we may obtain in
litigation. Additionally, in the case of successor institutions, we
are not aware of any provisions that explicitly preclude or limit
the successors’ ability to honor the obligations of the original
sponsor. Certain successor financial institutions have made
significant payments to certain claimants to settle breaches of
R&W perpetrated by sponsors that have been acquired by such
For example, Ambac received a
financial
significant payment in 2016 from JP Morgan to settle RMBS-
related litigation. As a result of these factors, we do not make
significant adjustments to our estimated subrogation recoveries
with respect to the credit risk of these sponsors or their
successors.

institutions.

law

Our ability to realize RMBS R&W subrogation recoveries is
subject to significant uncertainty, including risks inherent in
litigation, including adverse rulings or decisions in our cases or
in litigations to which AAC is not a party that set precedents or
resolve questions of
impact our own claims;
that
collectability of such amounts from counterparties (and/or their
respective parents and affiliates); timing of receipt of any such
recoveries; intervention by OCI, which could impede our ability
to take actions required to realize such recoveries; and
uncertainty inherent in the assumptions used in estimating such
recoveries. Failure
to realize RMBS R&W subrogation
recoveries for any reason or the realization of RMBS R&W
subrogation recoveries materially below the amount recorded on
Ambac's consolidated balance sheet would have a material
adverse effect on our results of operations and financial
condition and may result in adverse consequences such as
impairing the ability of AAC to honor its financial obligations,
particularly its outstanding debt and preferred stock obligations;
the
initiation of rehabilitation proceedings against AAC;
eliminating or reducing the likelihood of AAC delivering value
to Ambac, through dividends or otherwise; and a significant
drop in the value of securities issued and/or insured by Ambac
or AAC.

The approach used to estimate RMBS R&W subrogation
recoveries is based on obtaining loan files from the original pool
and conducting loan file re-underwriting to derive a breach rate
to be extrapolated to determine an estimated repurchase
obligation. We limit the estimated repurchase obligation by
ever-to-date incurred losses.

Multiple probability-weighted scenarios are developed by
applying various realization factors to the estimated repurchase
obligation. The realization factors in these scenarios reflect
Ambac’s own assumptions about the likelihood of outcomes
based on all the information available to it including, but not
limited to, (i) discussions with external legal counsel and their

| Ambac Financial Group, Inc. 79 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

views on ultimate settlement and/or
litigation outcomes;
(ii) assessment of the strength of the specific case; (iii) changes
in law or developments in RMBS litigation cases that impact our
estimated recoveries; and (iv) experience in settling similar
claims. The probability weightings are developed based on the
unique facts and circumstances for each transaction. The sum of
these
the
undiscounted RMBS R&W subrogation recovery, which is then
discounted using a factor derived from a risk-free discount rate
term structure that corresponds to the estimated date of each
respective recovery.

probability-weighted

represents

scenarios

Student Loan Expected Loss Estimate

loan

The student
insured portfolio consists of credits
collateralized by private student loans. The calculation of loss
reserves for our student loan portfolio involves evaluating
numerous factors that can impact ultimate losses. Since our
policy covers timely interest and ultimate principal payment, our
loss projections must make assumptions for many factors
covering a long horizon. Key assumptions that will impact
ultimate losses include, but are not limited to, the following:
collateral performance (which is highly correlated to the
economic environment); interest rates; operating risks associated
with the issuer, servicers, special servicers, and administrators;
investor appetite
insured
obligations; and as applicable, Ambac’s ability and willingness
to commute policies. In addition, we consider in our student loan
loss projections the potential impact, if any, of proposed or final
regulatory actions or orders, including by the Consumer
Financial Protection Bureau ("CFPB"), affecting our insured
transactions.

tendering or commuting

for

Ceded Reinsurance

Loss and loss expense reserve reported on the balance sheet
relates only to gross insurance policies. The corresponding
reinsurance
reserve ceded
recoverable on paid and unpaid losses. Ambac has reinsurance
in place pursuant to quota share, surplus share treaty and
facultative reinsurance agreements.

reported as

reinsurers

The reinsurance of risk does not legally relieve Ambac of its
original liability to its policyholders. In the event that any of
Ambac’s reinsurers are unable to meet their obligations under
reinsurance contracts, Ambac would, nonetheless, be liable to its
policyholders for the full amount of its policy.

To minimize its credit exposure to losses from reinsurer
insolvencies, Ambac (i) is entitled to receive collateral from
certain reinsurance counterparties pursuant to the terms of the
relevant reinsurance contracts and (ii) has certain cancellation
rights that can be exercised by Ambac in the event of rating
agency downgrades of a reinsurer (among other events and
circumstances). For those reinsurance counterparties that do not
currently post collateral, Ambac’s
reinsurers are well
capitalized, highly rated, authorized capacity providers.

Under CECL, Ambac has a formal quarterly credit impairment
review process whereby Ambac has elected to use the practical
expedient of considering the fair value of collateral posted by
reinsurers when evaluating credit impairment. To determine the
total unsecured
for credit
impairment, Ambac nets the reinsurance recoverable amount by
ceded premiums payable and the fair value of collateral posted,
if any.

to be evaluated

recoverable

We develop and assign probabilities to multiple cash flow
scenarios based on each transaction’s unique characteristics.
Probabilities assigned are based on available data related to the
credit, information from contact with the issuer (if applicable),
and any economic or market information that may impact the
outcomes of the various scenarios being evaluated. Our base
case usually projects deal performance out to maturity using
expected loss assumptions. As appropriate, we also develop
other cases that incorporate various upside and downside
scenarios that may include changes to defaults and recoveries.

Specialty P&C:

Loss and
loss expense reserves for Everspan represent
management's estimate of the ultimate liability for unpaid losses
and loss expenses for claims that have been reported and claims
that have been incurred but not yet reported ("IBNR") as of the
balance sheet date. The reserves are estimated based upon
experience and using a variety of actuarial methods. These
estimates are continually reviewed and are subject to the impact
of future changes in factors such as claim severity and
frequency, underwriting and claims practices, changes in social
and economic conditions including the impact of inflation, legal
and judicial developments, medical cost trends and upward
trends in damage awards. The ultimate amount for loss and loss
expenses may be in excess, or less than, the amounts recorded
on our financial statements. Adjustments will be reflected as part
of the net increase or reduction in loss and loss expense reserves
in the periods in which they become known.

The key factors in assessing credit impairment for reinsurance
recoverables are independent rating agency credit ratings and
loss severities. Management utilizes a PD/LGD approach, which
is applied to the net unsecured reinsurance recoverable amount.
Refer to Note 7. Insurance Contracts for credit impairment
disclosures.

Long-Term Debt
Long-term debt issued by Ambac is carried at par value less
unamortized discount. Accrued interest and discount accretion
on long-term debt is reported as Interest expense on the
Consolidated Statements of Total Comprehensive Income
(Loss). To the extent Ambac repurchases or redeems its long-
term debt, such repurchases or redemptions may be settled for
an amount different than the carrying value of the obligation.
Any difference between the payment and carrying value of the
obligation is reported in Net realized gains (losses) on
extinguishment of debt on the Consolidated Statements of Total
Comprehensive Income (Loss).

For long-term debt issued by consolidated VIEs in which
Ambac's variable interest arises from financial guarantees
written by Ambac's subsidiaries ("FG VIEs"), we may elect to
use the fair value option on an instrument by instrument basis.
When the fair value option is elected, changes in the fair value
of the FG VIEs' long-term debt is reported within Income (loss)
on variable interest entities in the Consolidated Statements of
Total Comprehensive Income (Loss), except for the portion of

| Ambac Financial Group, Inc. 80 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

the total change in fair value of financial liabilities caused by
changes in the instrument-specific credit risk which is presented
separately in Other comprehensive income (loss). In cases
where the fair value option has not been elected, the FG VIEs'
long-term debt is carried at par less unamortized discount, with
interest expense reported within Income (loss) on variable
interest entities in the Consolidated Statements of Total
Comprehensive Income (Loss).

Noncontrolling Interests
Nonredeemable noncontrolling interests

At December 31, 2021 and 2020, AAC had 5,501 shares of
issued and outstanding AMPS with a liquidation preference of
$138 (reported as nonredeemable noncontrolling interest of $60
on Ambac's balance sheet). The auction occurs every 28 days
and the dividend rate has continuously been reset at the
maximum rate of one-month LIBOR plus 200 basis points.

Under the terms of the AMPS, dividends may not be paid on the
common stock of AAC unless all accrued and unpaid dividends
on the AMPS for the then current dividend period have been
paid, provided, that dividends on the common stock may be
made at all times for the purpose of, and only in such amounts as
are necessary for, enabling AFG (i) to service its indebtedness
for borrowed money as such payments become due or (ii) to pay
its operating expenses. If dividends are paid on the common
stock as provided in the prior sentence, dividends on the AMPS
become cumulative until the date that all accumulated and
unpaid dividends have been paid on the AMPS. AAC has not
paid dividends on its AMPS since 2010.

Redeemable noncontrolling interests

The Xchange acquisition, further described in Note 3. Business
Combination, resulted in 80% ownership of the acquired entities
by Ambac. Under the terms of the acquisition agreement,
Ambac has a call option to purchase the remaining 20% from
the minority owners (i.e., noncontrolling interests) and the
minority owners have a put option to sell the remaining 20% to
Ambac. The call and put options are exercisable after different
time periods elapse. Because the exercise of the put option is
the
outside
Distinguishing Liabilities from Equity Topic of the ASC,
Ambac reports redeemable noncontrolling interests in the
mezzanine section of its consolidated balance sheet.

the control of Ambac,

in accordance with

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

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

ii. the redemption value of the put option under ASC 480 as if

it were exercisable at the end of the reporting period.

increase (decrease)

the carrying amount of

Any
the
redeemable noncontrolling interest as a result of adjusting to the
redemption value of the put option is recorded as an offset to
retained earnings. The impact of such differences on earnings
per share are presented in Note 15. Net Income Per Share.

Following
interest.

is a rollforward of redeemable noncontrolling

Years ended December 31,

2021

Beginning balance ........................................... $

7 $

Fair value of redeemable noncontrolling
interest at acquisition date ...............................

Net income attributable to redeemable
noncontrolling interest (ASC 810) ..................
Adjustment to redemption value (ASC 480 ) ..

—

(1)

Ending Balance

18 $

2020

—

Revenue Recognition:
Revenues for the MGA/U business operations are recognized in
accordance with the Revenue from Contracts with Customers
Topic of the ASC. The following steps are applied to recognize
revenue: identify the contract(s) with the customer, identify the
performance obligations in the contract(s), determine the
transaction price, allocate
the
the
performance obligations in the contract and recognize revenue
when (or as) the entity satisfies a performance obligation. A
performance obligation is satisfied either at a point in time or
over time depending on the nature of the product or service
provided, and the specific terms of the contract with customers.

transaction price

MGA/U performance obligations consist of placing policies
with insurers and, for certain products, providing claims
servicing. Revenue from limited and short-term medical
policies sold through affinity groups ("Affinity") are recognized
up front as no further performance obligations exist after policy
placement. Revenue from employer stop loss policies ("ESL")
is apportioned to policy placement and claims servicing based
on the relative stand-alone selling price of the respective
performance obligations with policy placement
revenue
recognized upfront while claims servicing revenue is recognized
over the claim adjustment period.

Revenue consists of base and profit-sharing commissions. Base
commissions, associated with policy placement and claims
servicing, are estimated by applying the contractual commission
percentages to estimated gross premiums written. Profit-sharing
commissions represent variable consideration associated with
policy placement only and are estimated based on expected loss
ratios and the estimated gross premium for base commissions.
Base and profit-sharing commissions are estimated with a
constraint applied such that a significant reversal of revenue in
the future is not probable. MGA/U revenue is reported in other
income (expense) on the Consolidated Statement of Total
Comprehensive Income.

the Company's right

to future
Contract assets represent
consideration for services it has already transferred to the
customer, which is subject to certain contingencies such as the
achievement of loss ratios on underlying insurance policies.
Once the right to consideration becomes unconditional, it is
reported as a receivable. Contract liabilities represent the
Company's obligation to transfer services for which it has
already received consideration from the customer. Contract
assets and contract liabilities are reported as other assets and
other liabilities, respectively, on the Consolidated Balance
Sheet.

| Ambac Financial Group, Inc. 81 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The Company’s costs to fulfill contracts with its insurance
company customers relate to certain commissions paid to
independent agents for procuring policies. As these costs relate
to the Company’s policy placement performance obligation to
its customers, they are expensed as incurred. The Company
does not incur costs related to obtaining customer contracts.

Employee Benefits
Postretirement and Postemployment Benefits

Ambac provides postretirement and postemployment benefits,
including health and life benefits covering employees who meet
certain age and service requirements. Ambac accounts for these
benefits under the accrual method of accounting. Amounts
related to the postretirement health benefits liability are
established and charged
to expense based on actuarial
determinations.

Incentive Compensation

Incentive compensation is a key component of our compensation
strategy. Incentive compensation has two components: short
term incentive compensation (consisting of an annual cash
bonus and, prior to 2020, awards of deferred stock units for
certain officers) and long term incentive plan awards (consisting
of deferred cash and awards of restricted and performance stock
units). Annual decisions with regard to incentive compensation
are generally made in the first quarter of each year and are based
on the prior year's performance for the Company, the employee
and the employee's business unit.

In 2020, the Ambac 2013 Incentive Compensation Plan (the
“2013 Incentive Plan”) was superseded by the 2020 Incentive
Compensation Plan ("2020 Incentive Plan"). Both plans allow
for the granting of stock options, restricted stock, stock
appreciation rights, restricted and performance units and other
awards to employees, directors and consultants that are valued
or determined by reference to Ambac's common stock. Under
these plans, Ambac has issued both cash and equity awards to
US employees and consultants.

In connection with the adoption of the 2020 Incentive Plan, all
shares reserved but unissued under the 2013 Incentive Plan were
transferred to the the 2020 Incentive Plan in addition to any
shares underlying outstanding awards under the 2013 Incentive
Plan as of June 2, 2020 that subsequently terminate by
expiration or forfeiture, cancellation, or otherwise are not issued.

Under the 2013 and 2020 Incentive Compensation Plans. Ambac
recognizes compensation costs for all equity classified awards
granted at fair value, which is measured on the grant date, and
records forfeitures for unvested shares only when they occur.
For awards
include service and performance
conditions, the fair value is the market price of Ambac stock on
the grant date. For awards that also contain a market condition,
specifically a total shareholder return ("TSR") modifier, the fair
value is estimated using a Monte Carlo simulation.

that only

The types of equity awards granted to employees are as follows:

• Deferred stock units - vest upon grant and will settle and
convert to Ambac common stock annually over a two-year

period (50% on the first anniversary of the grant date and
50% on the second anniversary of the grant date). The fair
value of these grants is recognized as compensation
expense on the date of grant since no future service is
required. These awards have not been granted since 2019.

• Restricted stock units - only require future service and
accordingly the respective fair value is recognized as
compensation expense over the relevant service period.

• Performance stock units - require both future service and
achieving specified performance targets to vest. Certain
performance stock unit grants also include a market
condition TSR modifier that will cause the total payout at
the end the performance period to increase or decrease
depending on Ambac's stock performance relative to a peer
group. Compensation costs for all performance stock units
are only recognized when
the
performance conditions are considered probable. Once
deemed probable, such compensation costs are recognized
as compensation expense over the relevant service period.
Compensation costs are initially based on the probable
outcome of the performance conditions and adjusted for
subsequent changes in the estimated or actual outcome each
reporting period as necessary. Changes in the estimated or
actual outcome of a performance condition are recognized
by reflecting a retrospective adjustment to compensation
cost in the current period.

the achievement of

In 2015, Ambac UK's Board of Directors adopted a long term
incentive plan which provided cash based performance awards
to Ambac UK employees. Since all performance conditions
under this plan were met, the Ambac UK Board of Directors
adopted a new long term incentive plan for Ambac UK
employees in 2020, which includes both performance and time
based awards. Compensation costs for all performance based
awards are based on the probable outcome of the performance
conditions and adjusted for subsequent changes in the estimated
or actual outcome each reporting period as necessary.
Compensation costs for time-based awards are recognized
evenly over the service period.

Operating Leases
A contract contains a lease if it conveys the right to control the
use of identified property, plant, or equipment for a period of
time in exchange for consideration. Ambac's evaluation of
whether certain contracts contain leases requires judgment
regarding what party controls the asset and whether the asset is
physically distinct.

Ambac is the lessee in leases which are classified as operating
leases. Ambac recognizes a single lease cost, calculated so that
the cost is allocated generally on a straight-line basis over the
lease term within operating expenses in the Consolidated
Statements of Total Comprehensive Income (Loss). The lease
term commences on the earlier of the date when we become
legally obligated for the rent payments or the date on which we
take possession of the property. For such operating leases,
Ambac recognizes a right-of-use ("ROU") asset and a lease
liability, initially measured at the present value of the lease
payments. The discount rate used to initially measure the ROU
assets and lease liabilities reflects the estimated secured

| Ambac Financial Group, Inc. 82 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

borrowing rate of the applicable Ambac subsidiary, which
considers the rate of existing or recent debt obligations of the
entity. All cash payments are classified within operating
activities in the statement of cash flows.

For contracts where Ambac is the lessee, we have elected the
short-term lease recognition exemption for all leases that
qualify. For those leases that qualify for that exemption, we will
not recognize ROU assets or lease liabilities. For all contracts
where Ambac is the lessee and lessor we have also elected the
practical expedient
lease and non-lease
to not separate
components.

Depreciation and Amortization
Depreciation of furniture and fixtures, certain information
technology development costs and electronic data processing
equipment is charged over the estimated useful lives of the
respective assets, ranging from three to five years, using the
straight-line method. Amortization of leasehold improvements is
charged over the remaining term of the respective operating
lease using the straight-line method.

Foreign Currency
Financial statement accounts expressed in foreign currencies are
translated into U.S. dollars in accordance with the Foreign
Currency Matters Topic of the ASC. The functional currencies
of Ambac's subsidiaries are the local currencies of the country
where the respective subsidiaries are based, which are also the
primary operating environments in which the subsidiaries
operate.

Foreign currency translation: Functional currency assets
and liabilities of Ambac’s foreign subsidiaries are translated into
U.S. dollars using exchange rates in effect at the balance sheet
dates and the related translation adjustments, net of deferred
taxes, are included as a component of Accumulated Other
Comprehensive
in Stockholders' Equity.
(Loss)
Functional currency operating results of foreign subsidiaries are
translated using average exchange rates.

Income

Foreign currency transactions: The impact of non-functional
currency transactions and the remeasurement of non-functional
currency assets and liabilities into the respective subsidiaries'
functional currency (collectively "foreign currency transactions
gains/(losses)") are $(7), $(1) and $12 for the years ended
December 31, 2021, 2020 and 2019, respectively. Foreign
currency transactions gains/(losses) are primarily the result of
remeasuring Ambac UK's assets and liabilities denominated in
currencies other than its functional currency, primarily the U.S.
dollar and the Euro.

Commitments and Contingencies
The Company and its subsidiaries are defendants in or parties to
actual, pending and threatened lawsuits and proceedings. A
liability is accrued for such contingencies when a loss is both
probable and reasonably estimable. If a loss is not "probable and
reasonably estimable," but is reasonably possible, disclosure of
the contingency and an estimate of the loss or range of loss is
required if such an estimate can be determined. Significant

management judgment is required to apply this guidance. As a
legal contingency develops, the Company, in conjunction with
outside counsel, evaluates what
level of accrual and/or
disclosure is required under the guidance. See the Litigation
Against Ambac section of Note 19. Commitments and
Contingencies for additional
legal
contingencies and related accounting evaluation.

information about our

Income Taxes
Ambac files a consolidated U.S. Federal income tax return with
its subsidiaries. Ambac and its subsidiaries also file separate or
combined income tax returns in various states, local and foreign
jurisdictions. Current tax assets and liabilities are recognized for
taxes refundable or payable for the current year.

to differences between

Deferred tax assets and liabilities are recognized for the future
tax consequences attributable
the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
current and deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment
date. In July 2020, United Kingdom legislation increasing the
tax rate from 17% to 19% was fully enacted. As such, we
incorporated the effects of the tax rate increase in our current
and deferred tax evaluation for the years ended December 31,
2020 and 2021.

The Income Taxes Topic of the ASC requires that companies
assess whether valuation allowances should be established
against their deferred tax assets based on the consideration of all
available evidence using a ‘more likely than not' standard. In
making such judgments, significant weight is given to evidence
that can be objectively verified. The level of deferred tax asset
recognition is influenced by management’s assessment of future
profitability, which depends on the existence of sufficient
taxable income within the carry forward periods available under
the tax law.

Net Income Per Share
Basic net income per share is computed by dividing net income
attributable to common stockholders, including the adjustment
to redemption value of the redeemable noncontrolling interest,
by the weighted-average number of common shares outstanding
and vested restricted stock units (together, "Basic Weighted
Average Shares Outstanding"). Diluted net income per share is
computed by dividing net income attributable to common
stockholders, including the adjustment to redemption value of
the redeemable controlling interest, by the Basic Weighted-
Average Shares Outstanding plus all potential dilutive common
shares outstanding during the period. All potential dilutive
common shares outstanding consider common stock deliverable
pursuant to warrants, vested and unvested options, unvested
restricted stock units and performance stock units granted under
existing compensation plans.

| Ambac Financial Group, Inc. 83 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Supplemental Disclosure of Cash Flow Information

Year Ended December 31,

Cash paid during the period for:

2021

2020

2019

Income taxes .............................................................................................................................................................
Interest on long-term debt ........................................................................................................................................

15 $
80

11 $
107

Non-cash investing and financing activities:

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

—

21
143

—

December 31,

2021

2020

2019

Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance
Sheets to the Consolidated Statements of Cash Flow:

Cash and cash equivalents ........................................................................................................................................

17 $

20 $

Restricted cash ..........................................................................................................................................................

Variable Interest Entity Restricted cash ...................................................................................................................

Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows

Reclassifications and Rounding
Reclassifications may have been made to prior years' amounts to
conform to the current year's presentation. Certain amounts and
tables in the consolidated financial statements and associated
notes may not add due to rounding.

Adopted Accounting Standards
Effective January 1, 2021, the Company adopted the following
accounting standards:

Simplifying Income Tax Accounting

In December 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740) - Simplifying the Accounting for Income
Taxes. The FASB issued this ASU as part of its initiative to
reduce complexity in accounting standards. The ASU removes
certain exceptions in the guidance related to investments, intra-
period allocations and interim period allocations. It further adds
new guidance related to the allocation of consolidated income
taxes and evaluating a step-up in the tax basis of goodwill. The
ASU did not have a consequential impact on Ambac's financial
statements.

Future Application of Accounting Standards:
Reference Rate Reform

to ease

In March 2020, the FASB issued ASU 2020-04, Reference Rate
Reform (Topic 848) - Facilitation of the Effects of Reference
Rate Reform on Financial Reporting. The ASU provides
companies with optional guidance
the potential
accounting burden related to transitioning away from reference
rates, such as LIBOR, that are expected to be discontinued as a
result of initiatives undertaken by various jurisdictions around
the world. For example, under current GAAP, contract
modifications which change a reference rate are required to be
evaluated in determining whether the modifications result in the
establishment of new contracts or the continuation of existing
contracts. The amendments in this ASU provide optional
expedients and exceptions for applying GAAP to contracts,
hedging relationships, and other
transactions affected by
reference rate reform if certain criteria are met. The ASU can be
applied prospectively as of the beginning of the interim period

that includes or is subsequent to March 12, 2020 or any date
thereafter, but does not apply to contract modifications and other
transactions entered into or evaluated after December 31, 2022.
In December 2021, the FASB voted to extend the sunset date to
December 31, 2024 and expects to issue a formal proposal for
public comment in the first quarter of 2022. Management has
not determined when it will adopt this ASU, and the impact on
Ambac's financial statements is being evaluated.

3. BUSINESS COMBINATION

On December 31, 2020, Ambac completed the acquisition of
80% of the membership interests of Xchange for a purchase
price of $81 in cash. The acquisition was accounted for as a
business combination and advances Ambac's strategy of
expanding into the MGU and MGA sector. All amounts
recorded at the time of acquisition are final and no subsequent
adjustments were made within the permitted measurement
period as defined by ASC 805.

The following table summarizes the consideration paid for
Xchange and the estimated fair values of the aggregate assets
and liabilities acquired, as well as the fair value of the
noncontrolling interest, at the acquisition date:

Cash..................................................................................
Restricted cash .................................................................
Intangible assets ...............................................................
Goodwill ..........................................................................
Other assets ......................................................................
Total assets acquired ...................................................
Other liabilities .................................................................
Total liabilities assumed .............................................
Less: Redeemable noncontrolling interest ......................
Total consideration

Fair Value
2
$
4
36
46
8
96
8

8
7
81

reflect

recorded

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

| Ambac Financial Group, Inc. 84 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

other Ambac business operations. Tax deductible goodwill
totaled $65, of which $4 was deducted in 2021.

The overall weighted average useful life of the identified
amortizable intangible assets acquired is fourteen years.

The fair values assigned to tangible and identifiable intangible
assets acquired and
liabilities assumed were based on
management’s estimates and assumptions at the time of
acquisition.

Because the acquisition occurred on last day of the reporting
period, there were no revenues or earnings of Xchange included
in Ambac's Consolidated Statements of Comprehensive Income
for the period ended December 31, 2020.

The fair value of the redeemable non-controlling interest of $7
on the acquisition date was estimated based on the non-
controlling interest’s respective share of Xchange's enterprise
value, adjusted for the value of Ambac's call option to purchase,
and the minority owners' put option to sell to Ambac,
respectively, the remaining 20% membership interests in
Xchange. Please refer to the Noncontrolling Interests section of
Note 2. Basis of Presentation and Significant Accounting
Policies, for further information regarding the terms of the call
and put option, as well as the redeemable noncontrolling interest
balance sheet classification.

The following table sets forth the estimated fair values of
identifiable intangible assets acquired and their estimated useful
lives as of the date of acquisition.

Fair
Value

Distribution relationships ........................
Non-compete agreements ........................
Trade name ..............................................
Total

33
1
1
36

Weighted
Average
Remaining
Useful
Life - Years
15.0
5.0
8.0

The distribution relationships intangible represents existing
relationships Xchange maintains with a variety of brokers and
distributors across its product lines. It excludes the value of
potential future distribution relationships that may be developed,
which is included in goodwill. The non-compete agreements
intangible relates to agreements entered into with certain key
management personnel of Xchange. The trade name intangible
represents the rights to the Xchange Group brand name which is
well known in the marketplace Xchange competes in.

As of December 31, 2020, pro forma information related to the
acquisition was not been presented as the impact was not
material to the Company’s financial results.

4. INVESTMENTS

investments on

Ambac’s non-VIE invested assets are primarily comprised of
fixed maturity securities classified as available-for-sale and
interests in pooled investment funds which are reported within
the Consolidated Balance Sheets.
Other
Interests in pooled investment funds in the form of common
stock or in-substance common stock are classified as trading
securities, while limited partner interests in such funds are
reported using the equity method. Other investments also
included equity interests held by AFG, including the equity
Certificates in Corolla Trust, an unconsolidated trust created in
connection with its sale of Segregated Account junior surplus
notes on August 28, 2014. As further described in Note 1.
Background and Business Description, on January 22, 2021,
AAC completed the Corolla Note Exchange transaction whereby
it acquired 100% of the outstanding obligations and the
Certificates of, and subsequently dissolved, the Corolla Trust.

Disclosures in this Note for the period ended December 31,
2021, are in accordance with the new CECL standard adopted
January 1, 2020, which is more fully described in Note 2. Basis
of Presentation and Significant Accounting Policies. To the
extent disclosures for periods prior to January 1, 2020, made in
accordance with prior GAAP rules differ from disclosures under
the new CECL standard, such differences are explained below.

| Ambac Financial Group, Inc. 85 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Fixed Maturity Securities
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2021 and 2020
were as follows:

Amortized
Cost

Allowance for
Credit Losses

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

December 31, 2021

Fixed maturity securities:

Municipal obligations ......................................................
Corporate obligations .......................................................

Foreign obligations ..........................................................

U.S. government obligations ............................................

Residential mortgage-backed securities ...........................

Collateralized debt obligations ........................................
Other asset-backed securities (2)
.......................................

Short-term ..........................................................................

Fixed maturity securities pledged as collateral: .............

U.S. government obligations ............................................

Short-term ........................................................................

315 $

— $

28 $

3 $

612

182

128

234

1,605

415

2,020

105

120

—

141

—

141

—

340

613

252

128

265

1,730

414

2,145

105

120

Total available-for-sale investments

2,140 $

— $

141 $

16 $

2,265

Amortized
Cost

Allowance for
Credit Losses

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair Value

December 31, 2020
Fixed maturity securities:

Municipal obligations ........................................................
Corporate obligations (1)
.....................................................
Foreign obligations ............................................................
U.S. government obligations .............................................
Residential mortgage-backed securities .............................
Collateralized debt obligations ..........................................
Other asset-backed securities (2)
.........................................

Short-term ............................................................................

Fixed maturity securities pledged as collateral: ...............
U.S. government obligations .............................................
Short-term ..........................................................................

Total available-for-sale investments

321
1,059

97
105
256
74
263
2,175

492
2,667

125
140
2,807 $

—
—

—
—
—
—
—
—

—
—

—

—
—
— $

37
24

1
2
46
—
40
149

—
149

—

—
—
149 $

—
6

—
1
—
—
—
8

—
8

—

—
—

8 $

358
1,077

98
106
302
74
303
2,317

492
2,809

125
140
2,949

(1)

Includes Ambac's holdings of the LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions.

(2) Consists primarily of Ambac's holdings of military housing and student loan securities.

| Ambac Financial Group, Inc. 86 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2021, by
contractual maturity, were as follows:

Amortized
Cost

Estimated
Fair Value

Due in one year or less ........................................................................................................................................................

565 $

Due after one year through five years .................................................................................................................................

Due after five years through ten years ................................................................................................................................

Due after ten years ...............................................................................................................................................................

Residential mortgage-backed securities ..............................................................................................................................

Collateralized debt obligations ............................................................................................................................................

Other asset-backed securities ..............................................................................................................................................

457

406

168

1,596

182

128

234

565

457

411

188

1,620

252

128

265

Total

2,140 $

2,265

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with
or without call or prepayment penalties.

Unrealized Losses on Fixed Maturity Securities
The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments,
which at December 31, 2021, did not have an allowance for credit losses under the CECL standard. This information is aggregated by
investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31,
2021 and 2020:

Less Than 12 Months
Gross
Unrealized
Loss

Fair Value

12 Months or More

Total

Fair Value

Gross
Unrealized
Loss

Fair Value

Gross
Unrealized
Loss

December 31, 2021
Fixed maturity securities:

Municipal obligations ...............................
Corporate obligations ...............................
Foreign obligations ...................................
U.S. government obligations ....................
Residential mortgage-backed securities ...
Collateralized debt obligations .................
Other asset-backed securities ...................

Short-term ..................................................

Fixed maturity securities, pledged as
collateral: ....................................................
U.S. government obligations .....................
Total collateralized investments ..................
Total temporarily impaired securities

117 $
363
75
25
—

68
6
654
114
768

15
15
783 $

3 $
8
2
—
—

—
—
14
—
14

—
—
14 $

2 $
17
3
2
1

3
—
28
13
41

—
—
41 $

— $

1
—
—
—

—
—
1
—
1

—
—

1 $

118 $
380
78
27
2

71
6
682
128
810

15
15
825 $

3
9
2
1
—

—
—
16
—
16

—
—
16

| Ambac Financial Group, Inc. 87 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Less Than 12 Months
Gross
Unrealized
Loss

Fair Value

12 Months or More

Total

Fair Value

Gross
Unrealized
Loss

Fair Value

Gross
Unrealized
Loss

December 31, 2020
Fixed maturity securities:

Municipal obligations ...............................

Corporate obligations ...............................

Foreign obligations ...................................
U.S. government obligations ....................
Residential mortgage-backed securities ...
Collateralized debt obligations .................

Other asset-backed securities ...................

Short-term ..................................................

Fixed maturity securities, pledged as
collateral: ..................................................
U.S. government obligations .....................

Total collateralized investments ................

25 $

543

17
14

—

629

187

816

—

— $

6 $

— $

—

1
—

—

—
—

—

—
—

—

31 $

543

17
14

654

187

841

—

Total securities

816 $

7 $

25 $

— $

841 $

Management has determined that the securities in the above
table do not have credit impairment as of December 31, 2021
and 2020 based upon (i) no actual or expected principal and
interest payment defaults on these securities; (ii) analysis of the
creditworthiness of the issuer and financial guarantor, as
applicable, and (iii) for debt securities that are non-highly rated
beneficial interests in securitized financial assets, analysis of
whether there was an adverse change in projected cash flows.
Management's evaluation as of December 31, 2021, includes the
expectation that all principal and interest payments on securities
guaranteed by AAC or Ambac UK will be made timely and in
full.

Year Ended
December 31,

2021

2020

2019

Gross realized gains on
securities ........................

14 $

38 $

Gross realized losses on
securities ........................

Foreign exchange
(losses) gains .................
Credit impairments ........
Intent / requirement to
sell impairments ............

Net realized gains
(losses)

(2)

(5)

—

(12)

(4)

—

7 $

22 $

—

1
—

—

(5)

—

Ambac’s assessment about whether a security is credit impaired
reflects management’s current judgment regarding facts and
circumstances specific to the security and other factors. If that
judgment changes, Ambac may record a charge for credit
impairment in future periods.

The following table presents a roll-forward of Ambac’s
cumulative credit losses on debt securities for which a portion of
an other-than-temporary impairment was recognized in other
comprehensive income under prior GAAP for the year ended
December 31, 2019:

(Losses),

Investment Gains

Net
Impairments
The following table details amounts included in net investment
gains (losses) and impairments included in earnings for the
affected periods:

including

Year Ended December 31,
Balance, beginning of period ........................................

2019

Reductions for credit impairments previously
recognized on: ................................................................
Securities that matured or were sold during the period

Balance, end of period

(1)
12

Ambac had zero allowance for credit losses at December 31,
2021 and 2020.

Ambac did not purchase any financial assets with credit
deterioration for the years ended December 31, 2021 and 2020.

Collateral,

Counterparty
Regulators and Other Restrictions
Ambac routinely pledges and receives collateral related to
certain transactions. Securities held directly in Ambac’s

Deposits

with

| Ambac Financial Group, Inc. 88 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

investment portfolio with a fair value of $120 and $140 at
December 31, 2021 and 2020, respectively, were pledged to
derivative counterparties. Ambac’s derivative counterparties
have the right to re-pledge the investment securities and as such,
these pledged securities are separately classified on
the
Consolidated Balance Sheets as “Fixed maturity securities
pledged as collateral, at fair value” and "Short-term investments
pledged as collateral, at fair value". Refer to Note 9. Derivative
Instruments for further information on cash collateral. There
was no cash or securities received from other counterparties that
were re-pledged by Ambac.

Securities carried at $17 and $8 at December 31, 2021 and 2020,
respectively, were deposited by Ambac's insurance subsidiaries
with governmental authorities or designated custodian banks as
required by laws affecting insurance companies. Invested assets
carried at $1 as December 31, 2021 were deposited as security in
connection with a letter of credit issued for an office lease.

Securities with a fair value of $— and $178 at December 31,
2021 and 2020, respectively, were pledged as collateral and as
sources of funding to repay the LSNI Ambac Note. AAC also
pledged for the benefit of the holders of LSNI Secured Notes
(other than AAC) the proceeds of interest payments and partial
redemptions of the LSNI Secured Notes held by AAC. The
amount of such proceeds held by AAC was $— and $9 at
December 31, 2021 and 2020, respectively, and is included in
Restricted cash on the Consolidated Balance Sheet. As further
described in Note 1. Background and Business Description, on
July 6, 2021, the LSNI Secured Notes were fully redeemed.

Securities with a fair value of $669 at December 31, 2021 were
held by Ambac UK, the capital stock of which was pledged as
collateral on the Sitka AAC Note. Refer to Note 12. Long-term
Debt for further information about the Sitka AAC Note.

Guaranteed Securities
Ambac’s fixed maturity portfolio includes securities covered by guarantees issued by AAC and other financial guarantors (“insured
securities”). The published rating agency ratings on these securities reflect the higher of the financial strength rating of the financial
guarantor or the rating of the underlying issuer. Rating agencies do not always publish separate underlying ratings (those ratings excluding
the insurance by the financial guarantor). In the event these underlying ratings are not available from the rating agencies, Ambac will assign
an internal rating. The following table represents the fair value and weighted-average underlying rating of insured securities in Ambac's
investment portfolio at December 31, 2021 and 2020, respectively:

Municipal
Obligations

Corporate
Obligations (2)

Mortgage
and Asset-
backed
Securities

Weighted
Average
Underlying
Rating (1)

Total

December 31, 2021:
Ambac Assurance Corporation .................

National Public Finance Guarantee
Corporation ...............................................
Assured Guaranty Municipal Corporation
Total

December 31, 2020:
Ambac Assurance Corporation .................

National Public Finance Guarantee
Corporation ...............................................
Assured Guaranty Municipal Corporation

Total

316 $

2
1
318 $

320 $

6
1
327 $

— $

—
—
— $

465 $

—
—
465 $

439 $

—
—
439 $

754

2
1
757

BBB-
A-
B

481 $

1,266

CCC+

—
—
481 $

6
1
1,273

BBB-
C
CCC+

(1) Ratings are based on the lower of Standard & Poor’s or Moody’s rating. If unavailable, Ambac’s internal rating is used.

(2) Represents Ambac's holdings of LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions. These secured notes were
insured by AAC. As further described in Note 1. Background and Business Description, on July 6, 2021, the LSNI Secured Notes were fully
redeemed.

Other Investments
Ambac's investment portfolio includes interests in various pooled investment funds. Fair value and additional information about
investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value as reported is
determined using net asset value ("NAV") as a practical expedient. Redemption of certain funds valued using NAV may be subject to

| Ambac Financial Group, Inc. 89 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

withdrawal limitations and/or redemption fees which vary with the timing and notification of withdrawal provided by the investor. In
addition to these investments, Ambac has unfunded commitments of $74 to private credit and private equity funds at December 31, 2021.

Class of Funds
December 31,
Hedge funds (1)
...................................................................
Investment grade floating rate income (2)...........................
Equity market investments (3) (10)........................................
Private credit (4)
..................................................................
High yield and leveraged loans (5) (10)
Private equity (6)
Real estate properties (7)
Emerging markets debt (8) (10)
Insurance-linked investments (9)

.................................................................

.....................................................

.............................................

........................................

................................

2021

2020

Redemption Frequency

Redemption Notice Period

216 $

196 quarterly or semi-annually

107

73 weekly

90 days

0 days

73 daily or quarterly

0 - 90 days

65 quarterly if permitted

180 days if permitted

78 daily

0 - 30 days

13 quarterly if permitted

90 days if permitted

16 quarterly

25 daily

10 business days

0 days

see footnote (9)

Total equity investments in pooled funds

683 $

543

Ambac held direct equity interests as of December 31, 2020,
including in an unconsolidated trust created in connection with
the 2014 sale of Segregated Account junior surplus notes, which
was accounted for under the equity method.

Investment Income (Loss)
Net investment income (loss) was comprised of the following
for the affected periods:

Year Ended
December 31,

Fixed maturity
securities ......................

2021

2020

2019

78 $

103 $

183

Short-term
investments ..................
Loans ...........................
Investment expense .....

Securities available-
for-sale and short-term

Other investments .......

Total net investment
income (loss)

—
—
(6)

74
66

5
1
(6)

103
19

139 $

122 $

17
1
(6)

196
32

227

Net investment income (loss) from Other investments primarily
represents changes in fair value on equity securities including
certain pooled investment funds, and income from investment
limited partnerships and other equity interests accounted for
under the equity method.

(1) This class seeks to generate superior risk-adjusted returns through
selective asset sourcing, active trading and hedging strategies
across a range of asset types.

(2) This class of funds includes investments in high quality floating
rate debt securities including ABS and corporate floating rate
notes.

(3) This class of funds aim to achieve long-term growth through

diversified exposure to global equity markets.

(4) This class aims to obtain high long-term returns primarily through
credit and preferred equity investments with low liquidity and
defined term.

(5) This class of funds includes investments in a range of instruments
including high-yield bonds, leveraged loans, CLOs, ABS and
floating rate notes to generate income and capital appreciation.
(6) This class seeks to generate long-term capital appreciation through
investments in private equity, equity-related and other instruments.
Investments consist of UK property to generate income and capital
growth.

(7)

(8) This class seeks long-term income and growth through investments

in the bonds of issuers in emerging markets.

(9) This class seeks to generate returns from insurance markets
through investments in catastrophe bonds, life insurance and other
insurance linked investments. This investment is restricted in
connection with the unwind of certain insurance linked exposures.
Ambac has redeemed its investment to the extent permitted by the
fund.

(10) These categories include fair value amounts totaling $106 and $89
at December 31, 2021 and 2020, respectively, that are readily
determinable and are priced through pricing vendors, including for
High yield and leveraged loans products of $— and $3; for Equity
market investments of $82 and $60; for Emerging markets debt of
$24 and $25.

Ambac held preferred equity investments with a carrying value
of $8 and $— as of December 31, 2021 and 2020, respectively,
that do not have readily determinable fair values and are carried
at cost, less any impairments as permitted under the Investments
— Equity Securities Topic of the ASC. There were no
impairments recorded on these investments or adjustments to
fair value to reflect observable price changes in identical or
similar investments from the same issuer during the periods
presented.

| Ambac Financial Group, Inc. 90 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The portion of net unrealized gains (losses) related to securities classified as trading and equity securities, excluding those reported using
the equity method, still held at the end of each period is as follows:

Year Ended
December 31,

2021

2020

2019

Net gains (losses) recognized during the period on trading securities ..................................................................

23 $

— $

Less: net gains (losses) recognized during the reporting period on trading securities sold during the period .....

(18)

Unrealized gains (losses) recognized during the reporting period on trading securities still held at the

reporting date

22 $

18 $

5. FAIR VALUE MEASUREMENTS

The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value
measurements.

Fair Value Hierarchy
The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to
measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect Company-based assumptions. The fair value hierarchy has three broad levels as follows:

l Level 1

Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury
and other foreign government obligations traded in highly liquid and transparent markets, certain highly liquid pooled fund
investments, exchange traded futures contracts, variable rate demand obligations and money market funds.

l Level 2

l Level 3

Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets. Assets and liabilities classified as Level 2 generally include investments in fixed maturity securities representing
municipal, asset-backed and corporate obligations, certain interest rate swap contracts and most long-term debt of variable
interest entities consolidated under the Consolidation Topic of the ASC.

Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This
hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include
credit derivative contracts, certain uncollateralized interest rate swap contracts, certain equity investments and certain
investments in fixed maturity securities. Additionally, Level 3 assets and liabilities generally include loan receivables, and
certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

The Fair Value Measurement Topic of the ASC permits, as a practical expedient, the estimation of fair value of certain investments in
funds using the net asset value per share of the investment or its equivalent (“NAV”). Investments in funds valued using NAV are not
categorized as Level 1, 2 or 3 under the fair value hierarchy. The Investments — Equity Securities Topic of the ASC permits the
measurement of certain equity securities without a readily determinable fair value at cost, less impairment, and adjusted to fair value when
observable price changes in identical or similar investments from the same issuer occur (the "measurement alternative"). The fair values of
investments measured under this measurement alternative are not included in the below disclosures of fair value of financial instruments.

| Ambac Financial Group, Inc. 91 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of December 31, 2021 and
2020, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by the Fair Value
Measurement Topic of the ASC financial assets and liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement.

Carrying
Amount

Total Fair
Value

Fair Value Measurements Categorized as:

Level 1

Level 2

Level 3

December 31, 2021:

Financial assets:

Fixed maturity securities:

Municipal obligations ............................................................

340 $

— $

340 $

—

—
—

71
3

3,320
—
—
2,718

—
6,202

—

(112)

169

—
79

Corporate obligations .............................................................

Foreign obligations ................................................................

U.S. government obligations ..................................................

Residential mortgage-backed securities .................................

Collateralized debt obligations ..............................................

Other asset-backed securities .................................................

Fixed maturity securities, pledged as collateral:

U.S. government obligations ..................................................

Short-term ..............................................................................

Short term investments ...........................................................
Other investments (1)
...............................................................
Cash, cash equivalents and restricted cash ...........................
Derivative assets: .....................................................................
Interest rate swaps—asset position ........................................
Other assets-loans ....................................................................
Variable interest entity assets: ...............................................
Fixed maturity securities: Corporate obligations .................
Fixed maturity securities: Municipal obligations ................
Restricted cash .....................................................................
Loans ...................................................................................
Derivative assets: .................................................................
Currency swaps-asset position .............................................

Total financial assets
Financial liabilities:
Long term debt, including accrued interest ..........................
Derivative liabilities:

Interest rate swaps—liability position ...................................

Liabilities for net financial guarantees written (2)
Variable interest entity liabilities:

................

Long-term debt (includes $4,056 at fair value) .....................
Derivative liabilities:

Interest rate swaps—liability position .................................

Total financial liabilities

613

252

128

265

105

414

690
21

76
3

3,320
136
2
2,718

613

252

128

265

105

414

683
21

76
3

3,320
136
2
2,718

—

105

369

106
21

—
—

—
—
2
—

600

—

252

128

187

—

—
1

5
—

—
136
—
—

38
9,268 $

38
9,261 $

—
750 $

38
1,732 $

2,806 $

2,598 $

— $

2,575 $

(866)

(112)

4,216

4,255

—

4,086

1,940
8,190 $

1,940
8,775 $

—
— $

1,940
8,695 $

| Ambac Financial Group, Inc. 92 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Carrying
Amount

Total Fair
Value

Fair Value Measurements Categorized as:

Level 1

Level 2

Level 3

December 31, 2020:

Financial assets:

Fixed maturity securities:

Municipal obligations ............................................................

358 $

— $

358 $

Corporate obligations .............................................................

1,077

—

3,215

—

2,998

—

6,433

401

—

539

155

—

1,095

Foreign obligations ................................................................

U.S. government obligations ..................................................

Residential mortgage-backed securities .................................

Collateralized debt obligations ..............................................

Other asset-backed securities .................................................

Fixed maturity securities, pledged as collateral:

U.S. government obligations ...............................................

Short-term ............................................................................

Short term investments ...........................................................
Other investments (1)
Cash and cash equivalents and restricted cash ....................

...............................................................

Derivative assets:

Interest rate swaps—asset position ........................................

Other assets - equity in sponsored VIE .................................

Other assets-loans ....................................................................

Variable interest entity assets:

Fixed maturity securities: Corporate obligations .................
Fixed maturity securities: Municipal obligations ................

Restricted cash .....................................................................

Loans ...................................................................................

Derivative assets; Currency swaps-asset position ...............

Total financial assets

Financial liabilities:

106

302

303

125

492

595

3,215

139

2,998

106

302

303

125

492

597

3,215

139

2,998

106

—

125

415

—

1,073

—

302

225

—

139

—

10,071 $

10,073 $

888 $

2,299 $

Long term debt, including accrued interest ..........................

3,255 $

3,071 $

— $

2,670 $

Derivative liabilities:

Interest rate swaps—liability position ...................................

Liabilities for net financial guarantees written (2)
Variable interest entity liabilities:

................

114

(740)

114

539

Long-term debt (includes $4,324 at fair value) ...................

4,493

4,504

Derivative liabilities:

Interest rate swaps—liability position ..............................

1,835

Total financial liabilities

8,958 $

1,835

10,063

—

114

—

4,349

1,835

8,968

(1) Excluded from the fair value measurement categories in the table above are investment funds of $577 and $453 as of December 31, 2021 and 2020,
respectively, which are measured using NAV as a practical expedient. Also excluded from the fair value measurements in the table above are equity
securities with a carrying value of $8 and $— as of December 31, 2021 and 2020, respectively, that do not have readily determinable fair values and
have carrying amounts determined using the measurement alternative.

(2) The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on
paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense
reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.

Determination of Fair Value
When available, Ambac uses quoted active market prices
specific to the financial instrument to determine fair value and
classifies such items within Level 1. The determination of fair
value for financial instruments categorized in Level 2 or 3
involves judgment due to the complexity of factors contributing

to the valuation. Third-party sources from which we obtain
independent market quotes also use assumptions, judgments and
estimates
instrument values and
different third parties may use different methodologies or
provide different values for financial instruments. In addition,
the use of internal valuation models may require assumptions

in determining financial

| Ambac Financial Group, Inc. 93 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

about hypothetical or inactive markets. As a result of these
factors, the actual trade value of a financial instrument in the
market, or exit value of a financial instrument position by
Ambac, may be significantly different from its recorded fair
value.

Ambac’s financial instruments carried at fair value are mainly
comprised of investments in fixed maturity securities, equity
interests in pooled investment funds, derivative instruments, and
certain variable interest entity assets and liabilities. Valuation of
financial instruments is performed by Ambac’s finance group
using methods approved by senior financial management with
consultation from risk management and portfolio managers as
appropriate. Preliminary valuation results are discussed with
portfolio managers quarterly to assess consistency with market
transactions and trends as applicable. Market transactions such
as trades or negotiated settlements of similar positions, if any,
are reviewed to validate fair value model results. However many
of
significant
unobservable inputs have very little or no observable market
activity. Methods and significant inputs and assumptions used to
determine fair values across portfolios are reviewed quarterly by
control
financial management. Other valuation
senior
procedures specific to particular portfolios are described further
below.

instruments valued using

financial

the

Fixed Maturity Securities

The fair values of fixed maturity investment securities are based
primarily on market prices received from broker quotes or
alternative pricing sources. Because many fixed maturity
securities do not trade on a daily basis, pricing sources apply
available market information through processes such as matrix
pricing to calculate fair value. Such prices generally consider a
variety of factors, including recent trades of the same and
similar securities. In those cases, the items are classified within
Level 2. For those fixed maturity investments where quotes were
not available or cannot be reasonably corroborated, fair values
are based on internal valuation models. Key inputs to the
internal valuation models generally include maturity date,
coupon and yield curves for asset-type and credit rating
characteristics that closely match those characteristics of the
specific investment securities being valued. Items valued using
valuation models are classified according to the lowest level
input or value driver that is significant to the valuation. Thus, an
item may be classified in Level 3 even though there may be
significant inputs that are readily observable. Longer (shorter)
expected maturities or higher (lower) yields used in the
valuation model will, in isolation, result in decreases (increases)
in fair value. Generally, lower credit ratings or longer expected
maturities will be accompanied by higher yields used to value a
security. At December 31, 2021, approximately 6%, 90%, and
4% of the fixed maturity investment portfolio (excluding
variable interest entity investments) was valued using broker
quotes, alternative pricing sources and
internal valuation
models, respectively. At December 31, 2020, approximately 2%,
95%, and 3% of the fixed maturity investment portfolio
(excluding variable interest entity investments) was valued using
broker quotes, alternative pricing sources and internal valuation
models, respectively.

Ambac performs various review and validation procedures to
quoted and modeled prices for fixed maturity securities,
including price variance analyses, missing and static price
reviews, overall valuation analysis by portfolio managers and
finance managers and reviews associated with our ongoing
impairment analysis. Unusual prices identified through these
procedures will be evaluated further against alternative third-
party quotes (if available), internally modeled prices and/or
other relevant data, and the pricing source values will be
challenged as necessary. Price challenges generally result in the
use of the pricing source’s quote as originally provided or as
revised by the source following their internal diligence process.
A price challenge may result in a determination by either the
pricing source or Ambac management that the pricing source
cannot provide a reasonable value for a security or cannot
adequately support a quote, in which case Ambac would resort
to using either other quotes or internal models. Results of price
challenges are reviewed by portfolio managers and finance
managers.

Information about the valuation inputs for fixed maturity
securities classified as Level 3 is included below:

Other asset-backed securities: This security is a subordinated
tranche of a securitization collateralized by Ambac-insured
military housing bonds. The fair value classified as Level 3 was
$79 and $78 at December 31, 2021 and 2020, respectively. Fair
value was calculated using a discounted cash flow approach
with expected future cash flows discounted using a yield
consistent with the security type and rating. Significant inputs
for the valuation at December 31, 2021 and 2020 include the
following:

December 31, 2021:

a. Coupon rate .............................................. 5.97%

b. Average Life ............................................ 14.14 years

c. Yield ......................................................... 10.20%

December 31, 2020:

a. Coupon rate .............................................. 5.97%

b. Average Life ............................................ 14.83 years

c. Yield ......................................................... 10.50%

Corporate obligations: This includes certain investments in
convertible debt securities. The fair value classified as Level 3
was $12 at December 31, 2021. Fair value is determined by
discounting principal and interest cash flows to maturity of 2.75
years, at a weighted average yield of 11.6%, adjusted for the
estimated fair value of the conversion feature.

Other Investments

Other investments primarily relate to investments in pooled
investment funds. The fair value of pooled investment funds is
determined using dealer quotes or alternative pricing sources
when such investments have readily determinable fair values.
When fair value is not readily determinable, pooled investment
funds are valued using NAV as a practical expedient as
permitted under the Fair Value Measurement Topic of the ASC.
Refer to Note 4. Investments for additional information about

| Ambac Financial Group, Inc. 94 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

such investments in pooled funds that are reported at fair value
using NAV as a practical expedient.

At December 31, 2020, other investments also included Ambac's
equity interest in the Corolla Trust, a non-consolidated VIE
created in connection with Ambac's monetization of AAC junior
surplus notes. This equity interest was carried under the equity
method and its fair value was internally calculated using a
market approach and was classified as Level 3. As further
described in Note 1. Background and Business Description, on
January 22, 2021, AAC completed the Corolla Note Exchange
transaction whereby it acquired 100% of the outstanding
obligations and the owner trust certificate of, and subsequently
dissolved, the Corolla Trust.

Derivative Instruments

Ambac’s derivative instruments primarily comprise interest rate
swaps, credit default swaps and exchange traded futures
contracts. Fair value is determined based upon market quotes
from independent sources, when available. When independent
quotes are not available, fair value is determined using valuation
models. These valuation models require market-driven inputs,
including contractual terms, credit spreads and ratings on
underlying referenced obligations, yield curves and tax-exempt
interest ratios. The valuation of certain derivative contracts also
require the use of data inputs and assumptions that are
determined by management and are not readily observable in the
market. Under the Fair Value Measurement Topic of the ASC,
Ambac is required to consider its own credit risk when
measuring the fair value of derivatives and other liabilities.
Factors considered in estimating the amount of any Ambac
credit valuation adjustment ("CVA") on such contracts include
collateral posting provisions,
the
counterparty, the period of time remaining on the derivative and
the pricing of recent terminations. The aggregate Ambac CVA
impact reduced the fair value of derivative liabilities by less than
a million dollars at both December 31, 2021 and 2020,
respectively.

right of set-off with

Interest rate swaps that are not centrally cleared are valued using
vendor-developed models that incorporate interest rates and
yield curves that are observable and regularly quoted. These
models provide the net present value of the derivatives based on
contractual terms and observable market data. Generally, the
need for counterparty (or Ambac) CVAs on interest rate
derivatives is mitigated by the existence of collateral posting
agreements under which adequate collateral has been posted.
Certain of these derivative contracts entered into with financial
guarantee customers are not subject to collateral posting
agreements. Counterparty credit risk related to such customer
derivative assets is included in our determination of their fair
value.

Ambac's credit derivatives ("CDS") are valued using an internal
model that uses traditional financial guarantee CDS pricing to
calculate the fair value of the derivative contract based on the
reference obligation's current pricing, remaining life and credit
rating and Ambac's own credit risk. The model calculates the
difference between the present value of the projected fees
receivable under the CDS and our estimate of the fees a
financial guarantor of comparable credit quality would charge to

the same protection at

provide
the balance sheet date.
Unobservable inputs used include Ambac's internal reference
obligation credit ratings and remaining life, estimates of fees
that would be charged to assume the credit derivative obligation
and Ambac's CVA. Ambac is party to only one remaining credit
derivative with an internal credit rating of AA at December 31,
2021. Ambac has not made any significant changes to its
modeling techniques or related model inputs for the periods
presented.

Financial Guarantees

Fair value of net financial guarantees written represents our
estimate of the cost to Ambac to completely transfer its
insurance obligation to another market participant of comparable
credit worthiness. In theory, this amount should be the same
amount that another market participant of comparable credit
worthiness would hypothetically charge in the marketplace, on a
present value basis, to provide the same protection as of the
balance sheet date. This fair value estimate of financial
guarantees is presented on a net basis and includes direct and
assumed contracts written, net of ceded reinsurance contracts.

Long-term Debt

Long-term debt includes AAC surplus notes and junior surplus
notes (cancelled in 2021 as part of the Surplus Note Exchanges
described in Note 1. Background and Business Description), the
Sitka AAC Note, the LSNI Ambac Note (fully redeemed on July
6, 2021 as described in Note 1. Background and Business
Description), Tier 2 Notes issued in connection with the
Rehabilitation Exit Transactions and the Ambac UK debt issued
in connection with the commutation of its exposure with respect
to Ballantyne Re plc in 2019. The fair values of surplus notes,
Sitka AAC Note, LSNI Ambac Note and Tier 2 Notes are
classified as Level 2. The fair value of junior surplus notes and
Ambac UK debt are classified as Level 3.

Other Financial Assets and Liabilities

Included in Other assets are loans and, at December 31, 2020,
Ambac’s equity interest in an Ambac sponsored VIE established
to provide certain financial guarantee clients with funding for
their debt obligations. The fair values of these financial assets
are estimated based upon internal valuation models and are
classified as Level 3.

Variable Interest Entity Assets and Liabilities

The financial assets and liabilities of FG VIEs consolidated
under the Consolidation Topic of the ASC consist primarily of
fixed maturity securities and loans held by the VIEs, derivative
instruments and notes issued by the VIEs which are reported as
long-term debt. As described in Note 11. Variable Interest
Entities, these FG VIEs are securitization entities which have
liabilities and/or assets guaranteed by AAC or Ambac UK.

The fair values of FG VIE long-term debt are based on price
independent market sources when
quotes received from
available. Such quotes are considered Level 2 and generally
consider a variety of factors, including recent trades of the same
and similar securities. For those instruments where quotes were
not available or cannot be reasonably corroborated, fair values
are based on internal valuation models. Comparable to the

| Ambac Financial Group, Inc. 95 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

sensitivities of investments in fixed maturity securities described
above, longer (shorter) expected maturities or higher (lower)
yields used in the valuation model will, in isolation, result in
decreases (increases) in fair value liability measurement for FG
VIE long-term debt.

FG VIE derivative asset and liability fair values are determined
using vendor-developed valuation models, which incorporated
observable market data related to specific derivative contractual
terms including interest rates, foreign exchange rates and yield
curves.

The fair value of FG VIE fixed maturity securities and loan
assets are based on Level 2 market price quotes received from
independent market sources when available. Typically, FG VIE
asset fair values are not readily available from market quotes

and are estimated internally. Internal valuation of FG VIE’s
fixed maturity securities or loan assets are derived from the fair
values of the notes issued by the respective VIE and the VIE’s
derivatives, determined as described above, adjusted for the fair
values of Ambac’s financial guarantees associated with the VIE.
The fair value of financial guarantees consist of: (i) estimated
future premium cash flows discounted at a rate consistent with
that implicit in the fair value of the VIE’s liabilities and (ii)
estimates of future claim payments discounted at a rate that
includes Ambac’s own credit risk. Estimated future premium
payments to be paid by the VIEs were discounted at a weighted
average rate of 3.0% and 2.4% at December 31, 2021 and 2020,
respectively. At December 31, 2021, the range of these discount
rates was between 2.2% and 4.1%.

Additional Fair Value Information for Financial Assets and Liabilities Accounted for at Fair Value
The following tables present the changes in the Level 3 fair value category for the periods presented in 2021, 2020 and 2019. Ambac
classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to
the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a
number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the
fair value related to both observable and unobservable inputs.

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Investments (1)
$

78 $

Other
Assets (2)

Derivatives

Investment
s
3,215 $

Loans

Long-term
Debt

Total

2,998 $

— $

6,376

84 $

Year ended December 31, 2021

Balance, beginning of period .........................
Total gains/(losses) realized and unrealized:
Included in earnings .......................................
Included in other comprehensive income ......
Purchases .........................................................
Issuances ..........................................................
Sales .................................................................
Settlements .......................................................
Balance, end of period
The amount of total gains/(losses) included
in earnings attributable to the change in
unrealized gains or losses relating to assets
and liabilities still held at the reporting date ..

The amount of total gains/(losses) included
in other comprehensive income attributable
to the change in unrealized gains or losses
relating to assets and liabilities still held at
the reporting date ............................................

1 $

—
—
—
—
—
(1)
— $

1
1
13
—
—
(2)
91 $

(6)
—
—
—
—
(8)
70 $

176
(32)
—
—
—
(38)
3,320 $

59
(26)
—
—
—
(313)
2,718 $

—
—
—
—
—
—
— $

230
(58)
13
—
—
(362)
6,199

(1) $

— $

(6) $

176 $

59 $

— $

227

(1) $

— $

(32) $

(26) $

— $

(59)

(1) Investments classified as Level 3 consist of a one other asset-backed security and two convertible notes purchased in 2021.

(2) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

| Ambac Financial Group, Inc. 96 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2020

Investments

Other
Assets (1)

Derivatives

Investments

Loans

Long-term
Debt

Total

Balance, beginning of period .....................

72 $

3 $

66 $

2,957 $

3,108 $

— $

6,207

Total gains/(losses) realized and
unrealized:
Included in earnings ....................................
Included in other comprehensive income ....

Purchases .....................................................

Issuances ......................................................

Sales ............................................................

Settlements ..................................................

Deconsolidations of VIEs ............................

Balance, end of period

The amount of total gains/(losses) included
in earnings attributable to the change in
unrealized gains or losses relating to
assets and liabilities still held at the
reporting date ..............................................

other

The amount of total gains/(losses) included
in
income
attributable to the change in unrealized
gains or losses relating to assets and
liabilities still held at the reporting date .....

comprehensive

—

(1)

—

(2)

—

(7)

—

183

109

—

(35)

—

(290)

—

306

198

—

(334)

—

78 $

1 $

84 $

3,215 $

2,998 $

— $

6,376

1 $

(2) $

25 $

183 $

98 $

— $

305

6 $

— $

109 $

83 $

— $

198

(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

Level-3 Financial Assets and Liabilities Accounted for at Fair Value

VIE Assets and Liabilities

Year Ended December 31, 2019

Investments

Other
Assets (1)

Derivatives

Investments

Loans

Long-term
Debt

Total

Balance, beginning of period ...................

72 $

5 $

46 $

2,737 $

4,288 $

(217) $

6,930

Total gains/(losses) realized and
unrealized:
Included in earnings ................................
Included in other comprehensive income
Purchases ...................................................
Issuances ....................................................
Sales ...........................................................
Settlements ................................................
Deconsolidation of VIEs ...........................
Balance, end of period

The amount of
total gains/(losses)
included in earnings attributable to the
change in unrealized gains or losses
relating to assets and liabilities still
held at the reporting date ..........................

2
—
—
—
—
(2)

—
72 $

(2)
—
—
—
—
—

—

3 $

25
—
—
—
—
(5)

138
116
—
—
—
(35)

287
74
—
—
—
(690)

—
66 $

—
2,957 $

(851)
3,108 $

(15)
8
—
—
—
—

223

— $

436
199
—
—
—
(731)

(627)
6,207

— $

(2) $

25 $

138 $

215 $

— $

376

(1) Other assets carried at fair value and classified as Level 3 relate to an equity interest in an Ambac sponsored VIE.

Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable
inputs are used to estimate fair value. All such securities that have internally modeled fair values have been classified as Level 3.
Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. There
were no transfers of financial instruments into or out of Level 3 in the periods disclosed.

| Ambac Financial Group, Inc. 97 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported
as follows:

Net
Investment
Income

Net Gains
(Losses) on
Derivative
Contracts

Income (Loss)
on Variable
Interest
Entities

Other
Income
(Expense)

Year Ended December 31, 2021

Total gains (losses) included in earnings for the period ...........................................

1 $

(6) $

235 $

Changes in unrealized gains (losses) relating to financial instruments still held at
the reporting date .......................................................................................................

(6)

235

Year Ended December 31, 2020

Total gains (losses) included in earnings for the period ...........................................

1 $

25 $

281 $

—

281

Year Ended December 31, 2019

Total gains (losses) included in earnings for the period ...........................................

2 $

25 $

410 $

—

353

—

(2)

6. FINANCIAL GUARANTEES IN FORCE

that

insure variable

interest entities

Financial guarantees outstanding includes the exposures of
(“VIEs”)
policies
consolidated in accordance with ASC Topic 810, Consolidation.
Financial guarantees outstanding include the exposure of
policies that insure 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. Financial guarantees outstanding exclude the exposures
of policies that insure bonds which have been called, pre-
refunded or refunded and excludes exposure of the policies
insuring the Sitka Senior Secured Notes and LSNI Secured
Notes as defined
in Note 1. Background and Business
Description. The gross par amount of financial guarantees
outstanding was $34,122 and $39,070 at December 31, 2021 and
2020, respectively. The par amount of financial guarantees
outstanding, net of reinsurance, was $28,020 and $33,888 at
December 31, 2021 and 2020, respectively. As of December 31,
2021, the aggregate amount of financial guarantee insured par
ceded to reinsurers under reinsurance agreements was $6,102
with the largest reinsurer accounting for $2,695 or 7.9% of gross
par outstanding at December 31, 2021.

As of December 31, 2021 and 2020, the financial guarantee
portfolio consisted of the types of guaranteed bonds as shown in
the following table:

Net Par Outstanding December 31, (1)
Public Finance:

...................................... $

Housing revenue (2)
Lease and tax-backed revenue .....................
General obligation .......................................
Other ............................................................

Total Public Finance
Structured Finance:

Mortgage-backed and home equity .............
Investor-owned utilities ...............................
Other ............................................................

Total Structured Finance
International Finance:

2021

2020

5,610 $
3,196
1,612
1,942
12,360

5,855
4,179
2,345
3,118
15,497

2,724
1,556
624
4,904

3,635
1,617
1,085
6,337

Sovereign/sub-sovereign .............................
Investor-owned and public utilities .............
Asset-backed and other ................................
Transportation ..............................................

Total International Finance
Total

5,141
3,283
1,276
1,056
10,756

5,270
3,899
1,374
1,511
12,054
$ 28,020 $ 33,888

(1) Net Par Outstanding includes 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 bond.

(2)

Includes $5,490 and $5,575 of Military Housing net par at
December 31, 2021 and 2020, respectively.

| Ambac Financial Group, Inc. 98 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

As of December 31, 2021 and 2020, the financial guaranteed
portfolio by location of risk was as outlined in the table below:

The following table summarizes net premiums earned by
location of risk:

Net Par Outstanding December 31,

2021

2020

Year Ended December 31,

2021

2020

2019

United States ................................................... $ 17,264 $ 21,834

United States ...........................

27 $

32 $

United Kingdom .............................................

9,255

9,711

United Kingdom ......................

Other international ..................

Total

(2)

47 $

54 $

(6)

Premium Receivables, including credit impairments

Premium receivables at December 31, 2021 and 2020 were $323
and $370, respectively.

Management evaluates premium receivables for expected credit
losses ("credit impairment") in accordance with the CECL
standard adopted January 1, 2020, which is further described in
Note 2. Basis of Presentation and Significant Accounting
Policies. Management's evaluation of credit impairment under
prior GAAP rules was not materially different. Most credit
impairment disclosures below were only made prospectively
from the CECL adoption date as they were not required
previously under GAAP.

As further discussed in Note 2. Basis of Presentation and
Significant Accounting Policies, the key indicator management
uses to assess the credit quality of financial guarantee premium
receivables is Ambac's internal risk classifications for the
insured obligation determined by the Risk Management Group.

Italy .................................................................

Austria ............................................................

France .............................................................

Australia ..........................................................

Other international ..........................................

718

343

219

203

803

707

277

420

136

Total

$ 28,020 $ 33,888

Gross financial guarantees in force (principal and interest) were
$54,272 and $61,895 at December 31, 2021 and 2020,
respectively. Net financial guarantees in force (after giving
to reinsurance) were $42,653 and $51,603 as of
effect
December 31, 2021 and 2020, respectively.

In the United States, Colorado and California were the states
with the highest aggregate net par amounts in force, accounting
for 8.3% and 5.1% of the total at December 31, 2021,
respectively. No other state accounted for more than 4%. The
highest single insured risk represented 3.3% of the aggregate net
par amount guaranteed.

7. INSURANCE CONTRACTS

Amounts presented in this Note relate only to Ambac’s non-
derivative insurance business for insurance policies issued to
beneficiaries, excluding consolidated VIEs.

Premiums
The effect of reinsurance on premiums written and earned was
as follows:

Year Ended
December 31,

2021:

Direct

Assumed

Ceded

Net
Premiums

Written ............. $

2 $

— $

35 $

Earned ..............

—

2020:

Written ............. $

(1) $

— $

(1) $

Earned ..............

2019:

Written ............. $

(28) $

— $

31 $

Earned ..............

—

(33)

—

(60)

Ambac’s accelerated financial guarantee premium revenue for
retired obligations for the years ended December 31, 2021, 2020
and 2019, was $1, $12 and $10, respectively.

| Ambac Financial Group, Inc. 99 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Below is the amortized cost basis of financial guarantee premium receivables by risk classification code and asset class as of December 31,
2021 and 2020:

Type of Guaranteed Bond

Public Finance:

Surveillance Categories as of December 31, 2021

III

Total

Housing revenue .............................................................................. $

149 $

3 $

5 $

— $

Other ................................................................................................

Total Public Finance

Structured Finance:

Mortgage-backed and home equity .................................................

Student loan .....................................................................................
Structured insurance ........................................................................

Other ................................................................................................

Total Structured Finance

International:

Sovereign/sub-sovereign .................................................................

Investor-owned and public utilities .................................................

Other ................................................................................................

151

107

—

277 $

12 $

6 $

22 $

12 $

157

159

125

329

Surveillance Categories as of December 31, 2020

III

Total

Total International
Total (1) (2)

Type of Guaranteed Bond

Public Finance:

Housing revenue .............................................................................. $

155 $

13 $

— $

Other ................................................................................................

Total Public Finance

Structured Finance:

Mortgage-backed and home equity .................................................

Student loan .....................................................................................

Structured insurance ........................................................................

Other ................................................................................................

Total Structured Finance

International:

Sovereign/sub-sovereign .................................................................

Investor-owned and public utilities .................................................

Other ................................................................................................

Total International

Total (2)

157

118

—

302 $

40 $

3 $

27 $

15 $

168

185

108

144

387

(1) Excludes specialty property and casualty premium receivables of $2.

(2) The underwriting origination dates for all policies included are greater than five years prior to the current reporting date.

| Ambac Financial Group, Inc. 100 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Below is a rollforward of the premium receivable allowance for
credit losses as of December 31, 2021 and 2020:

The table below summarizes the future gross undiscounted
financial guarantee premiums to be collected and future
premiums earned, net of reinsurance at December 31, 2021:

Year Ended December 31,
Beginning balance (1)
Current period provision (2)
Write-offs of the allowance ..........................

...................................

...........................

2021

2020

17 $

(6)

(2)

Ending balance

9 $

(2)

Future
Premiums
to be
Collected (1)

Future
Premiums
to be
Earned Net of
Reinsurance (2)

(1) At January 1, 2020, $9 of premiums receivable were deemed

uncollectible as determined under prior GAAP rules.

(2) The year ended December 31, 2020, includes $3 from the adoption

of CECL.

At December 31, 2021 and 2020, a deminimis amount of
premiums were past due.

Financial Guarantee Premium Receivables

Below is the gross premium receivable roll-forward (direct and
assumed contracts) for the affected periods:

Year Ended
December 31,

2021

2020

2019

Beginning premium
receivable ................................. $

370 $

416 $

495

Adjustment to initially apply
ASU 2016-13 .........................
Premium receipts ...................
Adjustments for changes in
expected and contractual cash
flows (1)
...................................
Accretion of premium
receivable discount .................

Deconsolidation of certain
VIEs .......................................

Changes to allowance for
credit losses ............................

Other adjustments (including
foreign exchange) ...................

—
(35)

(3)
(46)

—
(48)

(27)

(6)

(38)

—

(4)

—

(4)

(2)

(6)

Ending premium
receivable (2)

320 $

370 $

416

(1) Adjustments for changes in expected and contractual cash flows
are primarily due to reductions in insured exposure as a result of
early policy terminations and unscheduled principal paydowns.

(2) Premium receivable includes premiums to be received in foreign
denominated currencies most notably in British Pounds and Euros.
At December 31, 2021, 2020 and 2019 premium receivables
include British Pounds of $108 (£80), $117 (£86) and $129 (£97),
respectively, and Euros of $16 (€14), $19 (€16) and $26 (€23),
respectively.

Three months ended:

March 31, 2022 .......................... $

10 $

June 30, 2022 .............................

September 30, 2022 ....................

December 31, 2022 ....................

Twelve months ended:

December 31, 2023 ....................

December 31, 2024 ....................

December 31, 2025 ....................

December 31, 2026 ....................

Five years ended:

December 31, 2031 ....................

December 31, 2036 ....................

December 31, 2041 ....................

December 31, 2046 ....................

December 31, 2051 ....................

December 31, 2056

113

—

Total

393 $

—

303

(1) Future premiums to be collected are undiscounted, gross of
allowance for credit losses, and are used to derive the discounted
premium receivable asset recorded on Ambac's balance sheet.

receivable balance

(2) Future premiums to be earned, net of reinsurance relate to the
unearned premiums liability and deferred ceded premium asset
recorded on Ambac’s balance sheet. The use of contractual lives
for many bond types which do not have homogeneous pools of
underlying collateral is required in the calculation of the premium
receivable as further described in Note 2. Basis of Presentation and
Significant Accounting Policies. This results in a different
premium
lives were
considered. If installment paying policies are retired or prepay
early, premiums reflected in the premium receivable asset and
amounts reported in the above table for such policies may not be
collected. Future premiums to be earned also considers the use of
contractual lives for many bond types which do not have
homogeneous pools of underlying collateral, which may result in
lives were
different unearned premium
considered. If those bonds types are retired early, premium
earnings may be negative in the period of call or refinancing.

if expected

than

| Ambac Financial Group, Inc. 101 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Loss and Loss Expense Reserves
Ambac's loss and loss expense reserves ("loss reserves") are based on management's on-going review of the insured portfolio. Below are
the components of the loss and loss expense reserves and the subrogation recoverable asset at December 31, 2021 and 2020:

December 31, 2021:

December 31, 2020:

Balance Sheet Line
Item

Claims and
Loss
Expenses

Recoveries

Unearned
Premium
Revenue

Loss and
Loss
Expense
Reserves (1)

Claims and
Loss
Expenses

Recoveries

Unearned
Premium
Revenue

Loss and
Loss
Expense
Reserves (1)

Loss and loss expense
reserves ....................... $

1,781 $

(155) $

(56) $

1,570 $

2,060 $

(229) $

(72) $

1,759

Subrogation
recoverable ..................
Totals

(2,180)

—

(2,092)

100

(2,256)

—

1,869 $

(2,335) $

(56) $

(522) $

2,160 $

(2,486) $

(72) $

(2,156)

(397)

(1) Loss and loss expense reserves at December 31, 2021 includes financial guarantee and specialty P&C of $1,538 and $32, respectively. Subrogation
recoverable includes financial guarantee and specialty P&C of $(2,092) and $—, respectively. All balances at December 31, 2020 relate to the
financial guarantee business.

Below is the loss and loss reserve expense roll-forward, net of
subrogation recoverable and reinsurance, for the affected
periods.

Year Ended December 31,

2021

2020

2019

Beginning gross loss and loss

expense reserves .................... $

(397) $

(482) $

(107)

Reinsurance recoverable ...........

Beginning balance of net loss

and loss expense reserves .......

Losses and loss expenses

(benefit) incurred: .................
Current year ...........................
Prior years ..............................

Total (1)(2)
Loss and loss expenses

(recovered) paid:
Current year ...........................
Prior years ..............................

Total
Foreign exchange effect

Ending net loss and loss

expense reserves .....................
Impact of VIE consolidation .....
Reinsurance recoverable (3)
.......
Ending gross loss and loss

expense reserves

(430)

(508)

(130)

—
(89)
(88)

—
59
59
—

(577)
—
55

15
210
225

1
148
149
2

(430)
—
33

1
12
13

—
318
318
(1)

(436)
(72)
26

(522)

(397)

(482)

(1) Total losses and loss expenses (benefit) includes $5, $(11) and $(7)
for the years ended December 31, 2021, 2020 and 2019,
respectively, related to ceded reinsurance.

(2) Ambac records the impact of estimated recoveries related to
securitized loans in RMBS transactions that breached certain
R&W's by transaction sponsors within losses and loss expenses
(benefit). The losses and loss expense (benefit) incurred associated
with changes in estimated R&W's recoveries for the year ended
December 31, 2021, 2020 and 2019 was $20, $(23) and $42,
respectively.

(3) Represents reinsurance recoverable on future loss and loss
expenses. Additionally, the Balance Sheet line "Reinsurance
recoverable on paid and unpaid losses" includes reinsurance
recoverables (payables) of $0, $1 and $0 as of December 31, 2021,
2020 and 2019, respectively, related to previously presented loss
and loss expenses and subrogation.

For 2021, the positive development in prior years was primarily
due to favorable development in Public Finance credits (largely
Puerto Rico) and the RMBS portfolio.

For 2020, the adverse development in prior years was primarily
a result of deterioration in Public Finance credits, largely Puerto
Rico, partially offset by favorable development in the RMBS
portfolio.

| Ambac Financial Group, Inc. 102 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Financial Guarantee Loss Reserves:

The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation
recoverable at December 31, 2021 and 2020. Gross par exposures 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 bond. The weighted average risk-free rate
used to discount loss reserves at December 31, 2021 and 2020 was 1.2% and 1.1%, respectively.

Number of policies .........................................................

Remaining weighted-average contract period (in
years) (1)
Gross insured contractual payments outstanding: ....

........................................................................

Surveillance Categories as of December 31, 2021
V
III
IA

130

Principal .......................................................................

904 $

840 $

459 $

1,300 $

2,759 $

40 $

Interest .........................................................................

589

612

308

169

1,284

Total

Gross undiscounted claim liability ..............................

Discount, gross claim liability .....................................

Gross claim liability before all subrogation and

before reinsurance

Less:

Gross RMBS subrogation (2)
Discount, RMBS subrogation ......................................

........................................

Discounted RMBS subrogation, before reinsurance
Less:

Gross other subrogation (3)
...........................................
Discount, other subrogation .........................................

Discounted other subrogation, before reinsurance

Gross claim liability, net of all subrogation and

discounts, before reinsurance

Less: Unearned premium revenue ...................................
Plus: Loss expense reserves ............................................
Gross loss and loss expense reserves

Reinsurance recoverable reported on
Balance Sheet (4)

1,493 $

1,452 $

767 $

1,469 $

4,043 $

5 $

16 $

45 $

544 $

1,423 $

—

(1)

(3)

(109)

(185)

5 $

15 $

42 $

435 $

1,238 $

57 $

1,792

— $

(1,737) $

— $

(1,737)

—
—

—
—
—

—
—

(5)
—
(5)

—
—

—
—
—

—
—

(33)
2
(31)

7
(1,730)

(583)
24
(559)

—
—

(12)
2
(10)

5 $

(3) $
1
3 $

10 $

(10) $
—

1 $

42 $

(5) $
—
38 $

404 $

(1,051) $

(14) $
4
394 $

(24) $
40
(1,036) $

47 $

(1) $
—
46 $

7
(1,730)

(633)
28
(605)

(543)

(56)
45
(554)

1 $

10 $

22 $

(11) $

— $

Total

205

6,302

2,984

9,286

2,095

(303)

62 $

(4)

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

(2) RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.

(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance

transactions, including RMBS.

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $24 related to future loss and loss expenses and $0 related

to presented loss and loss expenses and subrogation.

| Ambac Financial Group, Inc. 103 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Number of policies .........................................................

Remaining weighted-average contract period (in
years) (1)
Gross insured contractual payments outstanding:

........................................................................

Principal .......................................................................
Interest .........................................................................
Total
Gross undiscounted claim liability ..............................
Discount, gross claim liability .....................................

Gross claim liability before all subrogation and
before reinsurance

Less:

Gross RMBS subrogation (2)
Discount, RMBS subrogation ......................................

........................................

Discounted RMBS subrogation, before reinsurance

Less:

Gross other subrogation (3)
Discount, other subrogation .........................................

...........................................

Discounted other subrogation, before reinsurance

Gross claim liability, net of all subrogation and

discounts, before reinsurance

Less: Unearned premium revenue ...................................
Plus: Loss expense reserves ............................................
Gross loss and loss expense reserves

Reinsurance recoverable reported on
Balance Sheet (4)

$
$

Surveillance Categories as of December 31, 2020
V
III
IA

132

842 $

1,375 $

595 $

1,469 $

3,246 $

47 $

279

1,011

484

215

1,427

Total

232

7,573

3,443

1,121 $
3 $

2,386 $
49 $

1,079 $
40 $

1,685 $
541 $

4,673 $
1,690 $

72 $ 11,016
2,395
72 $

—

(2)

(1)

(85)

(213)

(3)

(303)

3 $

47 $

40 $

456 $

1,477 $

69 $

2,092

— $

(1,753) $

— $

(1,753)

—

(36)

(35)

(1,751)

(706)

(689)

—

(12)

(11)

3 $

(2) $
1
2 $

47 $

(16) $
2
32 $

39 $

(5) $
1
35 $

421 $

(17) $
5
409 $

(963) $

(30) $
59
(933) $

58 $

(1) $
—
57 $

(1,751)

(755)

(735)

(394)

(72)
68
(397)

— $

6 $

9 $

24 $

(6) $

— $

(1) Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.

(2) RMBS subrogation represents Ambac's estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.

(3) Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance

transactions, including RMBS.

(4) Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $33 related to future loss and loss expenses and $1 related

to presented loss and loss expenses and subrogation.

COVID-19:

The COVID-19 pandemic had, and to a lesser degree, continues
to have, an impact on general economic conditions; including,
but not limited to, higher unemployment; volatility in the capital
markets; closure or severe curtailment of the operations and,
hence, revenues, of many businesses and public and private
enterprises to which we are directly or indirectly exposed.

COVID-19 and the public health responses by the US federal
and state governments at the onset of the pandemic resulted in a
shut down for several months of significant portions of the US
economy, including areas that AAC's insured obligors rely upon
to generate the revenues and cash flows necessary to service
debts we insure. In the U.S. and Europe, where most of Ambac's
financial guaranty exposure is located, significant fiscal stimulus
measures, monetary policy actions and other relief measures
helped
impacts of
COVID-19 and supported the economic recovery which began
in the second half of 2020 and continues into 2022. As of
December 31, 2021, there have been no defaults of Ambac-
insured obligations as a result of the COVID-19 pandemic.

the negative economic

to moderate

Despite the significant overall benefit of the above relief
measures, which were designed to help mitigate the economic
impact of the COVID-19 pandemic generally, certain of these
measures may still adversely affect Ambac's FG insured
portfolio. In particular, this includes the U.S. government's
temporary relief measures that required mortgage loan servicers
to offer relief to borrowers who suffer hardship as a result of
COVID-19. These relief measures included moratoriums on
foreclosures and evictions as well as
the expansion of
forbearance and subsequent repayment options. While these
relief measures have largely since expired, the resulting delays
in starting mortgage foreclosure processes and the impact of
potential post-forbearance related mortgage loan modifications
may have an adverse impact on our insured RMBS transactions.
Consequently, we have anticipated that we will experience a
modest increase in claim payments for certain of our insured
RMBS obligations following the resumption of foreclosure
activity and the implementation of post-forbearance mortgage
loan modifications. However, since the onset of the COVID-19
pandemic, much of the potential increase in claim experience
has been offset by the benefit to excess spread within the
securitization structures as a result of the reduction in interest

| Ambac Financial Group, Inc. 104 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

rates, which is expected to result in higher excess spread
recoveries to Ambac.

negotiated by and between creditors and the Oversight Board, as
further described below.

We are continuously evaluating and updating our view of the
macro economic environment as well as our specific credit view
of each of our insured exposures considering the significant
uncertainties brought upon us by the COVID-19 pandemic.
Accordingly, despite the current economic recovery, our loss
reserves may be under-estimated as a result of the ultimate
scope, duration and magnitude of the effects of COVID-19
pandemic.

Puerto Rico

its

Ambac has exposure to the Commonwealth of Puerto Rico (the
"Commonwealth") and
instrumentalities across several
different issuing entities with total net par exposure of $1,054.
Components of Puerto Rico net par outstanding include capital
appreciation bonds which are reported at the par amount at the
time of issuance of the related insurance policy as opposed to
the current accreted value of the bonds. Each issuing entity has
its own credit risk profile attributable to discrete revenue
sources, direct general obligation pledges, and/or general
obligation guarantees.

The Commonwealth of Puerto Rico and certain of
its
instrumentalities are or were subject to Title III or Title VI
proceedings under the Puerto Rico Oversight, Management and
Stability Act ("PROMESA") and have suspended debt service
payments, including payments owed on bonds insured by AAC.
AAC has made and will continue to be required to make
significant amounts of policy payments over the next several
years leading to material permanent losses. The recoverability of
a portion of these policy payments is still subject to some
uncertainty as well as variability in terms of the value of certain
components of the plan consideration to be made available
under
the various PROMESA plans of adjustment and
qualifying modifications for the obligations AAC insures, which
may lead to a material increase in permanent losses and cause a
material adverse impact on our results of operations and
financial condition.

Our exposure to Puerto Rico will be impacted by the pending
consummation of the Eighth Amended Title III Joint Plan of
Adjustment of the Commonwealth of Puerto Rico ("Eighth
Amended POA"), the PRIFA Qualifying Modification ("PRIFA
QM") and the CCDA Qualifying Modification ("CCDA QM")
as well as the potential confirmation and implementation of the
PRHTA plan of adjustment ("PRHTA POA").

On November 3, 2021, the Financial Oversight & Management
Board for Puerto Rico ("Oversight Board"), as representative of
the Commonwealth of Puerto Rico, the Puerto Rico Public
Buildings Authority, and the Employees Retirement System of
the Government of the Commonwealth of Puerto Rico, filed the
Eighth Amended POA. The Eighth Amended POA proposed to
restructure approximately $33,000 of debt across various
Commonwealth instrumentalities, including obligations insured
by AAC, and approximately $50,000 in pension obligations. The
Eighth Amended POA, among other things, also incorporated
in various plan support agreements
settlements reflected

A hearing to confirm the Commonwealth’s plan of adjustment
was held over several days between November 8, 2021, and
November 23, 2021.

The Eighth Amended POA was modified several times. On
January 10, 2022, Judge Laura Taylor Swain, District of Puerto
Rico, entered an order requesting certain changes to the Eighth
Amended POA and related materials. None of the requested
changes would substantively impact the contemplated recovery
to Ambac and holders of AAC-insured bonds under the Eighth
Amended POA. The Oversight Board filed a revised version of
the plan and corresponding materials shortly thereafter.

On January 18, 2022, Judge Swain confirmed the Eighth
Amended POA. On January 20, 2022, Judge Swain also
approved the PRIFA QM and the CCDA QM. Unless the
Teachers' Unions', APJ's and the Credit Unions' requests for stay
pending appeal are granted, the plan of adjustment together with
the PRIFA QM and CCDA QM are expected to have an
effective date on or before March 15, 2022. The successful
consummation of the Eighth Amended POA and Qualifying
Modifications on the effective date will represent a significant
step towards resolution of AAC's remaining Puerto Rico
exposure.

The plan support agreements of the various instrumentalities of
the Commonwealth of Puerto Rico provide the basis for the plan
consideration to be made available to creditors, including
Ambac, under the Eighth Amended POA, the PRIFA QM, the
CCDA QM and the PRHTA POA.

The PRIFA Related Plan Support Agreement (“PRIFA PSA”),
signed on July 27, 2021, provides consideration for PRIFA
bondholders in the form of a combination of cash and a
Contingent Value Instrument (the "Rum Tax CVI") that will be
deposited into a master trust (the "CVI Master Trust") and into a
sub trust (the "PRIFA CVI Sub Trust") within the CVI Master
Trust and held for the benefit of PRIFA bondholders (the
“PRIFA Trust”). The Rum Tax CVI comprises potential cash
payments related to outperformance of general fund rum tax
collections relative to the certified 2021 Commonwealth Fiscal
Plan's projections. The PRIFA CVI Sub Trust will also be
funded with approximately a 27% share of the Clawback CVI
(described below), which is tied to potential cash payments
related to the outperformance of the Commonwealth's sales and
use tax ("SUT") against the certified 2020 Commonwealth
Fiscal Plan's projections. The rum tax and SUT outperformance
measures are subject to a joint lifetime nominal cap of 75% of
the allowed PRIFA claim under the Eighth Amended POA.

Ambac executed its joinder to the PRHTA/CCDA PSA on July
15, 2021. The PRHTA/CCDA Related Plan Support Agreement
("PRHTA/CCDA PSA"), dated May 5, 2021, provides
consideration for holders of PRHTA and CCDA bonds on
account of their claims against the Commonwealth. This
consideration consists of interests of approximately 69% and
4%, respectively, in a contingent value instrument tied to the
the certified 2020
the SUT against
outperformance of
Commonwealth Fiscal Plan's projections (the "Clawback CVI").

| Ambac Financial Group, Inc. 105 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The Clawback CVI outperformance measures are subject to a
lifetime nominal cap of 75% of the allowed PRHTA and CCDA
claims under the Eighth Amended POA. Additionally, the
PRHTA bondholders will receive consideration in the form of
new PRHTA bonds and cash, and CCDA bondholders, will
receive cash.

Ambac executed its joinder to the Amended and Restated Plan
Support Agreement ("Amended and Restated GO/PBA PSA")
on July 21, 2021. Under the Amended and Restated GO/PBA
PSA, dated as of July 12, 2021, consideration for holders of GO
and PBA bonds comprised of a combination of cash, new GO
bonds and a contingent value instrument intended to provide
creditors with additional returns tied to the outperformance of
the SUT against the certified 2020 Commonwealth Fiscal Plan's
projections.

Substantial uncertainty still exists with respect to the ultimate
outcome for AAC and other creditors in Puerto Rico due to,
among other matters, (i) whether the effective date will be
stayed pending the appeal of the order confirming Eighth
Amended POA; (ii) the result of the pending First Circuit appeal
of the order confirming the Eighth Amended POA; (iii) the
value or perceived value of the consideration provided by or on
behalf of the debtors under the Eighth Amended POA, PRIFA
QM, and CCDA QM; (iv) the extent to which exposure
management strategies, such as commutation and acceleration,
will be executed; (v) the tax treatment of the consideration
provided by or on behalf of the debtors under the Eighth
Amended POA, PRIFA QM, and CCDA QM; (vi) whether and
when the PRHTA POA will be confirmed; and (vii) other
factors, including market conditions such as interest rate
movements, credit spread changes on the new GO and CVI
instruments, and liquidity for the new GO and CVI instruments.
There is no assurance that should one or more of these
uncertainties negatively develop that it would not have a
material adverse impact on Ambac's financial condition and
results of operations.

reflecting

While our reserving scenarios account for a wide range of
possible outcomes,
the significant uncertainty
regarding future developments and outcomes, given our material
exposure to Puerto Rico and the economic, fiscal, legal, and
political uncertainties associated therewith, our loss reserves
may ultimately prove to be insufficient to cover our losses,
potentially having a material adverse effect on our results of
operations and financial position, and may be subject to material
volatility. Conversely, Ambac’s loss reserves may prove to be
overstated, due to favorable developments or results with respect
to the factors described in the preceding paragraphs.

Ambac has considered these developments and other factors in
evaluating its Puerto Rico loss reserves. While management
believes its reserves are adequate to cover losses in its Public
Finance insured portfolio, there can be no assurance that Ambac
may not incur additional losses in the future, given the
circumstances described herein. Such additional losses may
have a material adverse effect on Ambac’s results of operations
and financial condition and may result in adverse consequences
such as impairing the ability of AAC to honor its financial
obligations; the initiation of rehabilitation proceedings against

the

AAC; eliminating or decreasing
likelihood of AAC
delivering value to Ambac, through dividends or otherwise; and
a significant drop in the value of securities issued or insured by
Ambac or AAC. For public finance credits, including Puerto
Rico, as well as other issuers, for which Ambac has an estimate
of expected loss as of December 31, 2021, the possible increase
in loss reserves under stress or other adverse conditions and
circumstances was estimated to be approximately $355. This
possible increase in loss reserves under stress or other adverse
conditions is very significant and if we were to experience such
incremental losses, our stockholders’ equity as of December 31,
2021, would decrease from $1,098 to $743. However, there can
be no assurance that losses may not exceed such amount.

Representation and Warranty Recoveries

Ambac records estimated RMBS R&W subrogation recoveries
for breaches of R&W by sponsors of certain RMBS transactions.
For a discussion of the approach utilized to estimate RMBS
R&W subrogation recoveries, see Note 2. Basis of Presentation
and Significant Accounting Policies.

Ambac has recorded RMBS R&W subrogation recoveries of
$1,730, ($1,704 net of reinsurance) and $1,751, ($1,725 net of
reinsurance) at December 31, 2021 and 2020, respectively.

law

Our ability to realize R&W subrogation recoveries is subject to
significant uncertainty, including risks inherent in litigation,
including adverse rulings or decisions in our cases or in
litigations to which AAC is not a party that set precedents or
resolve questions of
impact our own claims;
that
collectability of such amounts from counterparties (and/or their
respective parents and affiliates); timing of receipt of any such
recoveries; intervention by OCI, which could impede our ability
to take actions required to realize such recoveries; and
uncertainty inherent in the assumptions used in estimating such
recoveries. Failure to realize R&W subrogation recoveries for
any reason or the realization of R&W subrogation recoveries
materially below the amount recorded on Ambac's consolidated
balance sheet would have a material adverse effect on our results
of operations and financial condition. If we were unable to
realize R&W subrogation recoveries recorded on Ambac's
consolidated balance sheet, our stockholders’ equity as of
December 31, 2021, would decrease from $1,098 to $(607).
Additionally, failure to realize R&W subrogation recoveries, or
the realization of recoveries significantly below those recorded
on the balance sheet, may result in adverse consequences such
as impairing the ability of AAC to honor its financial
obligations, particularly its outstanding debt and preferred stock
obligations; the initiation of rehabilitation proceedings against
AAC; AAC not being able to deliver value to Ambac, through
dividends or otherwise; and a significant drop in the value of
securities issued or insured by Ambac or AAC.

Reinsurance
Impairment:

Recoverables,

Including

Credit

Amounts recoverable from reinsurers are estimated in a manner
consistent with the associated loss and loss expense reserves.
The Company reports its reinsurance recoverables net of an
allowance for amounts that are estimated to be uncollectible.

| Ambac Financial Group, Inc. 106 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Ambac’s reinsurance assets, including deferred ceded premiums
and reinsurance recoverables on losses amounted to $145 at
December 31, 2021. Credit exposure existed at December 31,
2021, with respect to reinsurance recoverables to the extent that
any reinsurer may not be able to reimburse Ambac under the
terms of these reinsurance arrangements. At December 31, 2021,
there were ceded reinsurance balances payable of $33 offsetting
this credit exposure. Contractually ceded reinsurance payables
can only be offset against amounts owed from the same
reinsurer in the event that such reinsurer is unable to meet its
obligations to reimburse Ambac.

To minimize its credit exposure to losses from reinsurer
insolvencies, Ambac (i) is entitled to receive collateral from its
reinsurance counterparties in certain reinsurance contracts and
(ii) has certain cancellation rights that can be exercised by
Ambac in the event of rating agency downgrades of a reinsurer
(among other events and circumstances). Ambac held letters of
credit and collateral amounting to $111 from its reinsurers at
December 31, 2021. For those reinsurance counterparties that
do not currently post collateral, Ambac's reinsurers are well
capitalized, highly
rated, authorized capacity providers.
Additionally, while legacy liabilities from the PWIC acquisition
were fully ceded to certain reinsurers, Everspan also benefits
from an unlimited, uncapped indemnity from the Enstar
Holdings (US) to mitigate any residual risk to these reinsurers.

the key

The allowance for credit losses is based upon Ambac's ongoing
review of amounts outstanding and
indicators
management uses to assess the credit quality of reinsurance
recoverables are collateral posted by
the reinsurers and
independent rating agency credit ratings. The evaluation begins
with a comparison of the fair value of collateral posted by the
reinsurer to the recoverable, net of ceded premiums payable.
Any shortfall of collateral posted is evaluated against the credit
rating of the reinsurer to determine whether an allowance is
considered necessary.

For 2021, our top three reinsurers represented 98% of our total
ceded reinsurance recoverables, and reinsurance recoverables
were primarily from reinsurers with applicable ratings of A or
better. The following table sets forth our three most significant
reinsurers by amount of reinsurance recoverable as of
December 31, 2021.

Type of
Insurance

Specialty
P&C

Financial
Guarantee

Rating
(1)

A+

Reinsurers

QBE Insurance
Corporation .......

Assured
Guaranty Re
Ltd. ....................

Sompo Japan
Nipponkoa
Insurance, Inc. ...

All other
reinsurers ...........

Total
recoverables

Reinsurance
Recoverable
(2)

Unsecured
Recoverable
(3)

27 $

55 $

—

(1) Represents financial strength ratings from S&P for financial
guarantee reinsurers and AM Best for specialty P&C reinsurers.

(2) Represents reinsurance recoverables on paid and unpaid losses.
Unsecured amounts from QBE Insurance Corporation is also

supported by an unlimited, uncapped indemnity from Enstar
Holdings (US).

(3) Reinsurance recoverables reduced by ceded premiums payables
due to reinsurers, letters of credit, and collateral posted for the
benefit of Ambac.

Ambac has a credit allowance
reinsurance
recoverables of less than $1 at December 31, 2021 and 2020,
respectively.

8. INSURANCE REGULATORY

RESTRICTIONS

United States
AAC is domiciled in the State of Wisconsin and, as such, it is
subject to the insurance laws and regulations of the State of
Wisconsin (the “Wisconsin Insurance Laws”) and is regulated
by the OCI as a domestic insurer. Everspan Indemnity and its
wholly owned subsidiary, Everspan
Insurance Company
("Everspan Insurance"), are domiciled in Arizona and are
subject to the insurance laws and regulations of Arizona (the
“Arizona Insurance Laws”) and are regulated by the Arizona
Department of Insurance and Financial Institutions as domestic
insurers. The other subsidiaries of Everspan Insurance are
domiciled in various States and are therefore subject to the
insurance laws and regulations of their respective States of
domicile (together with the Wisconsin Insurance Laws and the
Arizona Insurance Laws, the “State Insurance Laws”) and
regulated by the insurance departments of those States as
domestic insurers. In addition, AAC, Everspan Insurance and its
subsidiaries are subject to the insurance laws and regulations of
the other jurisdictions in which they are licensed and operate as
foreign insurers.

insurer

is not subject

Insurance laws and regulations applicable to insurers vary by
jurisdiction, but the insurance laws and regulations applicable to
our insurance carriers generally require them to maintain
minimum standards of business conduct and solvency; to meet
certain financial tests; and to file policy forms, premium rate
schedules and certain reports with regulatory authorities,
including information concerning capital structure, ownership,
financial condition (such as risk-based capital), corporate
governance and enterprise risk. AAC, because it is a financial
guarantee
risk-based capital
requirements. Regulated insurance companies are also required
to file quarterly and annual statutory financial statements in each
jurisdiction in which they are licensed. The State Insurance
Laws also require prior approval (or non-disapproval) of certain
transactions between an insurance carrier and its affiliates. The
level of supervisory authority that may be exercised by non-
jurisdiction.
domiciliary
Generally, however, non-domiciliary regulators are authorized
to suspend or revoke the insurance license they issued and to
impose restrictions on that license in the event that laws or
regulations are breached by a regulated insurance company or in
the event that continued or unrestricted licensing of the
regulated
insurance company constitutes a “hazardous
condition” (or meets a similar standard) in the opinion of the
non-domiciliary regulator.

regulators varies by

insurance

| Ambac Financial Group, Inc. 107 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The domiciliary regulators have primary regulatory authority,
including with respect to the initiation and administration of
rehabilitation or liquidation proceedings. Additionally, the
accounts and operations of AAC and Everspan are subject to
individual periodic comprehensive financial examinations by
their domestic regulators, and may be examined collectively by
the lead regulator of the affiliated insurance company group,
which is currently OCI.

In December 2020, Everspan Insurance completed its re-
domestication from Wisconsin to Arizona and obtained broad
authority to write property and casualty insurance (while
contemporaneously surrendering its authority to write financial
guaranty insurance) in Arizona. Everspan Insurance has sought
similar amendments to its certificates of authority in all other
states. Everspan Insurance and its subsidiaries (Providence
Washington Insurance Company, 21st Century Indemnity
Insurance Company, 21st Century Pacific Insurance Company
and 21st Century Auto Insurance Company of New Jersey) are
subject to risk-based capital requirements. Everspan Insurance
issued surety policies in 2021.

Everspan Indemnity was formed in 2020 as a domestic surplus
lines insurer in Arizona and, accordingly, is eligible to write
property and casualty insurance as an excess and surplus lines
insurance in all states by virtue of the U.S. Nonadmitted and
Reinsurance Reform Act of 2010. Everspan Indemnity owns
100% of Everspan Insurance. Everspan Indemnity issued its
first policies in May 2021.

All of Ambac's insurance subsidiaries are in compliance with the
minimum capital and surplus levels required under the State
Insurance Laws required to transact all business written to date.

Xchange, like some other managing general agents and program
administrators, may be subject to licensing requirements and
regulation by insurance regulators in various states in which
they conduct business.

In addition to the legal restrictions applicable to AAC as
described herein, pursuant to the terms of the Settlement
Agreement, the Stipulation and Order and the indenture for the
Tier 2 Notes, AAC must seek prior approval by OCI of certain
corporate actions. The Settlement Agreement, Stipulation and
Order and indenture for the Tier 2 Notes include covenants
which restrict
the operations of AAC. The Settlement
Agreement will remain in force until the surplus notes that were
issued pursuant to the Settlement Agreement have been
redeemed, repurchased or repaid in full. The Stipulation and
Order will remain in force for so long as OCI determines it to be
necessary. The indenture for the Tier 2 Notes will remain in
force until the Tier 2 Notes have been redeemed, repurchased or
repaid in full. Certain of the restrictions in the Settlement
Agreement and the indenture for the Tier 2 Notes may be
waived with the approval of the OCI and/or the requisite
percentage of holders of the related debt securities.

Although not domiciled in New York, AAC is nevertheless
subject to the New York insurance law governing financial
guarantee
insurers. New York’s comprehensive financial
guarantee insurance law defines the scope of permitted financial
guarantee insurance and governs the conduct of business of all

financial guarantors licensed to do business in New York,
including AAC. The New York financial guarantee insurance
law also establishes single and aggregate risk limits with respect
to insured obligations insured by financial guarantee insurers.
Such single risk limits are specific to the type of insured
obligation (for example, municipal or asset-backed). Under the
aggregate
limits, policyholders’ surplus and contingency
reserves must at least equal a percentage of aggregate net
liability that is equal to the sum of various percentages of
aggregate net liability for various categories of specified
obligations. At December 31, 2021, AAC is in compliance with
applicable aggregate risk limits but not in compliance with
applicable single risk limits. Through run-off of the portfolio,
AAC will continue to seek the reduction in its exposure for
compliance with applicable single and aggregate risk limits, but
may not be able to do so.

The financial statements of AAC and Everspan are prepared on
the basis of accounting practices prescribed or permitted by the
State Insurance Laws and the actions of regulatory authorities
thereunder. AAC and Everspan use such statutory accounting
practices prescribed or permitted by the applicable regulatory
their financial
authorities for determining and reporting
condition and results of operations, including for determining
solvency under the State Insurance Laws. The States in which
AAC and Everspan are domiciled have adopted the National
Association of Insurance Commissioners (“NAIC”) accounting
practices and procedures manual (“NAIC SAP”) as a component
of prescribed practices as codified in each State’s applicable law
or regulation.

Statutory policyholder surplus differs from stockholder's equity
determined under GAAP principally due to statutory accounting
rules that treat financial guarantee premiums and loss reserves,
investments, consolidation of subsidiaries or variable interest
entities and surplus notes differently.

The following are details of statutory surplus for AAC and
Everspan Indemnity:

• AAC’s statutory policyholder surplus was $757 at
to $865 as of

December 31, 2021, as compared
December 31, 2020.

• Everspan Indemnity has statutory policyholder surplus of
$106 as of December 31, 2021 as compared to $26 as of
December 31, 2020.

The OCI has prescribed additional practices and has permitted
accounting practices for AAC. As a result of the prescribed and
permitted practices discussed below, AAC’s statutory surplus at
December 31, 2021 and 2020 was lower by $5 and higher by
$40, respectively, than if AAC had reported such amounts in
accordance with NAIC SAP.

The Arizona Department of Insurance and Financial Institutions
has permitted accounting practices for Everspan Indemnity and
Everspan Insurance. As a result of the permitted practice
discussed below, Everspan Indemnity's statutory surplus at
December 31, 2021 was higher by $18 than if Everspan had
reported such amounts with NAIC SAP. Everspan had no
additional prescribed practices as at December 31, 2021 and no

| Ambac Financial Group, Inc. 108 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

permitted or additional prescribed practices at December 31,
2020.

Additional Prescribed Accounting Practices
AAC:

OCI has prescribed the following accounting practices that differ
from NAIC SAP for AAC:

• Paragraph 8 of Statement of Statutory Accounting
Principles No. 60 “Financial Guaranty Insurance” allows
for a deduction from loss reserves for the time value of
money by application of a discount rate equal to the
average rate of return on the admitted assets of the financial
guaranty insurer as of the date of the computation of the
reserve. The discount rate shall be adjusted at the end of
each calendar year. Additionally, in accordance with
paragraph 13.e of Statutory Accounting Principles No. 97
"Investments in Subsidiary, Controlled and Affiliated
Entities" and paragraph 8 of Statutory Accounting
Principles No. 5R “Liabilities, Contingencies and
Impairments of Assets - Revised”, AAC records probable
losses on its subsidiaries for which it guarantees their
obligations. AAC also discounts probable
losses on
guarantees of subsidiary obligations using a discount rate
equal to the average rate of return on its admitted assets.
AAC’s average rates of return on its admitted assets at
December 31, 2021 and 2020 were 5.28% and 4.56%,
respectively. OCI has directed AAC to utilize a prescribed
discount rate of 5.10% for the purpose of discounting both
its loss reserves and its probable losses on subsidiary
guarantees.

• Paragraph 4 of Statement of Statutory Accounting
Principles No. 41 “Surplus Notes” (“SSAP 41”) states that
proceeds received by the issuer of surplus notes must be in
the form of cash or other admitted assets having readily
determinable values and liquidity satisfactory to the
commissioner of the state of domicile. Under statutory
accounting principles, surplus notes issued in conjunction
with commutations or the settlement of obligations would
be valued at zero upon issuance pursuant to paragraph 4,
SSAP 41. OCI has directed the Company to record surplus
notes issued in connection with commutations or the
settlement of obligations at full par value upon issuance.
The surplus notes issued have a claim against surplus
senior to the preferred and common shareholders.

• Paragraph 35 of Statement of Statutory Accounting
Principles No. 43R ”Loan-backed and Structured
Securities” states
that when an other-than-temporary
impairment ("OTTI") has occurred, the amount of the OTTI
recognized as a realized loss shall equal the difference
between the investment’s amortized cost basis and the
present value of cash flows expected to be collected,
discounted at the loan-backed or structured security’s
effective interest rate. Beginning June 11, 2014, as a result
of the amended Segregated Account Rehabilitation Plan,
OCI has directed the Company to not evaluate investments
in AAC insured securities with policies that were allocated
to the Segregated Account for OTTI and require all such
investments be reported at amortized cost regardless of its

its ownership of

NAIC risk designation. This accounting determination was
intended to recognize that AAC continues to maintains
statutory loss reserves without adjustment for the economic
investment
effects of
securities, improve transparency to the users of the
statutory financial statements and to minimize operational
risks. Effective February 12, 2018, with the Segregated
Account's exit from rehabilitation, this prescribed practice
was no longer applicable for OTTI evaluations going
forward.

insured

the

Permitted Accounting Practices
AAC:

OCI has allowed the following permitted practice for AAC:

• Wisconsin accounting practices for changes to contingency
reserves differ from NAIC SAP. Under NAIC SAP,
contributions to and releases from the contingency reserve
are recorded via a direct charge or credit to surplus. Under
the Wisconsin Administrative Code, contributions to and
releases from the contingency reserve are to be recorded
through underwriting income. AAC received permission
from OCI to record contributions to and releases from the
contingency reserve, in accordance with NAIC SAP.

Everspan:

The Arizona Department of Insurance and Financial Institutions
has allowed the following permitted practice for Everspan:

• Paragraph 8 of Statement of Statutory Accounting
Principles No. 97 “Investment in Subsidiary, Controlled
and Affiliated Entities” (“SSAP 97”) states Investments in
US insurance Subsidiary, Controlled and Affiliated entities
shall be recorded based on the underlying audited statutory
equity of the respective entity's financial statements
adjusted for any unamortized goodwill. Everspan has
received permission from the Arizona Department of
Insurance and Financial Institutions to admit its investment
at December 31, 2021 of its wholly owned subsidiary,
Providence Washington Insurance Company. Providence
Washington Insurance Company received a waiver from its
regulator to file a statutory audit report issued for the year
ended December 31, 2021.

United Kingdom
The Prudential Regulatory Authority (“PRA”) and Financial
Conduct Authority (“FCA”) (and their predecessor regulator the
Financial Services Authority (“FSA”)) are the dual statutory
regulator responsible for regulating the financial services
the purpose of
industry
maintaining confidence in the U.K. financial system, providing
public understanding of the system, securing the proper degree
of protection for consumers and helping to reduce financial
crime.

the United Kingdom, with

These regulators have exercised significant oversight of Ambac
UK since 2008, after Ambac, AAC and Ambac UK began
experiencing financial stress. In 2009, Ambac UK’s license to
write new business was curtailed by the FSA and the insurance
license was limited to undertaking only run-off related activity.

| Ambac Financial Group, Inc. 109 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

As such, Ambac UK is authorized to run-off its credit,
suretyship and financial guarantee insurance portfolio in the
United Kingdom.

The PRA requires that non-life insurance companies such as
Ambac UK maintain a margin of solvency at all times in respect
of the liabilities of the insurance company, the calculation of
which depends on the type and amount of insurance business a
company writes. These solvency requirements were amended on
January 1, 2016, in order to implement the European Union's
"Solvency II" directive on risk-based capital. Ambac UK had
previously been in a capital shortfall position as compared to
these solvency capital requirements, but met the requirements as
at December 31, 2021. Ambac UK's regulators are fully aware
of the deficiency which previously existed, and dialogue
between Ambac UK and its regulators remains ongoing with
respect to options for strengthening the capital position further.

Dividend Restrictions, Including Contractual
Restrictions
State Insurance Regulators prescribe rules that determine if
AAC and Everspan may declare dividends. In addition, AAC
and Everspan are subject to certain restrictions in their
respective articles of incorporation with regards to the payment
of dividends. Board action authorizing a distribution by an
insurance company must generally be reported to the applicable
domiciliary regulator prior to payment. In addition, State
Insurance Laws generally require regulatory approval for the
payment of extraordinary dividends, which are distributions in
amounts that would exceed certain thresholds, such as a
percentage of surplus or net income for the prior year or number
of years.

Everspan does not have sufficient earned surplus at this time to
pay ordinary dividends under the State Insurance Laws.
Furthermore, certain subsidiaries of Everspan Insurance are
restricted from paying dividends to Everspan Insurance until
2025 or later pursuant to the regulatory orders approving the
acquisition of those subsidiaries, unless specifically approved by
the applicable domiciliary regulator.

Due to losses experienced by AAC, it has been unable to pay
ordinary dividends to AFG since 2008 and will be unable to pay
common dividends in 2022 without the prior consent of the OCI,
which is extremely unlikely. AAC’s ability to pay dividends is
further restricted by the Settlement Agreement (as described
below), by the indenture for the Tier 2 Notes (as described
below), by the terms of its AMPS (as described below) and by
the Stipulation and Order. See Note 1. Background and Business

for

the

to AFG

Description for further information. AAC is not expected to
make dividend payments
foreseeable
future.Pursuant to the Settlement Agreement, AAC may not
make any “Restricted Payment” (which includes dividends from
AAC to Ambac) in excess of $5 in the aggregate per annum,
other than Restricted Payments from AAC to Ambac in an
amount up to $8 per annum solely to pay operating expenses of
Ambac. Concurrent with making any such Restricted Payment, a
pro rata amount of AAC's surplus notes would also need to be
redeemed at par. The indenture for the Tier 2 Notes contains a
similar restrictive covenant and further requires a proportional
payment of the Tier 2 Notes (or interest thereon) when payments
are made on the surplus notes.

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

• The Stipulation and Order requires OCI approval for the
payment of any dividend or distribution on the common
stock of AAC.

UK law prohibits Ambac UK from declaring a dividend to its
shareholders unless it has “profits available for distribution.”
The determination of whether a company has profits available
for distribution is based on its accumulated realized profits less
its accumulated realized losses. While the UK insurance
regulatory laws impose no statutory restrictions on a general
insurer’s ability to declare a dividend, the PRA’s and FCA’s
capital requirements in practice act as a restriction on the
payment of dividends. Further, the FSA amended Ambac UK’s
license in 2010 such that the PRA must specifically approve
(“non-objection”) any transfer of value and/or assets from
Ambac UK to AAC or any other Ambac group company, other
than in respect of certain disclosed contracts between the two
parties (such as in respect of a management services agreement
between AAC and Ambac UK). Ambac UK is not expected to
pay any dividends to AAC for the foreseeable future.

| Ambac Financial Group, Inc. 110 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

9. DERIVATIVE INSTRUMENTS

The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported
in the Consolidated Balance Sheets as of December 31, 2021 and 2020.

Gross
Amounts of
Recognized
Assets /
Liabilities

Gross
Amounts
Offset in the
Consolidated
Balance Sheet

Net Amounts
of Assets/
Liabilities
Presented
in the
Consolidated
Balance Sheet

Gross Amount
of Collateral
Received /
Pledged not
Offset in the
Consolidated
Balance Sheet

Net Amount

December 31, 2021:

Derivative Assets:

Interest rate swaps .......................................................... $

Total non-VIE derivative assets

Derivative Liabilities:

Credit derivatives ........................................................... $

Interest rate swaps ..........................................................

Total non-VIE derivative liabilities

Variable Interest Entities Derivative Assets:

Currency swaps ................................................................... $

Total VIE derivative assets

Variable Interest Entities Derivative Liabilities:

76 $

— $

95 $

38 $

Interest rate swaps .......................................................... $

Total VIE derivative liabilities

1,940 $

December 31, 2020:

Derivative Assets:

Interest rate swaps .......................................................... $

Total non-VIE derivative assets

Derivative Liabilities:

Credit derivatives ........................................................... $

Interest rate swaps ..........................................................

Total non-VIE derivative liabilities

Variable Interest Entities Derivative Assets:

Currency swaps .............................................................. $

Total VIE derivative assets

Variable Interest Entities Derivative Liabilities:

93 $

— $

114

114 $

41 $

Interest rate swaps .......................................................... $

Total VIE derivative liabilities

1,835 $

— $

—

— $

—

— $

76 $

— $

95 $

38 $

1,940 $

93 $

— $

114

114 $

41 $

1,835 $

— $

93 $

— $

113

113 $

— $

—

1,940

—

1,835

Amounts representing the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts
recognized for derivative instruments on the Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and
posted margin, recorded in “Other assets” were $13 and $1 as of December 31, 2021 and 2020, respectively. There were no amounts held
representing an obligation to return cash collateral as of December 31, 2021 and 2020.

| Ambac Financial Group, Inc. 111 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total
Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019:

Location of Gain (Loss) Recognized
in Consolidated Statements of
Total Comprehensive Income (Loss)

Amount of Gain (Loss) Recognized in Consolidated
Statement of Total Comprehensive Income (Loss) –
Year Ended December 31,

2021

2020

2019

Non-VIE derivatives:

Credit derivatives ............................................

Net gains (losses) on derivative contracts

— $

Interest rate swaps...........................................

Net gains (losses) on derivative contracts

Futures contracts .............................................

Net gains (losses) on derivative contracts

Total non-VIE derivatives

Variable Interest Entities:

Currency swaps ...............................................

Income (loss) on variable interest entities

Interest rate swaps...........................................

Income (loss) on variable interest entities

Total Variable Interest Entities

Total derivative contracts

(152)

(150)

(9)

(41)

(50)

(6)

(138)

(144)

(128) $

(193) $

(6)

(45)

(50)

(12)

(20)

(32)

(82)

Credit Derivatives
Credit derivatives, which are privately negotiated contracts,
provide the counterparty with credit protection against the
occurrence of a specific event such as a payment default or
bankruptcy
to an underlying obligation. Credit
derivatives issued by ACP are insured by AAC. The outstanding
credit derivative transaction at December 31, 2021, does not
include ratings based collateral-posting triggers or otherwise
require Ambac to post collateral regardless of Ambac’s ratings
or the size of the mark to market exposure to Ambac.

relating

Our credit derivatives were written on a “pay-as-you-go” basis.
Similar to an insurance policy, pay-as-you-go provides that
Ambac pays interest shortfalls on the referenced transaction as
they are incurred on each scheduled payment date, but only pays
principal shortfalls upon the earlier of (i) the date on which the
assets designated to fund the referenced obligation have been
disposed of and (ii) the legal final maturity date of the
referenced obligation.

Ambac maintains internal credit ratings on its guaranteed
obligations, including credit derivative contracts, solely to
indicate management’s view of the underlying credit quality of
the guaranteed obligations. The principal notional outstanding
for credit derivative contracts was $201 and $257 as of
December 31, 2021 and 2020, respectively, all of which had
internal Ambac ratings of AA.

Interest Rate Derivatives
Ambac, through its subsidiary Ambac Financial Services
(“AFS”), uses interest rate swaps, US Treasury futures contracts
and other derivatives, to provide a partial economic hedge
against the effects of rising interest rates elsewhere in the
Company, including on Ambac’s financial guarantee exposures.
Additionally, AFS provided interest rate swaps to states,
municipalities and their authorities, asset-backed issuers and
other entities in connection with their financings. As of
December 31, 2021 and 2020, the notional amounts of AFS's
derivatives are as follows:

Type of Derivative

Notional - December 31,

2021

2020

Interest rate swaps—pay-fixed/receive-
variable ................................................... $

1,275 $

US Treasury futures contracts—short ....

Interest rate swaps—receive-fixed/pay-
variable ...................................................

470

185

726

240

195

Derivatives of Consolidated Variable Interest
Entities
Certain VIEs consolidated under the Consolidation Topic of the
ASC entered into derivative contracts to meet specified purposes
within the securitization structure. The notional for VIE
derivatives outstanding as of December 31, 2021 and 2020, were
as follows:

Type of VIE Derivative

Notional - December 31,

2021

2020

Interest rate swaps—receive-fixed/pay-
variable ................................................... $

1,221 $

1,233

Interest rate swaps—pay-fixed/receive-
variable ...................................................

Currency swaps ......................................

1,069

272

1,151

308

Contingent Features in Derivatives Related to
Ambac Credit Risk
Ambac’s over-the-counter interest rate swaps are centrally
cleared when eligible. Certain interest rate swaps remain with
professional swap-dealer counterparties and direct customer
counterparties. These non-cleared swaps are generally executed
under standardized derivative documents including collateral
support and master netting agreements. Under these agreements,
Ambac is required to post collateral in the event net unrealized
losses exceed predetermined threshold levels. Additionally,
given that AAC is no longer rated by an independent rating
agency, counterparties have the right to terminate the swap
positions.

| Ambac Financial Group, Inc. 112 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

linked

As of December 31, 2021 and 2020, the net liability fair value of
derivative
to
instruments with contingent features
Ambac’s own credit risk was $93 and $113, respectively, related
to which Ambac had posted cash and securities as collateral with
a fair value of $109 and $130, respectively. All such ratings-
based contingent features have been
triggered requiring
maximum collateral levels to be posted by AFS while preserving
counterparties’ rights to terminate the contracts. Assuming all
such contracts terminated at fair value on December 31, 2021,
settlement of collateral balances and net derivative liabilities
would result in a net receipt of cash and/or securities by Ambac.
If counterparties elect to exercise their right to terminate, the
actual termination payment amounts will be determined in
accordance with derivative contract terms, which may result in
amounts that differ from market values as reported in Ambac’s
financial statements.

10. INTANGIBLE ASSETS

Intangible asset and accumulated amortization are included in
the Consolidated Balance Sheets, as shown below.

December 31,

Finite-lived Intangible Assets:
Insurance intangible:

2021

2020

Gross carrying value ..................................
Accumulated amortization .........................

Net insurance intangible asset
Other intangibles:

1,278
958
320

1,281
908
373

Gross Carrying value .................................

Accumulated amortization .........................

Net other intangible assets
Total finite-lived intangible assets
Indefinite-lived Intangible Assets:

Insurance licenses ......................................

Total intangible assets

$
$

3
33
353

9
362

$
$

36
—
36
409

—
409

(1) The weighted-average insurance intangible amortization and other
intangible amortization periods are 7.3 years and 6.7 years,
respectively.

11. VARIABLE INTEREST ENTITIES

Ambac, with its subsidiaries, has engaged in transactions with
variable interest entities ("VIEs") in various capacities.

• Ambac provides financial guarantees for various debt
obligations issued by special purpose entities, including
VIEs ("FG VIEs");

• Ambac sponsors special purpose entities that issued notes

to investors for various purposes; and

• Ambac is an investor in collateralized debt obligations,
mortgage-backed and other asset-backed securities issued
by VIEs and its ownership interest is generally insignificant
to the VIE and/or Ambac does not have rights that direct
the activities that are most significant to such VIE.

financial protection

FG VIEs
Ambac’s subsidiaries provide financial guarantees in respect of
assets held or debt obligations of VIEs. Ambac’s primary
variable interest exists through this financial guarantee insurance
or credit derivative contract. The transaction structures provide
certain
to Ambac. Generally, upon
deterioration in the performance of a transaction or upon an
event of default as specified in the transaction legal documents,
Ambac will obtain certain control rights that enable Ambac to
remediate losses. These rights may enable Ambac to direct the
activities of the entity that most significantly impact the entity’s
economic performance. Under the 2018 Stipulation and Order,
AAC is required to obtain OCI approval with respect to the
exercise of certain significant control rights in connection with
policies that had previously been allocated to the Segregated
Account. Accordingly, AAC does not have the right to direct
the most significant activities of those FG VIEs.

Amortization Expense:
Amortization expense
the Consolidated
is
Statements of Total Comprehensive Income (Loss), as shown
below.

included

Year ended December 31,
Insurance intangible ................
Other intangible .......................
Total

2021

2020

2019

52
3

55 $

57 $
—
57 $

295
—
295

The estimated future amortization expense for intangible assets
is as follows:

Insurance
Intangible
Asset (1)

Other
Intangible
Assets (1)

Total

34 $
30

3 $
3

28
25
23
180

3
3
2
20

36
33

31
28
25
200

2022 ..........................
2023 ..........................
2024 ..........................
2025 ..........................
2026 ..........................
Thereafter .................

the

impact

that most significantly

• We determined that AAC and Ambac UK generally have
the obligation to absorb a FG VIE's expected losses given
that they have issued financial guarantees supporting
certain liabilities (and in some cases certain assets). As
further described below, Ambac consolidates certain FG
VIEs in cases where we also have the power to direct the
activities
the VIE’s
economic performance due to one or more of the following:
(i)
is experiencing deterioration and
breaching performance triggers, giving Ambac the ability
to exercise certain control rights, (ii) Ambac being
involved in the design of the VIE and receiving control
rights from its inception, such as may occur from loss
remediation activities, or (iii) the transaction is not
experiencing deterioration, however due to the passive
nature of the VIE, Ambac's contingent control rights upon a
future breach of performance triggers is considered to be
the power over the most significant activity.

transaction

• A VIE is deconsolidated in the period that Ambac no
longer has such control rights, which could occur in
connection with the execution of remediation activities on
the transaction or amortization of insured exposure, either

| Ambac Financial Group, Inc. 113 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

of which may reduce the degree of Ambac’s control over a
VIE.

• Assets and liabilities of FG VIEs that are consolidated are
reported within Variable interest entity assets or Variable
interest entity liabilities on the Consolidated Balance
Sheets.

• The election to use the fair value option is made on an
instrument by instrument basis. Ambac has elected the fair
value option for consolidated FG VIE financial assets and
financial liabilities, except in cases where Ambac was
involved in the design of the VIE and was granted control
rights at its inception.

◦ When the fair value option is elected, changes in the fair
value of the FG VIE's financial assets and liabilities are
reported within Income (loss) on variable interest entities
in the Consolidated Statements of Total Comprehensive
Income (Loss), except for the portion of the total change
in fair value of financial liabilities caused by changes in
the instrument-specific credit risk which is presented
separately in Other comprehensive income (loss).

◦ In cases where the fair value option has not been elected,
the FG VIE's invested assets are fixed maturity securities
and are considered available-for-sale as defined by the
Investments - Debt Securities Topic of the ASC. These
assets are reported in the financial statements at fair
value with unrealized gains and losses reflected in
Accumulated Other Comprehensive Income (loss) in
Stockholders' Equity. The financial liabilities of these
FG VIEs consist of long term debt obligations and are
carried at par less unamortized discount. Income from
the FG VIE's available-for-sale securities (including
investment income, realized gains and losses and credit
impairments as applicable) and interest expense on long
term debt are reported within Income (loss) on variable
interest entities in the Consolidated Statements of Total
Comprehensive Income (Loss).

• Upon initial consolidation of a FG VIE, Ambac recognizes
a gain or loss in earnings for the difference between: (i) the
fair value of the consideration paid, the fair value of any
non-controlling interests and the reported amount of any
previously held interests and (ii) the net amount, as
measured on a fair value basis, of the assets and liabilities
consolidated. Upon deconsolidation of a FG VIE, Ambac
recognizes a gain or loss for the difference between: (i) the
fair value of any consideration received, the fair value of
any retained non-controlling investment in the VIE and the
carrying amount of any non-controlling interest in the VIE

losses

and (ii) the carrying amount of the VIE’s assets and
liabilities. Gains or
from consolidation and
deconsolidation that are reported in earnings are reported
within Income (loss) on variable interest entities on the
Consolidated Statements of Total Comprehensive Income
(Loss).

• The impact of consolidating such FG VIEs on Ambac’s
balance sheet is the elimination of transactions between the
consolidated FG VIEs and Ambac’s operating subsidiaries
and the inclusion of the FG VIE’s third party assets and
liabilities. For a financial guarantee insurance policy issued
to a consolidated VIE, Ambac does not reflect the financial
guarantee insurance policy in accordance with the related
insurance accounting rules under the Financial Services —
Insurance Topic of
the ASC. Consequently, upon
consolidation, Ambac eliminates the insurance assets and
liabilities associated with the policy from the Consolidated
Balance Sheets. Such insurance assets and liabilities may
include premium receivables, reinsurance recoverable,
deferred
recoverable,
unearned premiums, loss and loss expense reserves, ceded
premiums payable and insurance intangible assets. For
investment securities owned by Ambac that are debt
instruments issued by the VIE, the associated debt and
investment balances are eliminated upon consolidation.

ceded premium,

subrogation

FG VIEs which are consolidated may include recourse and non-
recourse liabilities. FG VIEs' liabilities that are insured by AAC
or Ambac UK are with recourse, because the Company
guarantees the payment of principal and interest in the event the
issuer defaults. FG VIEs' liabilities that are not insured by the
AAC or Ambac UK are without recourse, because AAC or
Ambac UK have not issued a financial guarantee and is under no
obligation for the payment of principal and interest of these
instruments. AAC or Ambac UK’s economic exposure to
consolidated FG VIEs is limited to the financial guarantees
issued for recourse liabilities and any additional variable
interests held by them. Additionally, AAC or Ambac UK’s
general creditors, other than those specific policy holders which
own the VIE debt obligations, do not have rights with regard to
the assets of the VIEs. Ambac evaluates the net income effects
and earnings per share effects to determine attributions between
Ambac and non-controlling interests as a result of consolidating
a VIE. Ambac has determined that the net income and earnings
per share effect of consolidated FG VIEs are attributable to
Ambac’s interests through financial guarantee premium and loss
payments with the VIE.

| Ambac Financial Group, Inc. 114 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The following table summarizes the carrying values of assets and liabilities, along with other supplemental information related to VIEs that
are consolidated as a result of financial guarantees of Ambac UK and AAC:

December 31,

ASSETS:

Fixed maturity securities, at fair value:

Corporate obligations, fair value option .................................
Municipal obligations, available-for-sale (1)

...........................

Total FG VIE fixed maturity securities, at fair value ..........

Restricted cash .........................................................................
Loans, at fair value (2)
Derivative assets .....................................................................

..............................................................

Other assets ..............................................................................

Total FG VIE assets

LIABILITIES:

Long-term debt:

Long-term debt, at fair value (3)
Long-term debt, at par less unamortized discount .................

..............................................

Total long-term debt ...............................................................

Derivative liabilities .................................................................

2021

Ambac
Assurance

Ambac UK

Total VIEs Ambac UK

2020

Ambac
Assurance

Total VIEs

3,320 $

— $

3,320 $

3,215 $

— $

3,215

—

3,320

2,718

—

136

—

136

3,455

2,718

—

3,215

2,998

—

139

—

139

3,354

2,998

6,077 $

139 $

6,216 $

6,255 $

143 $

6,398

4,056 $

— $

4,056 $

4,324 $

— $

4,324

—

4,056

1,940

160

—

160

4,216

1,940

—

4,324

1,835

169

—

Total FG VIE liabilities

Number of FG VIEs consolidated

5,996 $

160 $

6,156 $

6,159 $

169 $

169

4,493

1,835

6,328

(1) Available-for-sale FG VIE fixed-maturity securities consist of municipal obligations with an amortized cost basis of $106 and $113, and aggregate
gross unrealized gains of $29 and $27 at December 31, 2021 and 2020, respectively. All such securities had contractual maturities due after ten years
as of December 31, 2021.

(2) The unpaid principal balances of loan assets carried at fair value were $2,363 and $2,546 as of December 31, 2021 and 2020, respectively.

(3) The unpaid principal balances of long-term debt carried at fair value were $3,579 and $3,769 as of December 31, 2021 and 2020, respectively.

The following schedule details the components of Income (loss) on variable interest entities for the affected periods:

Year ended December 31,

2021

2020

2019

Net change in fair value of VIE assets and liabilities reported under the fair value option .................................

4 $

(1) $

Less: Credit risk changes of fair value option long-term debt reported through other comprehensive income
(loss) .....................................................................................................................................................................

Net change in fair value of VIE assets and liabilities reported in earnings ..........................................................

Investment income on available-for-sale securities .............................................................................................

Net realized investment gains (losses) on available-for-sale securities ...............................................................

Interest expense on long-term debt carried at par less unamortized cost .............................................................

Other expenses .....................................................................................................................................................

Gain (loss) from consolidating FG VIEs ..............................................................................................................

Gain (loss) from de-consolidating FG VIEs ........................................................................................................

(6)

(1)

—

(1)

(3)

(6)

—

Income (loss) on variable interest entities

7 $

5 $

—

(11)

(1)

(2)

As further discussed in Note 7. Insurance Contracts, on February 12, 2019, in connection with the COFINA POA, the COFINA Class 2
Trust was established. Ambac was required to consolidate the COFINA Class 2 Trust, which resulted in a gain of $15. Ambac
deconsolidated zero, one and one VIEs for the years ended December 31, 2021, 2020 and 2019, respectively. These VIEs were
deconsolidated as a result of guaranteed bond retirements or loss mitigation activities that eliminated or reduced Ambac's control rights that
previously required Ambac to consolidate these entities, and resulted in the gain (loss) on deconsolidation noted in the above table. There
was no impact to consolidated assets and liabilities for the 2020 deconsolidation.

| Ambac Financial Group, Inc. 115 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac’s variable interests in
non-consolidated VIEs resulting from financial guarantee and derivative contracts by major underlying asset classes, as of December 31,
2021 and 2020:

Carrying Value of Assets and Liabilities

Maximum
Exposure
To Loss (1)

Insurance
Assets (2)

Insurance
Liabilities (3)

Net Derivative
Assets
(Liabilities) (4)

December 31, 2021:
Global structured finance:

Mortgage-backed—residential ....................................................... $
Other consumer asset-backed ........................................................

Other ..............................................................................................

Total global structured finance ......................................................

Global public finance ......................................................................

3,265 $

1,929 $

521 $

788

826

4,879

20,233

1,949

246

234

765

257

Total

25,112 $

2,195 $

1,023 $

December 31, 2020:
Global structured finance:

Mortgage-backed—residential ....................................................... $
Other consumer asset-backed ........................................................

Other ..............................................................................................

Total global structured finance ......................................................

Global public finance ......................................................................

4,308 $

2,024 $

580 $

1,050

994

6,352

21,646

2,051

263

239

834

287

Total

27,998 $

2,314 $

1,122 $

—

(1) Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts. Ambac’s
maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to
mitigate the risks associated with these variable interests.

(2)

(3)

Insurance assets represent the amount included in “Premium receivables” and “Subrogation recoverable” for financial guarantee insurance contracts on
Ambac’s Consolidated Balance Sheets.

Insurance liabilities represent the amount included in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee insurance
contracts on Ambac’s Consolidated Balance Sheets.

(4) Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated

Balance Sheets.

Ambac Sponsored Non-consolidated VIEs
On August 28, 2014, Ambac monetized its ownership of the
junior surplus note issued to it by AAC by depositing the junior
surplus note into the Corolla Trust, a VIE, in exchange for cash
and the Corolla Certificate, which represented Ambac's right to
residual cash flows from the junior surplus note. Ambac did not
consolidate the VIE since it did not have a variable interest in
the trust. Ambac reported the Corolla Certificate as an equity
investment within Other investments on the Consolidated
Balance Sheets with associated results from operations included
within Net investment income (loss): Other investments on the
Consolidated Statements of Total Comprehensive Income
(Loss). The equity investment had a carrying value of $51 at
December 31, 2020. As further described in Note 1. Background
and Business Description, on January 22, 2021, AAC completed
the Corolla Note Exchange transaction whereby it acquired
100% of the outstanding Notes of the Corolla Trust and the
Corolla Certificates for AAC surplus notes and subsequently
dissolved the Corolla Trust.

On February 12, 2018, Ambac formed a VIE, Ambac LSNI,
LLC ("Ambac LSNI"). Ambac LSNI issued LSNI Secured

Notes in connection with the Rehabilitation Exit Transactions.
Ambac does not consolidate Ambac LSNI since it does not have
a variable interest in the VIE. Ambac reported its holdings of
LSNI Secured Notes within Fixed Maturity Securities in the
Consolidated Balance Sheets. The carrying value of LSNI
Secured Notes held by Ambac was $465 at December 31, 2020.
Ambac's debt obligation to the VIE had a carrying value of
$1,641 at December 31, 2020, and was reported within Long-
term debt on the Consolidated Balance Sheets. As further
described in Note 1. Background and Business Description, on
July 6, 2021, Sitka, Ambac's newly formed VIE, issued the Sitka
Senior Secured Notes that were used to fund a portion of the full
redemption of the LSNI Secured Notes issued by LSNI, with the
remaining balance redeemed utilizing other available sources of
liquidity. Ambac does not consolidate Sitka since it does not
have a variable interest in the VIE. Ambac's debt obligation to
Sitka had a carrying value of $1,154 at December 31, 2021, and
is reported within Long-term debt on the Consolidated Balance
Sheets.

| Ambac Financial Group, Inc. 116 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

12. LONG-TERM DEBT

Long-term debt outstanding, excluding VIE long-term debt, was as follows:

December 31,

2021

2020

Par Value

Unamortized
Discount

Carrying
Value

Par Value

Unamortized
Discount

Carrying
Value

Ambac Assurance:

5.1% Surplus Notes .............................................................

785 $

(56) $

729 $

531 $

— $

5.1% Junior Surplus Notes ..................................................

LSNI Ambac Note ...............................................................

Sitka AAC Note ..................................................................

Tier 2 Notes .........................................................................

Ambac UK Debt ..................................................................

—

1,175

333

—

(21) $

1,154

—

(26)

333

365

1,641

—

306

(118)

—

(27)

531

247

1,641

—

306

Long-term debt

2,334 $

(104) $

2,230 $

2,884 $

(145) $

2,739

Aggregated annual maturities of non-VIE long-term debt
obligations (based on scheduled maturity dates as further
discussed below) are as follows:

2022 ........................................................................

(1)

785

2023 ........................................................................

2024 ........................................................................

2025 ........................................................................

2026 ........................................................................

Thereafter ...............................................................

Total

—

1,175

373

2,334

(1) Surplus Notes issued had a scheduled maturity date of June 7,
2020. OCI declined the request of Ambac Assurance to pay the
principal amount of the surplus notes, plus all accrued and unpaid
interest thereon, on June 7, 2020, and June 7, 2021. As a result, the
payment date for principal of the surplus notes was extended until
OCI grants approval to make the 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.
Included in the table above is the potential principal payment at the
next scheduled payment date of June 7, 2022.

Surplus Notes
Ambac Assurance's Surplus Notes, with a par amount of $785
and $531 at December 31, 2021 and 2020, respectively, had a
scheduled maturity of June 7, 2020, which has been extended
until OCI grants approval to make the payment. During the year
ended December 31, 2021, in connection with the 2021 Surplus
Note Exchanges and other transactions, Surplus Notes with
aggregate par amount of $255 were re-issued, and all Junior
Surplus Notes were acquired and extinguished. The discount on
Surplus Notes issued prior to 2021 was accreted into income
using the effective interest method based on projected cash
flows at the date of issuance through June 7, 2020, using a
weighted average imputed interest rate of 10.1%. The discount
on Surplus Notes issued during the year ended December 31,
2021, is being accreted into income using the effective interest
method at a weighted average imputed interest rate of 8.9%.
Refer to Note 1. Background and Business Description for
further discussion of the 2021 Surplus Note Exchanges.

Ambac can provide no assurance as to when surplus note
principal and interest payments will be made, if ever. If OCI
does not approve regular payments on surplus notes within the
next several years, the total amount due for surplus notes may
exceed AAC's financial resources and holders of surplus notes
may not ever be paid in full. Surplus notes are subordinated in
right of payment to other claims, which could impair the right of
holders of such notes to receive interest and principal in the
event of AAC's insolvency or a similar occurrence.

Sitka AAC Note
The Sitka AAC Note, issued in connection with the Secured
Note Refinancing on July 6, 2021, as more fully described in
Note 1. Background and Business Description, has a par value
of $1,175 at December 31, 2021, and a legal maturity of July 6,
2026. Interest on the Sitka AAC Note is payable quarterly (on
the last day of each quarter beginning with September 30, 2021)
at an annual rate of 3-month U.S. Dollar LIBOR + 4.50%,
subject to a 0.75% LIBOR floor. The discount on Sitka AAC
Note is being accreted into income using the effective interest
method based on an imputed interest rate of 5.7%

The Sitka AAC Note is redeemable prior to July 6, 2022, at a
price of 100% of the principal amount plus a make-whole
premium and accrued and unpaid interest. The make-whole
premium represents the excess of the present value of 103% of
the principal amount plus all required scheduled interest
payments through July 6, 2022 (excluding accrued and unpaid
interest to the redemption date), over the principal amount to be
redeemed. On and after July 6, 2022, and prior to July 6, 2023,
the notes are redeemable at a price equal to 103% of the
principal amount plus accrued and unpaid interest. On and after
July 6, 2023, the notes are redeemable at 100% of the principal
amount plus accrued and unpaid interest.

The Sitka AAC Note is secured by a pledge of AAC’s right, title
and interest in (i) up to $1,400 of proceeds from certain
litigations involving AAC related to residential mortgage-
backed securities (the "RMBS Litigations") and (ii) the capital
stock of Ambac UK. Such collateral may prove to be
insufficient to pay any or all the amounts due on the Sitka AAC
Note due to (a) inherent uncertainty with respect to the amount

| Ambac Financial Group, Inc. 117 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

and timing of recoveries on the RMBS Litigations, and (b)
uncertainty with respect to the value of Ambac UK and the
amount that could be obtained in a sale or other disposition of
such collateral due to factors such as market and economic
conditions, the availability of buyers, constraints associated with
any extant rehabilitation, liquidation or similar proceeding, and
regulatory requirements with respect to a change in ownership
of Ambac UK. In addition, AAC issued a financial guaranty
insurance policy (the “Sitka Senior Secured Notes Policy”) to
the trustee for the Sitka Senior Secured Notes for the benefit of
the holders of the Sitka Senior Secured Notes irrevocably
guaranteeing all regularly scheduled principal and interest
payments in respect of the Sitka Senior Secured Notes as and
when such payments become due and owing.

Upon receipt of any proceeds from the RMBS Litigations or
proceeds from the sale or disposition of Ambac UK, AAC shall
apply an amount equal to the lesser of (a) the amount of such
proceeds from the RMBS Litigations up to $1,400 or proceeds
of the sale or disposition of Ambac UK, as the case may be, and
(b) all outstanding principal, premium, if any, and accrued and
unpaid interest on the Sitka AAC Note to redeem the Sitka AAC
Note, in whole or in part, as applicable; provided, that any non-
cash recoveries from the RMBS Litigations shall be deemed to
be received upon the receipt of the applicable appraisal.

in connection with

LSNI Ambac Note
The LSNI Ambac Note,
the
issued
Rehabilitation Exit Transactions on February 12, 2018, had a par
value of $— and $1,641 at December 31, 2021 and 2020,
respectively, and had a legal maturity of February 12, 2023.
Interest on the LSNI Ambac Note was payable quarterly (on the
last day of each quarter beginning with June 30, 2018) at an
annual rate of 3-month U.S. Dollar LIBOR + 5.00%, subject to a
1.00% LIBOR floor. During the years ended December 31,
2021, 2020 and 2019, $1,641, $121 and $178 par value of the
LSNI Ambac Note was redeemed, respectively. The maturity
date for the LSNI Ambac Note was the earlier of (x) February
12, 2023, and (y) if the LSNI Secured Notes were then
outstanding, the date that is five business days prior to the date
for which OCI approved the repayment of the outstanding
principal amount of the surplus notes issued by AAC. Promptly,
and in any event within four business days after the receipt
(whether directly or indirectly) of any representation and
warranty subrogation recoveries, AAC was to apply an amount
(the “Mandatory Redemption Amount”) equal to the lesser of (a)
the amount of
representation and warranty subrogation
recoveries up to $1,400 and (b) all outstanding principal and
accrued and unpaid interest on the LSNI Ambac Note to redeem
the LSNI Ambac Note, in whole or in part, as applicable;
provided, that any non-cash representation and warranty
subrogation recoveries shall be deemed to be received upon the
receipt of the applicable appraisal.

As further described in Note 1. Background and Business
Description, on July 6, 2021, Sitka, Ambac's newly formed non-
consolidated VIE, issued the Sitka Senior Secured Notes that
were used to fund a portion of the full redemption of the LSNI
Secured Notes issued by LSNI, with the remaining balance
redeemed utilizing other available sources of liquidity.

Tier 2 Notes
The Tier 2 Notes, issued in connection with the Rehabilitation
Exit Transactions on February 12, 2018, with a par value of
$333 and $306 (including paid-in-kind interest of $93 and $66)
at December 31, 2021 and 2020, respectively, have a legal
maturity of February 12, 2055. Interest on the Tier 2 Notes is at
an annual rate of 8.50%. Other than upon payment of principal
at redemption or maturity, interest payments will not be made in
cash on interest payment dates and shall be paid-in-kind and
compounded on the last day of each calendar quarter. The Tier
2 Notes were recorded at a discount to par as any consideration
paid that was directly related to the issuance of the Tier 2 Notes
was capitalized and is part of the effective yield calculation.
Ambac accreted the discount on the Tier 2 Notes into earnings
using the effective interest method, at an imputed interest rate of
9.9% based on projected redemption at the date of issuance.
The discount had been fully accreted as of December 31, 2020.

The Tier 2 Notes are secured by recoveries from the RMBS
Litigations in excess of $1,600 and are subject to mandatory
redemption upon: (i) receipt of recoveries from the RMBS
Litigations in excess of $1,600 ("Tier 2 Net Proceeds") and (ii)
payment of principal or interest on AAC surplus notes.
Promptly, and in any event within five business days after the
receipt (whether directly or indirectly) of Tier 2 Net Proceeds,
AAC shall deposit an amount equal to the Tier 2 Net Proceeds
to a collateral account, provided, that any non-cash recoveries
from the RMBS Litigations shall be deemed to be received upon
the receipt of the applicable appraisal of the consideration
received by AAC. Similarly, within five business days after a
surplus note payment (other than in connection with the
Rehabilitation Exit Transactions), AAC shall deposit an amount
based on the percentage of Surplus Notes paid applied to the
outstanding balance of the Tier 2 Notes to a collateral account.
In both cases, the amount deposited shall not be in excess of the
amount required to redeem all outstanding Tier 2 Notes. Also,
such amounts shall be used to initiate a redemption on the Initial
Call Date (as defined below) for the Tier 2 Notes or, if the Initial
Call Date has occurred, promptly following the receipt of the
Tier 2 Net Proceeds or surplus note payment.

The Tier 2 Notes may also be redeemed, in whole or in part, at
the option of AAC. Both mandatory and optional redemptions
may be made at a price equal to 100% of the aggregate principal
amount redeemed, plus accrued and unpaid interest, if any, plus
a make-whole premium. Make-whole premiums are calculated
based on future interest payments through the contractual call
date ("Initial Call Date"). The Initial Call Date at issuance of
December 17, 2020 extends ratably beginning
the first
anniversary of issuance to (i) September 17, 2021 by the second
anniversary, and (ii) March 17, 2022 by the third anniversary of
issuance. There are no extensions of the Initial Call Date
beyond March 17, 2022. The Initial Call Date for redemptions
is determined based on the date the applicable amounts are
deposited to the collateral account.

Ambac UK Debt
The Ambac UK debt,
the
issued
commutation of its exposure with respect to Ballantyne Re plc
on June 18, 2019, has a par value of $41 and $41 at

in connection with

| Ambac Financial Group, Inc. 118 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

December 31, 2021 and 2020, and a legal maturity of May 2,
2036. Interest on the Ambac UK debt is at an annual rate of
0.00%. The Ambac UK debt was recorded at its fair value at the
date of issuance. The discount on the debt is currently being
accreted into income using the effective interest method at an
imputed interest rate of 7.4%.

Variable Interest Entities, Long-term Debt

The variable interest entity notes were issued by consolidated
VIEs. Ambac is the primary beneficiary of the VIEs as a result
of providing financial guarantees on certain of the VIEs
obligations. Consequently, Ambac has consolidated
these
variable interest entity notes and all other assets and liabilities of
the VIEs. Ambac is not primarily liable for the debt obligations
of these entities. Ambac would only be required to make
payments on these debt obligations in the event that the issuer
defaults on any principal or interest due and to the extent such
obligations are guaranteed by Ambac. The total unpaid principal
amount of outstanding long-term debt associated with VIEs
consolidated as a result of the financial guarantee provided by
Ambac was $3,739 and $3,927 as of December 31, 2021 and
2020, respectively. As of December 31, 2021 and 2020, the
ranges of final maturity dates of the outstanding long-term debt
associated with these VIEs were December 2025 to August 2054
and December 2025 to August 2054, respectively. As of
December 31, 2021 and 2020, the interest rates on these VIEs’
long-term debt ranged from 0.00% to 7.93% in both years.
Aggregated annual maturities of VIE long-term debt following
December 31, 2021 are: 2022-$0; 2023-$0; 2024-$0; 2025-$56;
2026-$0; Thereafter-$3,683.

13. REVENUES FROM CONTRACTS WITH

CUSTOMERS

The following table presents the MGA/U business operations
revenues recognized in accordance with the Revenue from
Contracts with Customers Topic of the ASC disaggregated by
policy type for the twelve months ended December 31, 2021:

Employer
Stop Loss

Affinity
Products

Other

Total

Gross
commissions .... $

8 $

18 $

— $

During the twelve months ended December 31, 2021, the
amount of
to performance
obligations satisfied in a previous period, inclusive of changes
due to estimates was approximately $12.

recognized

revenue

Contract Assets and Liabilities
The balances of contract assets and contract liabilities with
customers were as follows:

December 31,

2021

2020

Commissions receivable ............................... $

2 $

Contract assets ..............................................

Contract liabilities .........................................

Contract assets represent estimated future consideration related
to base commissions and profit-sharing commissions that were
recognized as revenue upon the placement of the policy. The
Company does not have the right to bill or collect payment on i)
base commissions until the insurer has collected the related
premiums from policyholders nor ii) profit-sharing commissions
until after the contract year is completed. The change in
contract assets during the year ended December 31, 2021, is
primarily due to reclassification to receivables (unconditional
right) and collections.

Contract liabilities represent advance consideration received
from customers related to Employer stop loss base commissions
that will be recognized over time as claims servicing is
performed, which typically occurs between 17 and 20 months
from contract inception. During the year ended December 31,
2021, the Company recognized revenue that was included in the
contract liability balance as of the beginning of the period of $1.

| Ambac Financial Group, Inc. 119 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

14. COMPREHENSIVE INCOME

The following tables detail the changes in the balances of each component of accumulated other comprehensive income for the affected
periods:

Year ended December 31, 2021:

Beginning Balance ..............................................
Other comprehensive income (loss) before
reclassifications ..................................................
Amounts reclassified from accumulated other
comprehensive income (loss) .............................
Net current period other comprehensive income
(loss)

Balance at December 31, 2021

Year ended December 31, 2020:

Beginning Balance ..............................................
Other comprehensive income before
reclassifications ..................................................
Amounts reclassified from accumulated other
comprehensive income .......................................
Net current period other comprehensive income
(loss)

Unrealized Gains
(Losses) on
Available- for
Sale Securities (1)

Amortization of
Postretirement
Benefit (1)

Gain (Loss) on
Foreign Currency
Translation (1)

Credit Risk
Changes of Fair
Value Option
Liabilities (1) (2)

Total

166 $

5 $

(92) $

— $

(5)

(7)

(12)

154 $

—

(1)

(8)

—

(8)

—

(1)

4 $

(100) $

(1) $

151 $

8 $

(116) $

(2) $

(21)

(2)

(1)

(3)
5 $

—

23
(92) $

—

— $

(13)

(9)

(21)

37
79

Balance at December 31, 2020

166 $

(1) All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate reductions to Accumulated Other Comprehensive Income.

(2) Represents the changes in fair value attributable to instrument-specific credit risk of liabilities for which the fair value option is elected.

The following table details the significant amounts reclassified from each component of accumulated other comprehensive income, shown
in the above rollforward tables, for the affected periods:

Details about Accumulated Other
Comprehensive Income Components
Unrealized Gains (Losses) on Available-for-Sale
Securities (1)

Amortization of Postretirement Benefit
Prior service cost ............................................................... $
Actuarial gains (losses) .....................................................

Credit Risk Changes of Fair Value Option Liabilities

Total reclassifications for the period

Amount Reclassified from Accumulated
Other Comprehensive Income

Year Ended December 31,
2020
2021

Affected Line Item in the
Consolidated Statement of
Total Comprehensive Income

(7) $
(1)
(7) $

(1) $
—
(1)
—
(1) $

(1) $
—
(1)
(9) $

(22) Net realized investment gains (losses)

1 Provision for income taxes

(21) Net of tax and noncontrolling interest

(1) Other income
— Other income
(1) Total before tax
— Provision for income taxes
(1) Net of tax and noncontrolling interest

Credit risk changes of fair value option
liabilities

2
— Provision for income taxes

1 Net of tax and noncontrolling interest
(21) Net of tax and noncontrolling interest

(1) Net unrealized investment gains (losses) on available for sale securities are included in Ambac's Consolidated Statements of Comprehensive Income as
a component of Accumulated Other Comprehensive Income. Changes in these amounts include reclassification adjustments to exclude from "Other
comprehensive income (loss)" those items that are included as part of "Net income" for a period that has been part of "Other comprehensive income
(loss)" in earlier periods.

| Ambac Financial Group, Inc. 120 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

15. NET INCOME PER SHARE

As of December 31, 2021, 46,304,139 shares of AFG's common
stock (par value $0.01) and warrants entitling holders to acquire
up to 4,877,617 shares of new common stock at an exercise
price of $16.67 per share were issued and outstanding. Common
shares outstanding increased by 495,000, during the year ended
December 31, 2021, primarily due to settlements of employee
restricted and performance stock units. For the three years
ended December 31, 2021, 2020 and 2019, 132, 34 and —
warrants were exercised, respectively, resulting in an issuance of
4, 8 and 0 shares of common stock, respectively.

On June 30, 2015, the Board of Directors of AFG authorized the
establishment of a warrant repurchase program that permits the
repurchase of up to $10 of warrants. On November 3, 2016, the
Board of Directors of AFG authorized a $10 increase to the
The remaining aggregate
warrant repurchase program.
authorization at December 31, 2021 was $12. For the years
ended December 31, 2021 and 2020, AFG did not repurchase
any warrants.

The following table provides a reconciliation of net income
attributable to common stockholders to the numerator in the
basic and diluted earnings per share calculation, together with
the resulting earnings per share amounts:

Year ended December 31,
Net income (loss) attributable
to common stockholders ...........

Adjustment to redemption
value (ASC 480) .......................

Numerator of basic and diluted
EPS ...........................................
Per Share:
Basic .........................................
Diluted ......................................

2021

2020

2019

(17)

(437)

(216)

(12)

—

(28)

(437)

(216)

The following table provides a reconciliation of the common
shares used for basic net income per share to the diluted shares
used for diluted net income per share:

Year Ended
December 31,

Basic weighted average
shares outstanding ............

Effect of potential
dilutive shares (1): .............
Warrants ...........................

Stock options ....................

Restricted stock units .......

Performance stock units
(2)

......................................

Diluted weighted average
shares outstanding
Anti-dilutive shares
excluded from the above
reconciliation
Warrants ...........................
Stock options ....................

2021

2020

2019

46,535,001

46,147,062

45,954,908

—

46,535,001

46,147,062

45,954,908

4,877,653

4,877,754

4,877,783

—

16,121

302,145

16,667

249,263

Restricted stock units .......

475,333

Performance stock
units (2)

..............................

700,915

1,002,501

872,258

(1) For the years ended years ended December 31, 2021, 2020 and
2019 , Ambac had a net loss and accordingly excluded all
potentially dilutive securities from the determination of diluted loss
per share as their impact was anti-dilutive.

(2) Performance stock units are reflected based on the performance
metrics through the balance sheet date. Vesting of these units is
contingent upon meeting certain performance metrics. Although a
portion of these performance metrics have been achieved as of the
respective period end, it is possible that awards may no longer
meet the metric at the end of the performance period.

$
$

(0.61) $
(0.61) $

(9.47) $
(9.47) $

(4.69)
(4.69)

16. INCOME TAXES

The denominator of the basic earnings per share computation
represents the weighted average common shares outstanding
plus vested restricted stock units (together, "Basic Weighted
Average Shares Outstanding"). The denominator of diluted
earnings per share adjusts the basic weighted average shares
outstanding for all potential dilutive common shares outstanding
during the period. All potential dilutive common shares
outstanding consider common stock deliverable pursuant to
warrants, unvested restricted stock units and performance stock
units granted under existing compensation plans.

The following are the major jurisdictions in which Ambac and
its subsidiaries operate and the earliest tax years subject to
examination:

Jurisdiction

Tax Year

United States ......................................................................

New York State ..................................................................

New York City ...................................................................

United Kingdom .................................................................

Italy ....................................................................................

2010

2013

2017

2018

2017

Consolidated Pretax Income (Loss)
U.S. and foreign components of pre-tax income (loss) were as
follows:

Year Ended
December 31,

2021

2020

2019

U.S. ..................................... $

(32) $

(441) $

(174)

Foreign ...............................

(9)

Total

2 $

(440) $

(183)

| Ambac Financial Group, Inc. 121 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Provision (Benefit) for Income Taxes
The components of the provision (benefit) for income taxes
were as follows:

Year Ended
December 31,

Current taxes

2021

2020

2019

U.S. state and local ......... $

2 $

— $

Reconciliation of U.S. Federal Statutory Income
Tax Rate to Actual Income Tax Rate
the accompanying Consolidated
The
Statements of Total Comprehensive Loss reflect effective tax
rates differing from prevailing Federal corporate income tax
rates. The following is a reconciliation of these differences:

tax provisions

(10)

6 $

(10) $

(3)

(1)

2021

Year Ended
December 31,
Tax on income
(loss) at statutory
rate ....................... $ —
Changes in
expected tax
resulting from:

2020

2019

21 % $ (92)

21 % $ (38)

21 %

Foreign ............................

Total current taxes ..........

Deferred taxes

Foreign ............................

Total deferred taxes

Provision for income
taxes

18 $

(3) $

The total effect of income taxes on net income and stockholders’
equity for the years ended December 31, 2021, 2020 and 2019 is
as follows:

Year Ended
December 31,

Total income taxes charged
to net income ...................... $
Income taxes charged
(credited) to stockholders’
equity: .................................

2021

2020

2019

18 $

(3) $

Unrealized gains (losses)
on investment securities .....
Unrealized gains (losses)
on foreign currency
translations .........................

Valuation allowance to
equity ..................................

Total charged to
stockholders’ equity: ..........

Total effect of income
taxes

(3)

—

(2)

—

(3)

16 $

(1) $

—

(23)

(8)

Tax-exempt
interest ..............
Foreign taxes ....

State Income
Taxes ................

Substantiation
adjustment ........

Valuation
allowance ..........
Other, net ..........

Tax expense on
income (loss)

(2)

(114) %

(2)

— %

(3)

2 %

448 %

(1) %

(22) %

794 % —

— %

(2)

1 %

—

— %

(29)

7 %

(15) %

(4)

(230) % 113

(26) %

(4) %

72 %

— % —

— %

$ 18

991 % $

(3)

1 % $ 32

(18) %

Unrecognized Tax Positions
The Company had no material unrecognized tax benefits at
December 31, 2021 and 2020.
Deferred Income Taxes
The tax effects of temporary differences that give rise to
significant portions of the deferred tax liabilities and deferred
tax assets at December 31, 2021 and 2020, are presented below:

December 31,
Deferred tax liabilities:

2021

2020

Insurance intangible ............................... $
Unearned premiums and credit fees ......
Investments ............................................
Variable interest entities ........................
Other ......................................................
Total deferred tax liabilities

67 $
32
14
15
6
134

Deferred tax assets:

Net operating loss carryforward ............
Loss reserves ..........................................
State capital loss carryforward ...............
Debentures .............................................
Compensation ........................................
Other ......................................................
Subtotal deferred tax assets ...................
Valuation allowance ..............................
Total deferred tax assets
Net deferred tax liability

786
180
7

7
8
4
993
886
106

28 $

78
32
22
13
7
152

764
218
—

22
9
5
1,019
891
128
24

| Ambac Financial Group, Inc. 122 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

In accordance with the Income Tax Topic of the ASC, a
valuation allowance is recognized if, based on the weight of
available evidence, it is more-likely-than-not that some, or all, of
the deferred tax asset will not be realized. As a result of the risks
and uncertainties associated with future operating results,
management believes it is more likely than not that the
Company will not generate sufficient U.S. federal, state and/or
local taxable income to recover the deferred tax operating assets
therefore maintains a full valuation allowance. The
and
remaining net deferred tax liability of $28 is attributable to
Ambac U.K. and is classified in other liabilities on the
Consolidated Balance Sheet.

NOL Usage
Pursuant to a 2013 Closing Agreement between Ambac and the
United States Internal Revenue Service ("IRS"), AAC could
have to pay amount to as much as $8 to the IRS should AAC
utilize NOLs available to it as of December 31, 2019.

As of December 31, 2021, the Company has $3,744 of NOLs,
which if not utilized will begin expiring in 2029, and will fully
expire in 2041.

17. EMPLOYMENT BENEFIT PLANS

Postretirement Health Care and Postemployment
Benefits
Ambac provides postretirement and postemployment / severance
benefits, including health and life benefits for certain employees
who meet predefined age and service requirements. None of the
plans are currently funded. Postretirement and postemployment
benefits expense, including severance benefits paid, were $1, $1
and $3 for the years ended December 31, 2021, 2020 and 2019,
respectively.

Effective August 1, 2005, new employees were not eligible for
postretirement benefits. The current postretirement benefit
requires retirees to purchase their own medical insurance policy
with a portion of their premium being reimbursed by Ambac.
The unfunded accumulated postretirement benefit obligation
was $11 as of December 31, 2021. The assumed health care cost
trend rates range from 5.1% in 2022, decreasing ratably to 4.5%
in 2032.

The following table sets forth projected benefit payments from
Ambac’s postretirement plan over the next ten years for current
retirees:

2022 .................................................................................

2023 .................................................................................

2024 .................................................................................

2025 .................................................................................

2026 .................................................................................

2025-2029 ........................................................................

Total

—

The discount rate used in determining the projected benefit
obligations for the postretirement plan is selected by reference to

a pension liability index with similar duration to that of the
benefit plan. The rates used for the projected plan benefit
obligations at the measurement date for December 31, 2021 and
2020, were 2.75% and 2.25%, respectively.

Savings Incentive Plans
As a result of the acquisition of Xchange on December 31, 2020,
Ambac has two Savings Incentive Plans. Substantially all US
employees are covered by one of these plans. The plan
sponsored by AAC includes employer matching contributions
equal to 100% of the employees’ contributions, up to 3% of such
participants’ compensation, as defined in the plan, plus 50% of
contributions up to an additional 2% of compensation, subject to
limits set by the Internal Revenue Code. The plan sponsored by
Xchange includes employer matching contributions equal to 4%
of such participants' compensation, as defined in the plan. The
total cost of the savings incentive plans were $1, $1 and $1 for
the years December 31, 2021, 2020 and 2019, respectively.

Incentive Compensation - Stock Units and Cash
Employees, directors and consultants of Ambac are eligible to
participate in Ambac’s 2020 Incentive Plan, which is the
successor plan to the 2013 Incentive Plan, subject to the
discretion of the compensation committee of Ambac’s Board of
Directors. There are 1,475,000 and 4,000,000 shares of Ambac's
common stock authorized for awards under the 2020 Plan and
2013 Plan, respectively. Awards may also be made under the
2020 Plan with respect to the shares that remained available for
grant under the 2013 Plan. In addition, shares subject to
outstanding awards granted under
that
subsequently terminate by expiration or forfeiture, cancellation,
or otherwise without the issuance of such shares become
available for awards under the 2020 Plan. Of the total shares
authorized for issuance pursuant to the 2020 Plan and 2013 Plan,
1,255,643 shares are available
future grant as of
December 31, 2021. Shares available for future grant are
reduced by the maximum number of shares that could be issued
pursuant to outstanding performance awards. The number of
shares available for future grant considering the target number
of shares instead of the maximum number of shares related to
performance awards is 2,691,618.

the 2013 Plan

for

On June 24, 2021, the compensation committee of Ambac's
Board of Directors adopted the Ambac Financial Group, Inc.
Executive Stock Deferral Plan (the “Stock Deferral Plan”).
Under the Stock Deferral Plan, certain executives of AFG and
its subsidiaries who are designated by the compensation
committee as eligible to participate in the Stock Deferral Plan
may elect to defer the settlement of all or a portion of the RSU
(as defined below) awards and PSU (as defined below) awards
that are granted to the executives to a future date(s) selected by
the executive. Deferred awards under the Stock Deferral Plan
(and any related dividend equivalents) will continue to be paid
in shares of common stock of AFG, which will be issued under
the 2020 Plan, provided that any dividend equivalents credited
on a participant’s deferred awards in respect of cash dividends
paid by AFG will be paid to the participant in cash. The Stock
Deferral Plan is not funded, and deferred awards under the Stock
Deferral Plan are not segregated from the Company’s general
assets.

| Ambac Financial Group, Inc. 123 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

The amount of stock-based compensation expense and
corresponding after-tax expense are as follows:

Year Ended
December 31,

2021

2020

2019

Restricted stock units ..................

Performance awards ...................

Total stock-based
compensation

Total stock-based

compensation (after-tax)

14 $

11 $

14 $

11 $

Restricted Stock Units (“RSUs”)

RSUs have been awarded to certain employees for a portion of
their STIP compensation, LTIP compensation, sign-on and
special awards for exceptional performance. RSUs have also
been awarded to consultants for meeting certain contractual
performance goals. The previously issued STIP awards vested
upon grant, but settlement was deferred (other than for
employment tax withholdings) into two equal installments
generally on the first and second anniversary date of the grant.
The LTIP, sign-on, consultant and special awards generally vest
in equal installments over a two to three year period. Such
vesting is expressly conditioned upon continued service with
Ambac through the applicable vesting date, although vesting
may be accelerated in certain circumstances under the awards,
including for terminations due to death, disability, eligible
retirement, or involuntary termination by Ambac other than for
cause.

As part of our director compensation program, prior to 2021
RSUs were awarded annually on or about April 30 of each year
to directors and would vest on the last day of April of the
following year. During 2021, the director compensation program
was revised to provide for quarterly grants of RSUs that would
vest one year from the grant date. These RSUs will not settle
until the respective director’s termination from the board of
directors or, if earlier, upon a change in control. All RSUs
provide for accelerated vesting upon a change in control, death
or disability or involuntary removal other than for cause (not
including removal pursuant to a shareholder vote at a regularly
scheduled annual meeting of shareholders). Upon termination
(other than for cause), the unvested RSUs shall partially vest as
of the date of such termination in an amount equal to the number
of then outstanding unvested RSUs multiplied by a fraction, the
numerator of which shall be the number of calendar days which
have lapsed since the grant date and the denominator of which
shall be the number of calendar days from the grant date until
the next regularly scheduled quarterly grant date pursuant to
Ambac’s director compensation program.

As of December 31, 2021, 837,070 RSUs remained outstanding,
of which (i) 504,764 units required future service as a condition
to the delivery of the underlying shares of common stock and
(ii) 332,306 units do not require future service and are deferred
for future settlement. As of December 31, 2020, 773,657 RSUs
remained outstanding, of which (i) 345,302 units required future
service as a condition to the delivery of the underlying shares of
common stock, and (ii) 428,355 units did not require future
service and were deferred for future settlement.

A summary of RSU activity for 2021 is as follows:

Weighted
Average
Grant Date
Fair Value

Outstanding at beginning of period ....

773,657 $

Granted ...............................................
Delivered or returned to plan (1)
Forfeited .............................................

..........

345,829

(280,672)

(1,744)

Outstanding at end of period

837,070 $

18.04

17.39

17.89

18.34

17.82

(1) When restricted stock unit awards issued by Ambac become
taxable compensation to employees, shares may be withheld to
cover the employee’s withholding taxes. For the year ended
December 31, 2021, Ambac purchased 88,723 of shares from
employees that settled restricted stock units to meet the required
tax withholdings.

Ambac’s closing share price on the grant date was used to
estimate the fair value of the service condition based RSU on the
grant date. The weighted average grant date fair value of RSUs
granted during 2021, 2020 and 2019 was $17.39, $17.36 and
$19.75, respectively. As of December 31, 2021, there was $5 of
total unrecognized compensation costs related to unvested RSUs
granted. These costs are expected to be recognized over a
weighted average period of 1.7 years. The fair value for RSUs
vested and delivered during the year ended December 31, 2021,
2020 and 2019 was $4, $4 and $4, respectively.

Performance Stock Awards ("PSUs")

Performance awards granted vest in 3 years and awards have
components relative to performance at AFG, Xchange and AAC.
Actual awards can payout 0% to 220% of the number of units
granted. Under currently outstanding award agreements,
performance will be evaluated as follows:

• AFG performance, as it relates to the 2019 PSU awards,
will be evaluated relative to cumulative earnings before
interest, taxes, depreciation and amortization over the
vesting period (exclusive of AAC and its subsidiaries'
earnings), which is intended to reward participants for
generating pre-tax income.

• Xchange, as it relates to the 2021 PSU awards, will be
evaluated relative to cumulative earnings before interest,
taxes, depreciation and amortization over the vesting
period.

• AAC performance will be evaluated according to: (i)
changes in AAC's assets relative to its insurance and
financial obligations, which
reward
participants for increases in the relative value of AAC
(2019 and 2020 PSU awards only) and (ii) reductions in
watch list and adversely classified credits, which is
intended to reward participants for de-risking the financial
guarantee insured portfolio.

intended

• In 2019, a relative Total Shareholder Return modifier was
added as an additional metric with respect to the LTIP
award payouts. The modifier will cause the payout at the
end of the performance period to be increased or decreased
by 10% if AFG's stock performance compared to a peer
group is at or above the 75th percentile or at or below the
25th percentile, respectively.

| Ambac Financial Group, Inc. 124 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

right-of-use assets unless exercise is considered reasonably
certain.

included

the
Lease costs are
Consolidated Statement of Total Comprehensive Income (Loss).
The components of lease costs, net of sub-lessor income, is as
follows:

in operating expenses on

Year Ended December 31,

2021

2020

Operating lease cost ................................

5 $

Variable lease cost ...................................

Sublease income ......................................

—

(1)

Total lease cost

4 $

—

(1)

Ambac is required to make variable lease payments under
certain leases which primarily relates to variable costs of the
lessor, such as taxes, insurance, maintenance and electricity.

Supplemental information related to leases is as follows:

Year Ended December 31,
Cash paid for amounts included in the
measurement of operating lease
liabilities .................................................
Right-of-use assets obtained in
exchange for operating lease liabilities
(non-cash) ...............................................

2021

2020

5 $

—

Supplemental balance sheet information related to leases is as
follows:

December 31,
Operating leases:

2021

2020

Operating lease right of use assets .......
Operating lease liabilities .....................

23
28

25
30

Weighted average remaining lease
term:

Operating leases ...................................

7.7 years

8.7 years

Weighted average discount rate:

Operating leases ...................................

7.7 %

Operating lease right of use assets and operating lease liabilities
are included in Other assets and Other liabilities, respectively,
on the consolidated balance sheet.

Pursuant to the LTIP award agreements if (i) a termination
occurs by reason of disability, an involuntary termination by the
Company other than for “cause,” or "retirement," the recipient
would be entitled to receive the PSU award which would only
be payable at the end of the relevant performance period and
based on the satisfaction of the performance conditions related
to such award at the time of termination; and (ii) a termination
occurred prior to the last day of the performance period by
reason of death, the beneficiaries of the recipient would be
entitled to receive the number of PSUs that the recipient would
have been entitled to receive at a 100% overall payout multiple
regardless of the outcome of any of the performance conditions.
The current performance awards shall be settled within 75 days
after the end of the performance period, including those with
partial or accelerated vesting, subject to any deferrals made
pursuant to the Stock Deferral Plan.

A summary of PSU activity for 2021 is as follows:

Outstanding at beginning of period

........................................

Granted (1)
Delivered (2)
.....................................
Forfeited ..........................................
Performance adjustment (3)
..............
Outstanding at end of period

Weighted
Average
Grant Date
Fair Value

844,514 $
396,202

(804,217)
(4,355)
289,912
722,056 $

18.09
18.12

16.23
19.10
15.09
18.97

(1) Represents performance share units at 100% of units granted for

LTIP Awards.

(2) Reflects the number of performance shares attributable to the
performance goals attained over the completed performance period
and for which service conditions have been met. When
performance stock unit awards issued by Ambac become taxable
compensation to employees, shares may be withheld to cover the
employee’s withholding taxes. For the year ended December 31,
2021, Ambac purchased 276,777 of shares from employees that
settled performance based restricted stock units to meet the
required tax withholdings.

(3) Represents the number of additional shares issued for awards
granted in 2018 as a result of actual performance during the
performance period.

As of December 31, 2021, there was $8 of total unrecognized
compensation costs related to the PSU portion of unvested
performance awards, which are expected to be recognized over a
weighted average period of 1.6 years.

18. LEASES

Ambac is the lessee and lessor for certain lease agreements
further described below.

Lessee information
Ambac is the lessee in operating leases for corporate offices, a
data center and equipment. Leases in effect at December 31,
2021, have remaining lease terms ranging from slightly over 2
years to 8 years. Certain of these leases include automatic
renewal or early termination provisions. Ambac does not include
these provisions in the determination of its lease liabilities and

| Ambac Financial Group, Inc. 125 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Future undiscounted lease payments, gross of sublease receipts,
to be made are as follows:

As of December 31, 2021

2022 ............................................................................

2023 ............................................................................

2024 ............................................................................

2025 ............................................................................

2026 ............................................................................

Thereafter ...................................................................

Total lease payments ..................................................

Less: imputed interest .................................................

Total

Operating
Leases

(9)

Lessor information
Ambac is the lessor in one operating sublease of corporate office
space which has a remaining term of 8.0 years. There are no
extension or termination provisions.

Future undiscounted lease payments to be received are as
follows:

As of December 31, 2021

2022 ............................................................................

2023 ............................................................................

2024 ............................................................................

2025 ............................................................................

2026 ............................................................................

Thereafter ...................................................................

Operating
Leases

Total lease receipts

19. COMMITMENTS AND CONTINGENCIES

Litigation Against Ambac
Monterey Bay Military Housing, LLC, et al. v. Ambac
Assurance Corporation, et al. (United States District Court,
Southern District of New York, Case No. 1:19-cv-09193-PGG,
transferred on October 4, 2019 from the United States District
Court, Northern District of California, San Jose Division, Case
No. 17-cv-04992-BLF, filed August 28, 2017). Plaintiffs, the
corporate developers of various military housing projects, filed
an amended complaint on October 27, 2017 against AAC, a
former employee of AAC, and certain unaffiliated persons and
entities, asserting claims for (i) violation of 18 U.S.C §§ 1962(c)
and 1962(d)
Influenced and Corrupt
Organizations Act (“RICO”) and conspiracy to commit civil
RICO), (ii) breach of fiduciary duty, (iii) aiding and abetting
breach of fiduciary duty, (iv) fraudulent misrepresentation, (v)
fraudulent concealment and (vi) conspiracy to commit fraud.
The claims relate to bonds and debt certificates (insured by
AAC)
the renovation and
construction of housing at certain military bases. Plaintiffs
allege that defendants secretly conspired to overcharge plaintiffs
for the financing of the projects and directed the excess profits

(civil Racketeer

to finance

that were

issued

to dismiss

to themselves. Plaintiffs allege defendants generated these
excess profits by supposedly charging inflated interest rates,
manipulating “shadow ratings,” charging unnecessary fees, and
hiding evidence of their alleged wrongdoing. Plaintiffs seek,
among other things, compensatory damages, disgorgement of
profits and fees, punitive damages, trebled damages and
attorneys’ fees. AAC and the other defendants filed motions to
dismiss the amended complaint on November 13, 2017. On July
17, 2018, the court granted AAC’s and the other defendants’
motion
the first amended complaint without
prejudice. On December 17, 2018, Plaintiffs filed a second
amended complaint. On February 15, 2019, AAC and the other
defendants filed a motion to dismiss the second amended
complaint. On September 26, 2019, the court issued a decision
denying defendants’ motion
to dismiss and sua sponte
reconsidering its previous denial of defendants’ motion to
transfer venue to the Southern District of New York (“SDNY”).
On October 10, 2019, after the case was transferred to the
SDNY, the defendants filed motions to vacate or reconsider the
decision by
the
defendants’ motion to dismiss. On March 31, 2021, the court
granted defendants’ motions for reconsideration and, upon
reconsideration, dismissed the claims against AAC and its
former employee for breach of fiduciary duty and for aiding and
abetting breach of AAC’s or its former employee’s fiduciary
duty; dismissed two plaintiffs’ RICO claims against AAC and
its former employee; and in all other respects denied defendants’
motions. Defendants served answers to the second amended
complaint on April 21, 2021, asserting several affirmative
defenses, including a defense for unclean hands focused on the
plaintiffs’ failure
the project properties and
falsification of maintenance records. On May 24, 2021,
plaintiffs moved to strike defendants’ unclean hands defenses.
On September 14, 2021, Magistrate Judge Sarah L. Cave, to
whom plaintiffs’ motion to strike was referred for a Report and
Recommendation,
issued an opinion and order denying
plaintiffs’ motion.

the Northern District of California on

to maintain

issued by

Financial Oversight and Management Board for Puerto Rico, et
al. v. Autonomy Master Fund Limited, et al. (United States
District Court, District of Puerto Rico, No. 19-ap-00291, filed
May 2, 2019). On May 2, 2019, the Financial Oversight and
Management Board for Puerto Rico (the "Oversight Board"),
together with the Official Committee of Unsecured Creditors for
the Commonwealth (the "Committee") filed an adversary
proceeding against certain parties that filed proofs of claim on
account of general obligation bonds
the
Commonwealth of Puerto Rico, including AAC. The complaint
seeks declarations
the general obligation bonds are
unsecured obligations and, in the alternative, seeks to avoid any
security interests that holders of such bonds may have. On June
12, 2019, a group of general obligation bondholders moved to
dismiss the complaint. On June 13, 2019, at the request of the
Plaintiffs, the District Court stayed the case until September 1,
2019 as to all defendants; on July 24, 2019, the District Court
referred this matter to mediation and ordered it stayed during the
pendency of such mediation. AAC filed a statement of position
and reservation of rights on February 5, 2020; certain other
defendants filed motions to dismiss on this same date. On
February 9, 2020, the Oversight Board announced that it
intended to file, and to seek to confirm, an amended plan of

that

| Ambac Financial Group, Inc. 126 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

adjustment (the “Commonwealth Plan”). On March 10, 2020,
the District Court ordered that this case remain stayed while the
Oversight Board attempted to confirm the Commonwealth Plan.

Financial Oversight and Management Board for Puerto Rico, et
al. v. Ambac Assurance Corporation, et al. (United States
District Court, District of Puerto Rico, No. 19-ap-00363, filed
May 20, 2019). On May 20, 2019, the Oversight Board,
together with the Committee, as Plaintiffs, filed an adversary
proceeding against certain parties that filed proofs of claim on
account of bonds issued by the Puerto Rico Highways and
Transportation Authority ("PRHTA"), including AAC. The
complaint seeks declarations that the PRHTA bonds are only
secured by revenues on deposit with the PRHTA Fiscal Agent
and that PRHTA bondholders have no security interest in any
other property of PRHTA or the Commonwealth, and in the
alternative, to the extent such other security interests exist, the
complaint seeks to avoid other security interests that holders of
PRHTA bonds may have. On June 14, 2019, at the request of
the Plaintiffs, the District Court stayed the case until September
1, 2019 as to all defendants; on July 24, 2019, the District Court
referred this matter to mediation and ordered it stayed during the
pendency of such mediation. On December 19, 2019, the
District Court ordered that this matter remain stayed pending
further order of the District Court pursuant to the Oversight
Board’s initiation of a separate adversary proceeding concerning
PRHTA bonds (No. 20-ap-00005, discussed below).

Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00003, filed Jan. 16, 2020).
On January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring bonds issued by
the Puerto Rico Infrastructure Financing Authority (“PRIFA”)
and the PRIFA bond trustee, all of which defendants filed proofs
of claim against the Commonwealth relating to PRIFA bonds.
The complaint seeks to disallow defendants’ proofs of claim
against the Commonwealth in their entirety, including for lack
of secured status. On February 27, 2020, defendants filed
motions to dismiss. On March 10, 2020, the District Court
stayed the motions to dismiss and authorized the Oversight
Board to move for summary judgment, which motion defendants
opposed. On May 5, 2021, monoline defendants Assured
Guaranty Corporation, Assured Guaranty Municipal Corporation
(“Assured”),
and National Public Finance Guarantee
Corporation (“National”) announced an agreement with the
Oversight Board with respect to the treatment of bonds issued by
PRHTA and the Puerto Rico Convention Center District
Authority (“PRCCDA”) (the “PRHTA/PRCCDA Settlement”).
On July 14, 2021, AAC and Financial Guaranty Insurance
Company (“FGIC”) reached an agreement in principle with the
Oversight Board with respect to the treatment of bonds issued by
the Puerto Rico Infrastructure Financing Authority ("PRIFA")
(the “PRIFA Settlement”), and as a result of that settlement, also
joined the PRHTA/PRCCDA Settlement. On August 2, 2021,
the Oversight Board, AAC, FGIC, and the PRIFA bond trustee
jointly moved to stay this case as a result of the PRIFA
Settlement and AAC’s
the PRHTA/PRCCDA
joinder
Settlement and the settlement related to general obligation and
PBA bonds (“GO/PBA Settlement”). On August 3, 2021, the
District Court ordered that this case be stayed. Following the

filing of several revised versions of the Commonwealth Plan, the
Court held a confirmation hearing in November 2021. On
January 18, 2022, the Court entered an order confirming the
Commonwealth Plan, as amended, and entered its findings of
fact and conclusions of law related thereto. The Commonwealth
Plan resolves the issues raised in this adversary proceeding.
Following confirmation of the Commonwealth Plan, several
parties filed notices of appeal of
the District Court’s
confirmation order to the First Circuit Court of Appeals. On
February 1, 2022, Federación de Maestros de Puerto Rico, Inc.,
Grupo Magisterial Educadores(as) por la Democracia, Unidad,
Cambio, Militancia y Organización Sindical, Inc., and Unión
Nacional de Educadores y Trabajadores de la Educación, Inc.
(collectively, the “Teachers’ Unions”) moved for a stay of the
confirmation order while the appeal is pending, and on February
4, 2022, Asociación Puertorriqueña de la Judicatura, Inc.
(“APJ”) and a number of credit unions (the “Credit Unions”)
also filed motions for a stay pending appeal. On February 9 and
February 11, 2022, a number of parties—including AAC—filed
oppositions to the stay motions, requesting, in the alternative,
that the appealing parties seeking a stay be required to post
supersedeas bonds pending appeal. On February 11, 2022, the
District Court entered an order granting APJ’s motion for
voluntary dismissal of its appeal. The District Court has taken
the remaining stay motions on submission. On February 17,
2022, the Oversight Board filed a notice of appeal of the District
Court’s confirmation order, seeking review of the District
Court’s finding regarding the nondischargeability of certain
claims arising under
the U.S.
Constitution.

the Takings Clause of

Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00004, filed Jan. 16, 2020).
On January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring bonds issued by
the PRCCDA and the PRCCDA bond trustee, all of which
defendants filed proofs of claim against the Commonwealth
relating to PRCCDA bonds. The complaint seeks to disallow
defendants’ proofs of claim against the Commonwealth in their
entirety, including for lack of secured status. On February 27,
2020, defendants filed motions to dismiss. On March 10, 2020,
the District Court stayed the motions to dismiss and authorized
the Oversight Board to move for summary judgment, which
motion defendants opposed. On May 5, 2021, Assured and
National announced an agreement with the Oversight Board
with respect to the PRHTA/PRCCDA Settlement. On July 14,
2021, AAC and FGIC reached an agreement in principle with
the Oversight Board with respect to the PRIFA Settlement. On
August 2, 2021, the Oversight Board, AAC, FGIC, and the
PRCCDA bond trustee jointly moved to stay this case as a result
of the PRIFA Settlement and AAC’s joinder to the PRHTA/
PRCCDA Settlement and the GO/PBA Settlement. On August
3, 2021, the District Court ordered that this case be stayed.
Following
the
Commonwealth Plan, the Court held a confirmation hearing in
November 2021. On January 18, 2022, the Court entered an
order confirming the Commonwealth Plan, as amended, and
entered its findings of fact and conclusions of law related
thereto. The Commonwealth Plan resolves the issues raised in
this adversary proceeding. Following confirmation of the

the filing of several revised versions of

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Commonwealth Plan, several parties filed notices of appeal of
the District Court’s confirmation order to the First Circuit Court
of Appeals. On February 1 and 4, 2022, the Teachers’ Unions,
APJ, and the Credit Unions moved for a stay of the confirmation
order while this appeal is pending. On February 9 and February
11, 2022, a number of parties—including AAC—filed
oppositions to the stay motions, requesting, in the alternative,
that the appealing parties seeking a stay be required to post
supersedeas bonds pending appeal. On February 11, 2022, the
District Court entered an order granting APJ’s motion for
voluntary dismissal of its appeal. The District Court has taken
the remaining stay motions on submission. On February 17,
2022, the Oversight Board filed a notice of appeal of the District
Court’s confirmation order, seeking review of the District
Court’s finding regarding the nondischargeability of certain
claims arising under
the U.S.
Constitution.

the Takings Clause of

Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00005, filed Jan. 16, 2020).
On January 16, 2020, the Oversight Board filed an adversary
proceeding against monoline insurers insuring bonds issued by
PRHTA, certain PRHTA bondholders, and the PRHTA fiscal
agent for bondholders, all of which defendants filed proofs of
claim against the Commonwealth relating to PRHTA bonds.
The complaint seeks to disallow defendants’ proofs of claim
against the Commonwealth in their entirety, including for lack
of secured status. On February 27, 2020, defendants filed
motions to dismiss. On March 10, 2020, the District Court
stayed the motions to dismiss and authorized the Oversight
Board to move for summary judgment, which motion defendants
opposed. On May 5, 2021, Assured and National announced an
agreement with the Oversight Board with respect to the PRHTA/
PRCCDA Settlement. On July 14, 2021, AAC and FGIC
reached an agreement in principle with the Oversight Board with
respect to the PRIFA Settlement. On August 2, 2021, the
Oversight Board, AAC, FGIC, and the PRHTA fiscal agent
jointly moved to stay this case as a result of the PRIFA
Settlement and AAC’s
the PRHTA/PRCCDA
joinder
Settlement and the GO/PBA Settlement. On August 3, 2021, the
District Court ordered that this case be stayed. Following the
filing of several revised versions of the Commonwealth Plan, the
Court held a confirmation hearing in November 2021. On
January 18, 2022, the Court entered an order confirming the
Commonwealth Plan, as amended, and entered its findings of
fact and conclusions of law related thereto. The Commonwealth
Plan resolves the issues raised in this adversary proceeding.
Following confirmation of the Commonwealth Plan, several
parties filed notices of appeal of
the District Court’s
confirmation order to the First Circuit Court of Appeals. On
February 1 and 4, 2022, the Teachers’ Unions, APJ, and the
Credit Unions moved for a stay of the confirmation order while
this appeal is pending. On February 9 and February 11, 2022, a
number of parties—including AAC—filed oppositions to the
stay motions, requesting, in the alternative, that the appealing
parties seeking a stay be required to post supersedeas bonds
pending appeal. On February 11, 2022, the District Court
entered an order granting APJ’s motion for voluntary dismissal
of its appeal. The District Court has taken the remaining stay
motions on submission. On February 17, 2022, the Oversight

Board filed a notice of appeal of
the District Court’s
confirmation order, seeking review of the District Court’s
finding regarding the nondischargeability of certain claims
arising under the Takings Clause of the U.S. Constitution.

the filing of several revised versions of

Financial Oversight and Management Board for Puerto Rico v.
Ambac Assurance Corp., et al. (United States District Court,
District of Puerto Rico, No. 20-ap-00007, filed Jan. 16, 2020).
On January 16, 2020, the Oversight Board and the Committee
filed an adversary proceeding against monoline insurers insuring
bonds issued by PRHTA, certain PRHTA bondholders, and the
PRHTA fiscal agent for bondholders, all of which defendants
filed proofs of claim against PRHTA relating to PRHTA bonds.
The complaint seeks to disallow portions of defendants’ proofs
of claim against the PRHTA, including for lack of secured
status. On March 10, 2020, the District Court stayed this case.
On May 5, 2021, Assured and National announced an agreement
with the Oversight Board with respect to the PRHTA/PRCCDA
Settlement. On July 14, 2021, AAC and FGIC reached an
agreement in principle with the Oversight Board with respect to
the PRIFA Settlement. On August 2, 2021, the Oversight
Board, AAC, FGIC, and the PRHTA fiscal agent jointly moved
to stay this case as a result of the PRIFA Settlement. On August
3, 2021, the District Court ordered that this case be stayed.
Following
the
Commonwealth Plan, the Court held a confirmation hearing in
November 2021. On January 18, 2022, the Court entered an
order confirming the Commonwealth Plan, as amended, and
entered its findings of fact and conclusions of law related
thereto. The Commonwealth Plan resolves the issues raised in
this adversary proceeding. Following confirmation of the
Commonwealth Plan, several parties filed notices of appeal of
the District Court’s confirmation order to the First Circuit Court
of Appeals. On February 1 and 4, 2022, the Teachers’ Unions,
APJ, and the Credit Unions moved for a stay of the confirmation
order while this appeal is pending. On February 9 and February
11, 2022, a number of parties—including AAC—filed
oppositions to the stay motions, requesting, in the alternative,
that the appealing parties seeking a stay be required to post
supersedeas bonds pending appeal. On February 11, 2022, the
District Court entered an order granting APJ’s motion for
voluntary dismissal of its appeal. The District Court has taken
the remaining stay motions on submission. On February 17,
2022, the Oversight Board filed a notice of appeal of the District
Court’s confirmation order, seeking review of the District
Court’s finding regarding the nondischargeability of certain
claims arising under
the U.S.
Constitution.

the Takings Clause of

AmeriNational Community Services, LLC, et al. v. Ambac
Assurance Corporation, et al. (United States District Court,
District of Puerto Rico, No. 21-ap-00068, filed June 26, 2021).
On June 26, 2021, AmeriNational Community Services, LLC,
and Cantor-Katz Collateral Monitor LLC, as servicer and
collateral monitor (respectively) for the GDB Debt Recovery
Authority (the “DRA”), filed an adversary proceeding against
AAC and other monoline insurers of PRHTA bonds, holders of,
PRHTA bonds, and the PRHTA bond trustee. The complaint
sought declaratory judgments regarding the DRA’s rights with
respect to certain revenues pledged as collateral for PRHTA
bonds, and asserted that the DRA is the only party with a right to

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

collect from and a security interest in certain such revenues. On
August 26, 2021, the monoline insurers filed their motion to
dismiss the DRA parties’ complaint, as well as their answer and
counterclaims. On October 19, 2021, the DRA parties filed a
motion to dismiss the monolines’ counterclaims. On October
29, 2021, the District Court entered an order granting the
monolines’ motion to dismiss all counts in the DRA parties’
complaint. On November 2, 2021, the monolines voluntarily
withdrew their counterclaims without prejudice. On November
4, 2021, the District Court entered an amended judgment closing
the adversary proceeding. On November 5, 2021, the Oversight
Board filed a motion notifying the court of its settlement with
the DRA parties. The stipulation attached to the motion
provided, among other things, that the DRA parties would not
take any appeals of the court’s order dismissing their complaint,
and would support the Commonwealth Plan, the PRCCDA Title
VI Qualifying Modification, and the forthcoming HTA Plan of
Adjustment (the "PRHTA Plan").

inquiries that such regulators are conducting. AAC has complied
with all such inquiries and requests for information.

The Company is involved from time to time in various routine
legal proceedings, including proceedings related to litigation
with present or former employees. Although the Company’s
litigation with present or former employees is routine and
incidental to the conduct of its business, such litigation can
result in large monetary awards when a civil jury is allowed to
determine compensatory and/or punitive damages for, among
other things, termination of employment that is wrongful or in
violation of implied contracts.

From time to time, Ambac is subject to allegations concerning
its corporate governance that may lead to litigation, including
derivative litigation, and while the monetary impacts may not be
material, the matters may distract management and the Board of
Directors from their principal focus on Ambac's business,
strategy and objectives.

NC Residuals Owners Trust, et al. v. Wilmington Trust Co., et
al. (Delaware Court of Chancery, C.A. No. 2019-0880, filed
Nov. 1, 2019). On November 1, 2019, AAC became aware of a
new declaratory judgment action filed by certain residual equity
interest holders (“NC Owners” or “Plaintiffs”) in fourteen
National Collegiate Student Loan Trusts (the “Trusts”) against
Wilmington Trust Company, the Owner Trustee for the Trusts;
U.S. Bank National Association, the Indenture Trustee; GSS
Data Services, Inc., the Administrator; and AAC. Through this
action, Plaintiffs seek a number of judicial determinations. On
January 21, 2020, the presiding Vice Chancellor entered an
order consolidating the action with previously filed litigation
relating to the Trusts. On February 13, 2020, AAC, the Owner
Trustee,
filed
declaratory judgment counterclaims. Several parties, including
Plaintiffs and AAC, filed motions for judgment on the pleadings
in support of their requested judicial determinations. On August
27, 2020, the Vice Chancellor issued an opinion addressing all
of the pending motions for judgment on the pleadings, which
granted certain of the parties’ requested judicial determinations
and denied others. He deferred judgment on still other
declarations pending further factual development. On January
31, 2022, the Vice Chancellor entered a thirty-day stay to
facilitate good-faith settlement discussions.

Indenture Trustee, and other parties

the

AAC’s estimates of projected losses for RMBS transactions
consider, among other things, the RMBS transactions’ payment
waterfall structure, including the application of interest and
principal payments and recoveries, and depend in part on our
interpretations of contracts and other bases of our legal rights.
From time to time, bond trustees and other transaction
participants have employed different contractual interpretations
and have commenced, or threatened to commence, litigation to
resolve these differences. It is not possible to predict whether
additional disputes will arise, nor the outcomes of any potential
litigation. It is possible that there could be unfavorable
outcomes in this or other disputes or proceedings and that our
interpretations may prove to be incorrect, which could lead to
changes to our estimate of loss reserves.

AAC has periodically received various regulatory inquiries and
requests for information with respect to investigations and

It is not reasonably possible to predict whether additional suits
will be filed or whether additional inquiries or requests for
information will be made, and it is also not possible to predict
the outcome of litigation, inquiries or requests for information. It
is possible that there could be unfavorable outcomes in these or
other proceedings. Legal accruals for litigation against the
Company which are probable and reasonably estimable, and
management's estimated range of loss for such matters, are
either not applicable or are not material to the operating results
or financial position of the Company. For the litigation matters
the Company is defending that do not meet the “probable and
reasonably estimable” accrual threshold and where no loss
estimates have been provided above, management is unable to
make a meaningful estimate of the amount or range of loss that
could
from unfavorable outcomes. Under some
circumstances, adverse results in any such proceedings could be
financial position,
material
profitability or cash flows. The Company believes that it has
substantial defenses to the claims above and, to the extent that
these actions proceed, the Company intends to defend itself
vigorously; however, the Company is not able to predict the
outcomes of these actions.

to our business, operations,

result

Litigation Filed or Joined by Ambac
In the ordinary course of their businesses, certain of Ambac’s
subsidiaries assert claims in legal proceedings against third
parties to recover losses already paid and/or mitigate future
losses. The amounts recovered and/or losses avoided which may
result from these proceedings is uncertain, although recoveries
and/or losses avoided in any one or more of these proceedings
during any quarter or fiscal year could be material to Ambac’s
results of operations in that quarter or fiscal year.

Student Loans Exposure
CFPB v. Nat’l Collegiate Master Student Loan Trust (United
States District Court, District of Delaware, Case No. 1:17-
cv-01323, filed September 18, 2017). The Consumer Financial
Protection Bureau (“CFPB”) filed a complaint against fifteen
National Collegiate Student Loan Trusts, regarding alleged
servicing practices.
improprieties

and deficiencies

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Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Simultaneous with the filing of its complaint, CFPB also filed a
motion to approve a proposed consent judgment that would have
granted monetary damages and injunctive relief against the
Trusts. AAC guaranteed certain securities issued by three of the
Trusts and indirectly insures six other Trusts. On September 20,
2017, AAC filed a motion to intervene in the action, which
motion was granted on October 19, 2018. Following discovery
and briefing, on May 31, 2020, the District Court denied the
CFPB’s motion to approve the proposed consent judgment. On
March 19, 2020, Intervenor Transworld Systems Inc. filed a
motion to dismiss the action for lack of subject matter
jurisdiction. On July 10, 2020, AAC and several other
intervenors filed a motion to dismiss the action for lack of
subject matter jurisdiction and for failure to state a claim. On
July 2, 2020, the CFPB submitted an application for entry of
default against the Trusts. AAC and the Owner Trustee opposed
the CFPB’s application. On March 26, 2021, the court granted
intervenors’ motion to dismiss for failure to state a claim and
denied the motion to dismiss for lack of subject matter
jurisdiction. The court also denied as moot the CFPB’s
application for entry of default against the Trusts. The CFPB
filed an amended complaint on April 30, 2021. On May 21,
2021, the Trusts and several intervenors, including AAC, moved
to dismiss the CFPB’s amended complaint for failure to state a
claim. On December 13, 2021, the court denied the Trusts' and
intervenors' motions to dismiss the amended complaint. On
intervenors,
December 23, 2021,
including AAC, filed a motion seeking (i) an order certifying for
interlocutory appeal the court’s December 13, 2021 order
denying the motion to dismiss the amended complaint, and (ii) a
stay of the action pending resolution of any appeal. The motion
is fully briefed and remains pending. On January 26, 2022, the
Trusts and several intervenors, including AAC, answered the
CFPB’s amended complaint, asserting several affirmative
defenses and denying that the CFPB is entitled to relief from the
Trusts. On February 11, 2022, the court certified its ruling on
the motion to dismiss for interlocutory appeal to the U.S. Court
of Appeals for the Third Circuit, and stayed the case pending
appeal. The Trusts and several intervenors, including AAC,
filed a petition for permission to appeal with the Third Circuit
on February 21, 2022.

the Trusts and several

Nat’l Collegiate Master Student Loan Trust v. Pa. Higher
Education Assistance Agency (PHEAA) (Delaware Court of
Chancery, C.A. No. 12111-VCS, filed March 21, 2016).
Plaintiffs purporting to act on behalf of fifteen National
Collegiate Student Loan Trusts filed a lawsuit against PHEAA, a
servicer of loans in the Trusts, alleging improprieties and
deficiencies
in servicing practices and seeking an order
compelling PHEAA to submit to an emergency audit. AAC
guaranteed certain securities issued by three of the Trusts and
indirectly insures certain securities in six other Trusts. The
Owner Trustee of the Trusts, Wilmington Trust Company,
WTC, citing irreconcilable differences with Plaintiffs, resigned
from its role as Owner Trustee and moved on August 21, 2017
for appointment of a successor Owner Trustee. AAC filed a
motion to intervene in the action on October 23, 2017, for the
limited purpose of being heard regarding the appointment of a
successor Owner Trustee and regarding WTC’s contractual
commitment and obligation to remain in that role until such
appointment is made. The court granted AAC’s motion to

intervene on April 10, 2018 and AAC filed its complaint in
intervention on April 16, 2018. On January 21, 2020, Vice
Chancellor Slights entered an order consolidating the action with
later-filed litigation pending in Delaware Chancery Court
relating to the Trusts, including a declaratory judgment action in
which AAC was named as a defendant, NC Residuals Owners
Trust, et al. v. Wilmington Trust Co., et al. (Del. Ct. Ch., C.A.
No. 2019-0880, filed Nov. 1, 2019).

Puerto Rico
Assured Guaranty Corp., Assured Guaranty Municipal Corp.,
and Ambac Assurance Corporation v. Alejandro Garcia Padilla,
et al. (United States District Court, District of Puerto Rico No.
3:16-cv-01037, filed January 7, 2016). AAC, along with co-
plaintiffs Assured Guaranty Corp. and Assured Guaranty
Municipal Corp., filed a complaint for declaratory and injunctive
relief to protect its rights against the illegal clawback of certain
revenue by the Commonwealth of Puerto Rico. Defendants
moved to dismiss on January 29, 2016. On October 4, 2016, the
court denied the Defendants’ motions to dismiss. On October
14, 2016, Defendants filed a Notice of Automatic Stay, asserting
that Plaintiffs’ claims have been rendered moot and further
asserting that the case was automatically stayed under section
405 of the Puerto Rico Oversight, Management and Economic
Stability Act ("PROMESA"). On October 28, 2016, Plaintiffs
informed the court that neither party was currently challenging
the stay, and expressly reserved their right to seek to lift the stay
at any time. Plaintiffs also objected to Defendants’ assertion that
the case should be dismissed as moot. PROMESA’s litigation
stay expired on May 2, 2017. On May 3, 2017, the Oversight
Board filed a petition to adjust the Commonwealth’s debts under
Title III of PROMESA, resulting in an automatic stay of
litigation against the Commonwealth. On May 17, 2017, the
court issued an order staying this case until further order of the
court.

Ambac Assurance Corporation v. Puerto Rico Highways and
Transportation Authority (United States District Court, District
of Puerto Rico, No. 16-cv-1893, filed May 10, 2016). AAC filed
a complaint against
the Puerto Rico Highways and
Transportation Authority ("PRHTA") on May 10, 2016, alleging
breach of fiduciary duty and breach of contract in connection
with PRHTA’s extension of an existing toll road concession
agreement. The complaint alleges that it was inappropriate for
PRHTA to enter into the extension agreement in its current state
of financial distress because PRHTA has no control over, and is
unlikely to receive, the proceeds of the transaction. AAC also
filed related motions seeking the appointment of a provisional
receiver for PRHTA and expedited discovery. On May 21, 2017,
the Oversight Board filed a petition to adjust PRHTA’s debts
under Title III of PROMESA, resulting in an automatic stay of
litigation against PRHTA. On May 24, 2017, the court issued an
order staying this case until further order of the court.

Ambac Assurance Corporation v. Puerto Rico, et al. (United
States District Court, District of Puerto Rico, No. 17-1567, filed
May 2, 2017). On May 2, 2017, AAC filed a complaint seeking
a declaration that the Commonwealth’s Fiscal and Economic
Growth Plan (the "FEGP") and a statute called the “Fiscal Plan
Compliance Law” are unconstitutional and unlawful because
they violate the Contracts, Takings, and Due Process Clauses of

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

from COFINA

transfers of property

the U.S. Constitution, are preempted by PROMESA, and are
unlawful
the
Commonwealth in violation of PROMESA. On May 3, 2017, a
petition under Title III of PROMESA was filed on behalf of the
Commonwealth of Puerto Rico, and on May 5, 2017, a petition
under Title III of PROMESA was filed on behalf of COFINA,
resulting in an automatic stay of litigation against COFINA. On
May 17, 2017, the court issued an order staying this case until
further order of the court. On August 2, 2021, the Oversight
Board, AAC, FGIC, and the PRCCDA bond trustee jointly
moved to stay this case as a result of the PRIFA Settlement and
AAC's joinder to the PRHTA/PRCCDA Settlement and the GO/
PBA Settlement. On August 3, 2021, the District Court ordered
that this case be stayed.

Ambac Assurance Corporation v. Puerto Rico, et al. (United
States District Court, District of Puerto Rico, No. 17-1568, filed
May 2, 2017). On May 2, 2017, AAC filed a complaint alleging
that various moratorium laws and executive orders enacted by
the Commonwealth to claw back funds from PRIFA, PRHTA,
and PRCCDA bonds violate the Contracts, Takings, and Due
Process Clauses of the U.S. Constitution, are preempted by
PROMESA, and unlawfully transfer PRHTA, PRCCDA, and
PRIFA property to the Commonwealth. On May 3, 2017, a
petition under Title III of PROMESA was filed on behalf of the
Commonwealth of Puerto Rico and on May 21, 2017, a petition
under Title III of PROMESA was filed on behalf of PRHTA,
resulting
the
Commonwealth and PRHTA (respectively). On May 17, 2017,
the court issued an order staying this case until further order of
the court. On August 2, 2021, the Oversight Board, AAC,
FGIC, and the PRCCDA bond trustee jointly moved to stay this
case as a result of the PRIFA Settlement and AAC's joinder to
the PRHTA/PRCCDA Settlement and the GO/PBA Settlement.
On August 3, 2021, the District Court ordered that this case be
further stayed.

in an automatic stay of

litigation against

Ambac Assurance Corporation v. U.S. Department of Treasury
et al. (United States District Court, District of Columbia, No.
17-809, filed May 2, 2017). On May 2, 2017, AAC filed a
complaint against the U.S. Department of Treasury and Steven
Mnuchin, in his official capacity as Secretary of the Treasury,
alleging that Puerto Rico’s ongoing diversion of rum taxes from
PRIFA violates the Contracts, Takings, and Due Process Clauses
of the U.S. Constitution, and seeking an equitable lien on all rum
taxes possessed by the U.S. Treasury, and an injunction
preventing their transfer to the Commonwealth. On May 3,
2017, a petition under Title III of PROMESA was filed on
behalf of the Commonwealth of Puerto Rico. On May 24, 2017,
the Oversight Board filed a statement requesting that the court
take notice of the stay resulting from the Commonwealth’s Title
III filing. On May 25, 2017, the court issued an order staying
this case as a result of the Title III proceedings.

Ambac Assurance Corporation v. Bank of New York Mellon
(United States District Court, Southern District of New York,
No. 1:17-cv-03804, filed May 2, 2017). On May 2, 2017, AAC
filed a complaint in New York State Supreme Court, New York
County, against the trustee for the COFINA bonds, Bank of New
York Mellon ("BNY"), alleging breach of fiduciary, contractual,
and other duties for failing to adequately and appropriately

protect the holders of certain AAC-insured senior COFINA
bonds. On May 19, 2017, BNY filed a notice of removal of this
action from New York state court to the United States District
Court for the Southern District of New York. On May 30, 2017,
the United States District Court for the District of Puerto Rico
entered an order in an adversary proceeding brought by BNY
(No. 1:17-ap-00133) staying this litigation pending further order
of the court. The COFINA Plan became effective on February
12, 2019, and, pursuant to the District Court’s confirmation
order, this litigation was permitted to continue, with AAC’s
claims against BNYM being limited to those for gross
negligence, willful misconduct and intentional fraud. Following
confirmation of the COFINA Plan, several parties filed notices
of appeal of the District Court’s confirmation order to the First
Circuit Court of Appeals. On April 12, 2019, the Oversight
Board and AAFAF moved to dismiss these appeals as equitably
moot because the COFINA Plan has been consummated. On
February 8, 2021, the First Circuit dismissed the appeals of the
confirmation order. On November 17, 2021, the District Court
denied as moot BNY's motion to transfer venue to the District of
Puerto Rico and continued the stay of the action.

resolution of claim objections

Financial Oversight and Management Board for Puerto Rico v.
Public Buildings Authority (United States District Court,
District of Puerto Rico, No. 1:18-ap-00149, filed December 21,
2018). On December 21, 2018, the Oversight Board, together
with the Committee, as Plaintiffs, filed a complaint against the
Puerto Rico Public Buildings Authority (“PBA”) seeking
declaratory judgment that the leases between PBA and its
lessees-many of whom are agencies and instrumentalities of the
Commonwealth-are “disguised financings,” not true leases, and
therefore should not be afforded administrative expense priority
under the Bankruptcy Code. On March 12, 2019, AAC and
other interested parties were permitted to intervene in order to
argue that the PBA leases are valid leases, and are entitled to
administrative expense treatment under the Bankruptcy Code.
On June 16, 2019, the Oversight Board announced that it had
entered into a plan support agreement ("PSA") with certain
general obligation and PBA bondholders that includes a
proposed
issues
surrounding both general obligation and PBA bonds, including a
proposed settlement of this adversary proceeding. On July 24,
2019, the District Court referred this matter to mediation and
ordered it stayed during the pendency of such mediation. On
September 27, 2019, the Oversight Board filed a joint plan of
adjustment and disclosure statement for the Commonwealth,
PBA, and the Employees’ Retirement System for Puerto Rico.
On February 9, 2020, the Oversight Board executed a new plan
support agreement with additional creditors (the “Amended
PSA”) and announced that it intended to file, and to seek to
confirm, the Commonwealth Plan. On March 10, 2020, the
District Court ordered that this case be stayed while the
Oversight Board attempted to confirm the Commonwealth Plan.
The Commonwealth Plan resolves this litigation. Following
confirmation of the Commonwealth Plan, several parties filed
notices of appeal of the District Court’s confirmation order to
the First Circuit Court of Appeals. On February 1 and 4, 2022,
the Teachers’ Unions, APJ, and the Credit Unions moved for a
stay of the confirmation order while this appeal is pending. On
February 9 and February 11, 2022, a number of parties—
the stay motions,
including AAC—filed oppositions

to and

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

requesting, in the alternative, that the appealing parties seeking a
stay be required to post supersedeas bonds pending appeal. On
February 11, 2022, the District Court entered an order granting
APJ’s motion for voluntary dismissal of its appeal. The District
Court has taken the remaining stay motions on submission. On
February 17, 2022, the Oversight Board filed a notice of appeal
of the District Court’s confirmation order, seeking review of the
District Court’s finding regarding the nondischargeability of
certain claims arising under the Takings Clause of the U.S.
Constitution.

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Omnibus Objection of (I) Financial Oversight
and Management Board, Acting Through its Special Claims
Committee, and (II) Official Committee of Unsecured Creditors,
Pursuant to Bankruptcy Code Section 502 and Bankruptcy Rule
3007, to Claims Filed or Asserted by Holders of Certain
Commonwealth General Obligation Bonds (Dkt. No. 4784, filed
January 14, 2019) (“GO Bond Claim Objection”). On January
14, 2019, the Oversight Board and the Committee filed an
omnibus claim objection in the Commonwealth’s Title III case
challenging claims arising from certain general obligation bonds
issued by the Commonwealth in 2012 and 2014 totaling
approximately $6 billion, none of which are held or insured by
AAC. The court subsequently ordered certain consolidated
procedures permitting parties in interest an opportunity to
participate in litigation of the objection. On April 11, 2019,
AAC filed a notice of participation in support of the objection,
advancing the argument, among other things, that the PBA
leases are true leases, but the associated debt nonetheless should
be included in the Commonwealth’s debt ceiling calculation
such that the 2012 and 2014 general obligation bond issuances
are null and void and claims arising therefrom should be
disallowed. On June 16, 2019, the Oversight Board announced
that it had entered into a PSA with certain general obligation and
PBA bondholders that includes a proposed resolution of claim
objections to and issues surrounding both general obligation and
PBA bonds, including a proposed settlement of this omnibus
claim objection. On June 25, 2019, the Oversight Board moved
to stay proceedings related to this omnibus claim objection
while it pursues confirmation of the plan contemplated in the
PSA. On July 24, 2019, the District Court referred this matter to
mediation and ordered it stayed during the pendency of such
mediation. On February 5, 2020, certain parties filed motions to
dismiss the claim objection. On February 9, 2020, the Oversight
Board executed the Amended PSA and announced that it
intended to file, and to seek to confirm, the Commonwealth
Plan. Additional motions to dismiss were filed on February 19,
2020. On March 10, 2020, the District Court ordered that this
matter remain stayed while the Oversight Board attempted to
confirm the Commonwealth Plan. On July 19, 2020, the
Committee filed a motion to lift the stay on this claim objection
in light of the changes to the fiscal plan and likely changes to the
Commonwealth Plan in light of COVID-19. On September 1,
2020, AAC filed a partial joinder to the Committee’s motion.
On September 17, 2020,
the
Committee’s motion without prejudice, indicating that the stay
likely would remain in place until at least March 2021. On
October 1, 2020, the Committee moved the District Court to
reconsider its denial of the Committee’s motion to lift the stay in

the District Court denied

light of materials released by the parties to the Amended PSA
that the Committee argued demonstrate a lack of agreement
between those parties. On October 5, 2020, the District Court
denied the Committee’s motion for reconsideration. On October
16, 2020, the Committee appealed to the First Circuit the
District Court’s order denying the Committee’s motion to lift the
stay on its claim objection. On February 22, 2021, the First
Circuit dismissed the appeal. Following the filing of several
revised versions of the Commonwealth Plan, the Court held a
confirmation hearing in November 2021. On January 18, 2022,
the Court entered an order confirming the Commonwealth Plan,
as amended, and entered its findings of fact and conclusions of
law related thereto. The Commonwealth Plan resolves the GO
Bond Claim Objection. Following confirmation of
the
Commonwealth Plan, several parties filed notices of appeal of
the District Court’s confirmation order to the First Circuit Court
of Appeals. On February 1 and 4, 2022, the Teachers’ Unions,
APJ, and the Credit Unions moved for a stay of the confirmation
order while this appeal is pending. On February 9 and February
11, 2022, a number of parties—including AAC—filed
oppositions to the stay motions, requesting, in the alternative,
that the appealing parties seeking a stay be required to post
supersedeas bonds pending appeal. On February 11, 2022, the
District Court entered an order granting APJ’s motion for
voluntary dismissal of its appeal. The District Court has taken
the remaining stay motions on submission. On February 17,
2022, the Oversight Board filed a notice of appeal of the District
Court’s confirmation order, seeking review of the District
Court’s finding regarding the nondischargeability of certain
claims arising under
the U.S.
Constitution.

the Takings Clause of

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Ambac Assurance Corporation's Motion and
Memorandum of Law in Support of Its Motion Concerning
Application of the Automatic Stay to the Revenues Securing
PRIFA Rum Tax Bonds (Dkt. No. 7176, filed May 30, 2019)
(“PRIFA Stay Motion”). On May 30, 2019, AAC filed a motion
seeking an order that the automatic stay does not apply to certain
lawsuits AAC seeks to bring or to continue relating to bonds
issued by PRIFA, or, in the alternative, for relief from the
automatic stay to pursue such lawsuits or for adequate protection
of AAC's collateral. On July 2, 2020, the District Court denied
the motion to lift the stay on certain grounds. Briefing regarding
additional grounds on which AAC and other movants seek stay
relief concluded on August 5, 2020; on September 9, 2020, the
District Court denied the motion to lift the stay on the additional
grounds. On September 23, 2020, AAC and the other movants
appealed this decision to the First Circuit. On March 3, 2021, the
First Circuit affirmed the District Court’s opinions denying the
motion to lift the stay. On May 5, 2021, Assured and National
announced an agreement with the Oversight Board with respect
to the PRHTA/PRCCDA Settlement. On July 14, 2021, AAC
and FGIC reached an agreement in principle with the Oversight
Board with respect to the PRIFA Settlement. On August 2,
2021, the Oversight Board, AAC, FGIC, and the PRIFA bond
trustee jointly moved to stay this motion as a result of the
PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA
Settlement and the GO/PBA Settlement. On August 3, 2021, the
this motion be stayed. The
District Court ordered

that

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

Commonwealth Plan and the PRIFA QM (defined below)
resolve the PRIFA Stay Motion. Following confirmation of the
Commonwealth Plan, several parties filed notices of appeal of
the District Court’s confirmation order to the First Circuit Court
of Appeals. On February 1 and 4, 2022, the Teachers’ Unions,
APJ, and the Credit Unions moved for a stay of the confirmation
order while this appeal is pending. On February 9 and February
11, 2022, a number of parties—including AAC—filed
oppositions to the stay motions, requesting, in the alternative,
that the appealing parties seeking a stay be required to post
supersedeas bonds pending appeal. On February 11, 2022, the
District Court entered an order granting APJ’s motion for
voluntary dismissal of its appeal. The District Court has taken
the remaining stay motions on submission. On February 17,
2022, the Oversight Board filed a notice of appeal of the District
Court’s confirmation order, seeking review of the District
Court’s finding regarding the nondischargeability of certain
the U.S.
claims arising under
Constitution.

the Takings Clause of

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Motion of Assured Guaranty Corp., Assured
Municipal Corp., Ambac Assurance Corporation, National
Public Finance Guarantee Corporation, and Financial
Guaranty Insurance Company for Relief from the Automatic
Stay, or, in the Alternative, Adequate Protection (Dkt. No.
10102, filed January 16, 2020) (“PRHTA Stay Motion”).
Pursuant to an order of the District Court setting out an agreed
schedule for litigation submitted by the Mediation Team, on
January 16, 2020, AAC, together with Assured Guaranty Corp.,
Assured Municipal Corp., National Public Finance Guarantee
Corporation, and Financial Guaranty Insurance Company filed a
motion seeking an order that the automatic stay does not apply
to movants’ enforcement of the application of pledged revenues
to the PRHTA bonds or the enforcement of movants’ liens on
revenues pledged to such bonds, or, in the alternative, for
adequate protection of movants’ interests in the revenues
pledged to PRHTA bonds. On July 2, 2020, the District Court
denied the motion to lift the stay on certain grounds. Briefing
regarding additional grounds on which AAC and other movants
seek stay relief concluded on August 5, 2020; on September 9,
2020, the District Court denied the motion to lift the stay on the
additional grounds. On September 23, 2020, AAC and the other
movants appealed this decision to the First Circuit. On March 3,
2021, the First Circuit affirmed the District Court’s opinions
denying the motion to lift the stay. On May 5, 2021, Assured
and National announced an agreement with the Oversight Board
with respect to the PRHTA/PRCCDA Settlement. On May 11,
2021, the Oversight Board, Assured, and National jointly moved
to stay this case with respect to Assured and National as a result
of the PRHTA/PRCCDA Settlement. AAC and FGIC objected
to the motion to stay on May 18, 2021, and briefing on the
motion to stay concluded on May 21, 2021. On May 25, 2021,
the District Court ordered this case stayed with respect to
Assured and National as a result of the PRHTA/PRCCDA
Settlement. On July 14, 2021, AAC and FGIC reached an
agreement in principle with the Oversight Board with respect to
the PRIFA Settlement. On August 2, 2021, the Oversight
Board, AAC, FGIC, and the PRHTA fiscal agent jointly moved
to stay this motion as a result of the PRIFA Settlement and

AAC’s joinder to the PRHTA/PRCCDA Settlement and the GO/
PBA Settlement. On August 3, 2021, the District Court ordered
that this motion be stayed. The Commonwealth Plan resolves
the PRHTA Stay Motion. Following confirmation of the
Commonwealth Plan, several parties filed notices of appeal of
the District Court’s confirmation order to the First Circuit Court
of Appeals. On February 1 and 4, 2022, the Teachers’ Unions,
APJ, and the Credit Unions moved for a stay of the confirmation
order while this appeal is pending. On February 9 and February
11, 2022, a number of parties—including AAC—filed
oppositions to the stay motions, requesting, in the alternative,
that the appealing parties seeking a stay be required to post
supersedeas bonds pending appeal. On February 11, 2022, the
District Court entered an order granting APJ’s motion for
voluntary dismissal of its appeal. The District Court has taken
the remaining stay motions on submission. On February 17,
2022, the Oversight Board filed a notice of appeal of the District
Court’s confirmation order, seeking review of the District
Court’s finding regarding the nondischargeability of certain
claims arising under
the U.S.
Constitution.

the Takings Clause of

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Ambac Assurance Corporation, Financial
Guaranty Insurance Company, Assured Guaranty Corp.,
Assured Municipal Corp., and the Bank of New York Mellon’s
Motion Concerning Application of the Automatic Stay to the
Revenues Securing the CCDA Bonds (Dkt. No. 10104, filed
January 16, 2020) (“PRCCDA Stay Motion”). Pursuant to an
order of the District Court setting out an agreed schedule for
litigation submitted by the Mediation Team, on January 16,
2020, AAC,
together with Financial Guaranty Insurance
Company, Assured Guaranty Corp., Assured Municipal Corp.,
and the PRCCDA bond trustee, filed a motion seeking an order
either (i) that the automatic stay does not apply to movants’
enforcement of their rights to revenues pledged to PRCCDA
bonds by bringing an enforcement action against PRCCDA; or,
in the alternative, (ii) lifting the automatic stay to enable
movants to pursue an enforcement action against PRCCDA; or,
in the further alternative, (iii) ordering adequate protection of
movants’ interests in the PRCCDA pledged to PRCCDA bonds.
On July 2, 2020, the District Court denied the motion to lift the
stay on certain grounds, but found that the movants had stated a
colorable claim that a certain account was the “Transfer
Account” on which movants hold a lien. Briefing regarding
additional grounds on which AAC and other movants seek stay
relief concluded on August 5, 2020; on September 9, 2020, the
District Court denied the motion to lift the stay on the additional
grounds, and found that a final determination on issues related to
the identity of the Transfer Account would be made in the
decision on the motions for summary judgment issued in the
PRCCDA-related adversary proceeding, No. 20-ap-00004. On
May 5, 2021, Assured and National announced an agreement
with the Oversight Board with respect to the PRHTA/PRCCDA
Settlement. On May 11, 2021, the Oversight Board, Assured,
and National jointly moved to stay this case with respect to
Assured and National as a result of the PRHTA/PRCCDA
Settlement. AAC and FGIC objected to the motion to stay on
May 18, 2021, and briefing on the motion to stay concluded on
May 21, 2021. On May 25, 2021, the District Court ordered this

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

that

case stayed with respect to Assured and National as a result of
the PRHTA/PRCCDA Settlement. On July 14, 2021, AAC and
FGIC reached an agreement in principle with the Oversight
Board with respect to the PRIFA Settlement. On August 2,
2021, the Oversight Board, AAC, FGIC, and the PRCCDA bond
trustee jointly moved to stay this motion as a result of the
PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA
Settlement and the GO/PBA Settlement. On August 3, 2021, the
this motion be stayed. The
District Court ordered
Commonwealth Plan and the PRCCDA QM (defined below)
resolve the PRCCDA Stay Motion. Following confirmation of
the Commonwealth Plan, several parties filed notices of appeal
of the District Court’s confirmation order to the First Circuit
Court of Appeals. On February 1 and 4, 2022, the Teachers’
Unions, APJ, and the Credit Unions moved for a stay of the
confirmation order while this appeal is pending. On February 9
and February 11, 2022, a number of parties—including AAC—
filed oppositions to the stay motions, requesting, in the
alternative, that the appealing parties seeking a stay be required
to post supersedeas bonds pending appeal. On February 11,
2022, the District Court entered an order granting APJ’s motion
for voluntary dismissal of its appeal. The District Court has
taken the remaining stay motions on submission. On February
17, 2022, the Oversight Board filed a notice of appeal of the
District Court’s confirmation order, seeking review of the
District Court’s finding regarding the nondischargeability of
certain claims arising under the Takings Clause of the U.S.
Constitution.

Ambac Assurance Corporation v. Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Citigroup Global Markets Inc., Goldman
Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley
& Co. LLC, Oriental Financial Services LLC; Popular Securities
LLC; Raymond James & Associates, Inc., RBC Capital Markets
LLC; Samuel A. Ramirez & Co. Inc., Santander Securities LLC;
UBS Financial Services Inc.; and UBS Securities LLC
(Commonwealth of Puerto Rico, Court of First Instance, San
Juan Superior Court, Case No. SJ-2020-CV-01505, filed
February 19, 2020). On February 19, 2020, AAC filed a
complaint in the Commonwealth of Puerto Rico, Court of First
Instance, San Juan Superior Court, against certain underwriters
of Ambac-insured bonds issued by PRIFA and PRCCDA, with
causes of action under the Puerto Rico civil law doctrines of
actos propios and Unilateral Declaration of Will. AAC alleges
defendants engaged in inequitable conduct in underwriting
issued by PRIFA and PRCCDA,
Ambac-insured bonds
including failing to investigate and adequately disclose material
information in the official statements for the bonds that
defendants provided to AAC regarding systemic deficiencies in
the Commonwealth’s financial reporting. AAC seeks damages
in compensation for claims paid by AAC on its financial
guaranty insurance policies insuring such bonds, pre-judgment
and post-judgment interest, and attorneys’ fees. On March 20,
2020, defendants removed this case to the Title III Court. On
April 20, 2020, AAC moved to remand the case back to the
Court of First Instance. On July 29, 2020, the District Court
granted AAC’s motion
the
Commonwealth court. AAC filed an amended complaint in the
Commonwealth court on October 28, 2020. In the Amended
Complaint, AAC added claims on bonds issued by the
Commonwealth, PBA and PRHTA and added defendants that

the case

remand

had underwritten these bonds. Defendants filed motions to
dismiss on December 8 and 14, 2020. On July 30, 2021, the
Commonwealth court granted defendants’ motions to dismiss.
AAC filed its appeal of the dismissal in the Commonwealth
Court of Appeals on September 16, 2021.

for

Ambac Assurance Corporation v. Autopistas Metropolitanas de
Puerto Rico, LLC (United States District Court, District of
Puerto Rico, No. 3:20-cv-01094, filed February 19, 2020). On
February 19, 2020, AAC filed a complaint in the U.S. District
Court for the District of Puerto Rico, against Autopistas
Metropolitanas de Puerto Rico, LLC (“Metropistas”), which
holds a concession from PRHTA for two Puerto Rico highways,
PR-5 and PR-22, in connection with a 10-year extension of the
concession that was entered into in April 2016. The complaint
includes claims
fraudulent conveyance and unjust
enrichment, alleging that the consideration paid by Metropistas
for the extension was less than reasonably equivalent value and
most of the benefit of such payment was received by the
Commonwealth instead of PRHTA.
AAC also seeks a
declaratory judgment that it has a valid and continuing lien on
certain toll revenues that are being collected by Metropistas. On
March 31, 2020, the Oversight Board filed a motion before the
Title III Court seeking an order directing Ambac to withdraw its
complaint. On April 20, 2020, the District Court ordered this
case stayed pending briefing before the Title III Court on the
Oversight Board’s motion to withdraw. On June 16, 2020, the
Title III Court ordered AAC to withdraw its complaint. AAC
withdrew its complaint on June 23, 2020, and noticed an appeal
from the Title III Court’s order to withdraw on June 30, 2020.
AAC’s opening appeal brief was filed before the First Circuit on
October 19, 2020; briefing was completed on February 12, 2021,
and oral argument was held on March 8, 2021. On August 2,
2021, the Oversight Board, AAC, and Metropistas jointly moved
to stay this appeal as a result of the PRIFA Settlement and
AAC’s joinder to the PRHTA/PRCCDA Settlement and the GO/
PBA Settlement. On August 4, 2021, the First Circuit ordered
that this appeal be stayed. On January 25, 2022, the First Circuit
granted the parties’ request for a continuation of the stay
pending the consummation of certain transactions contemplated
by the PRHTA/PRCCDA Settlement.

Ambac Assurance Corporation v. Financial Oversight and
Management Board for Puerto Rico (United States District
Court, District of Puerto Rico, No. 3:20-ap-00068, filed May 26,
2020). On May 26, 2020, AAC filed an adversary complaint
before the Title III Court seeking (i) a declaration that titles I, II,
and III of PROMESA are unconstitutional because they violate
the Bankruptcy Clause of the U.S. Constitution (which requires
all bankruptcy laws to be uniform) and (ii) dismissal of the
pending Title III petitions. On August 17, 2020, the Oversight
Board filed a motion to dismiss the complaint; on August 18,
2020, the Official Committee of Retired Employees of the
Commonwealth of Puerto Rico (the “Retiree Committee”) and
the Puerto Rico Fiscal Agency and Financial Advisory Authority
(“AAFAF”) filed joinders to the motion to dismiss. The United
States filed a memorandum of
the
constitutionality of PROMESA on October 2, 2020. On August
2, 2021, the Oversight Board, AAC, FGIC, and the PRCCDA
bond trustee jointly moved to stay this case as a result of the
PRIFA Settlement and AAC’s joinder to the PRHTA/PRCCDA

in support of

law

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

litigation.

Settlement and the GO/PBA Settlement. On August 3, 2021, the
this case be stayed. The
District Court ordered
that
Commonwealth Plan resolves
Following
this
confirmation of the Commonwealth Plan, several parties filed
notices of appeal of the District Court’s confirmation order to
the First Circuit Court of Appeals. On February 1 and 4, 2022,
the Teachers’ Unions, APJ, and the Credit Unions moved for a
stay of the confirmation order while this appeal is pending. On
February 9 and February 11, 2022, a number of parties—
including Ambac—filed oppositions to the stay motions,
requesting, in the alternative, that the appealing parties seeking a
stay be required to post supersedeas bonds pending appeal. On
February 11, 2022, the District Court entered an order granting
APJ’s motion for voluntary dismissal of its appeal. The District
Court has taken the remaining stay motions on submission. On
February 17, 2022, the Oversight Board filed a notice of appeal
of the District Court’s confirmation order, seeking review of the
District Court’s finding regarding the nondischargeability of
certain claims arising under the Takings Clause of the U.S.
Constitution.

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Urgent Motion for Bridge Order, and Motion
for Appointment as Trustees Under 11 U.S.C. § 926, of Ambac
Assurance Corporation, Assured Guaranty Corp., Assured
Guaranty Municipal Corp., Financial Guaranty Insurance
Company, and National Public Finance Guarantee Corporation
(Dkt. No. 13708, filed July 17, 2020) (“PRHTA Trustee
Motion”). On July 17, 2020, AAC, together with Assured
Guaranty Corporation, Assured Guaranty Municipal
Corporation, and Financial Guaranty Insurance Company, filed
a motion seeking appointment as trustees under Section 926 of
the Bankruptcy Code to pursue certain avoidance actions on
behalf of PRHTA against the Commonwealth of Puerto Rico.
The PRHTA Trustee Motion attached a proposed complaint
detailing the avoidance claims that movants would pursue. On
August 11, 2020, the District Court denied the PRHTA Trustee
Motion; on August 24, 2020, movants noticed an appeal of the
denial of the PRHTA Trustee Motion to the First Circuit.
Movants’ opening brief before the First Circuit was filed on
February 17, 2021. Briefing at the First Circuit concluded on
June 4, 2021. On July 29, 2021, AAC, FGIC, Assured, and
National jointly moved to dismiss the appeal at the First Circuit
as a result of the PRHTA/PRCCDA Settlement and the PRIFA
Settlement. On July 30, 2021, the First Circuit dismissed the
appeal.

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17-bk-03283), Objection of Ambac Assurance Corporation,
Pursuant to Bankruptcy Code Section 502 and Bankruptcy Rule
3007, to Claim Asserted by the Official Committee of Retired
Employees of the Commonwealth of Puerto Rico Appointed in
the Commonwealth’s Title III Case (Dkt. No. 16884, filed June
3, 2021) (“Pension Claim Objection”). On June 3, 2021, AAC
filed a claim objection in the Commonwealth’s Title III case
challenging the amount of the claim filed by the Retiree
Committee against the Commonwealth, which asserted pension
liabilities of at least $58.5 billion. AAC contended that this
asserted pension liability was overstated by at least $9 billion,

and sought disallowance of the Retiree Committee’s proof of
claim to the extent of the overstatement. On June 17, 2021, the
Oversight Board and the Retiree Committee each indicated an
intention to move to terminate the Pension Claim Objection.
The Oversight Board contended that AAC lacked standing to
bring the Pension Claim Objection and that the objection is
moot; the Retiree Committee contended that the Pension Claim
Objection should be addressed at confirmation. AAC responded
on June 21, 2021. On June 22, 2021, the District Court denied
the Pension Claim Objection without prejudice, directing the
parties to meet and confer on an appropriate schedule for
litigating the issues underlying the Pension Claim Objection.
On August 2, 2021, the Oversight Board and AAC jointly
moved to stay this matter as a result of the PRIFA Settlement
and AAC’s joinder to the PRHTA/PRCCDA Settlement and the
GO/PBA Settlement. On August 3, 2021, the District Court
ordered that this matter be stayed. The Commonwealth Plan
the
resolves
Commonwealth Plan, several parties filed notices of appeal of
the District Court’s confirmation order to the First Circuit Court
of Appeals. On February 1 and 4, 2022, the Teachers’ Unions,
APJ, and the Credit Unions moved for a stay of the confirmation
order while this appeal is pending. On February 9 and February
11, 2022, a number of parties—including Ambac—filed
oppositions to the stay motions, requesting, in the alternative,
that the appealing parties seeking a stay be required to post
supersedeas bonds pending appeal. On February 11, 2022, the
District Court entered an order granting APJ’s motion for
voluntary dismissal of its appeal. The District Court has taken
the remaining stay motions on submission. On February 17,
2022, the Oversight Board filed a notice of appeal of the District
Court’s confirmation order, seeking review of the District
Court’s finding regarding the nondischargeability of certain
claims arising under
the U.S.
Constitution.

Following confirmation of

the Takings Clause of

this matter.

In re Puerto Rico Infrastructure Financing Authority (United
States District Court, District of Puerto Rico, No. 21-cv-1492)
(the “PRIFA Title VI Proceedings”). On October 8, 2021, the
Oversight Board filed its application for approval of the
proposed Title VI Qualifying Modification for PRIFA (the
“PRIFA QM”). The hearing to consider approval of the PRIFA
QM was held on November 23, 2021. On January 20, 2022, the
Court entered orders approving the PRIFA QM and directing the
closure of the PRIFA Title VI Proceedings.

In re Puerto Rico Convention Center District Authority (United
States District Court, District of Puerto Rico, No. 21-cv-1493)
(the “PRCCDA Title VI Proceedings”). On October 8, 2021, the
Oversight Board filed its application for approval of the
proposed Title VI Qualifying Modification for PRCCDA (the
“PRCCDA QM”). The hearing to consider approval of the
PRCCDA QM was held on November 23, 2021. On January 20,
2022, the Court entered orders approving the PRCCDA QM and
directing the closure of the PRCCDA Title VI Proceedings.

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17- bk-03283), Monolines’ Reply to the Objection of the DRA
Parties to the Seventh Amended Title III Joint Plan of
Adjustment of the Commonwealth of Puerto Rico et al. (Dkt.

| Ambac Financial Group, Inc. 135 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

No. 18873, filed October 27, 2021). On July 30, 2021, the
Oversight Board filed the Seventh Amended Title III Joint Plan
of Adjustment of the Commonwealth of Puerto Rico et al. (the
“Seventh Amended Plan”) (Dkt. No. 17627). On October 8,
2021, the Oversight Board filed the Proposed Order and
Judgment Confirming Seventh Amended Title III Joint Plan of
Adjustment of the Commonwealth of Puerto Rico, et al. (the
“Proposed Confirmation Order”) (Dkt. No 18447). On October
19, 2021, the GDB Debt Recovery Authority and Cantor-Katz
Collateral Monitor LLC (together, the “DRA Parties”) filed their
objection to the Seventh Amended Plan (Dkt. No. 18590). On
October 27, 2021, AAC joined the Monolines in filing a reply in
response to the DRA Parties’ objection to the Seventh Amended
Plan. On November 5, 2021, the Oversight Board filed a motion
notifying the court of its settlement with the DRA Parties. The
motion requested that the court change the DRA Parties’ votes
to reflect their acceptance of the plan and attached a stipulation
providing, among other things, that the DRA Parties would
withdraw their confirmation objections. On November 8, 2021,
the District Court entered an order granting the motion
requesting to change the DRA Parties’ votes, and the DRA
Parties withdrew their plan objection and related filings.

response

the filing of several revised versions of

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17- bk-03283), Monolines’ Reply to Underwriter Defendants’
Objection to Plan and Proposed Confirmation Order (Dkt. No.
18871), filed October 27, 2021). On July 30, 2021, the
Oversight Board filed the Seventh Amended Plan. On October
8, 2021, the Oversight Board filed the Proposed Confirmation
Order. On October 19, 2021, certain banks, underwriters, and
professionals involved in the underwriting of bonds issued or
guaranteed by the Commonwealth and its instrumentalities (the
“Underwriter Defendants”) filed their objection to the Seventh
Amended Plan and Proposed Confirmation Order (Dkt. No.
18587). On October 27, 2021, AAC and FGIC filed their reply
the Underwriter Defendants’ objection.
in
Following
the
Commonwealth Plan, the Court held a confirmation hearing in
November 2021. On January 18, 2022, the Court entered an
order confirming the Commonwealth Plan, as amended, and
entered its findings of fact and conclusions of law related
thereto. Following confirmation of the Commonwealth Plan,
several parties filed notices of appeal of the District Court’s
confirmation order to the First Circuit Court of Appeals. On
February 1 and 4, 2022, the Teachers’ Unions, APJ, and the
Credit Unions moved for a stay of the confirmation order while
this appeal is pending. On February 9 and February 11, 2022, a
number of parties—including Ambac—filed oppositions to the
stay motions, requesting, in the alternative, that the appealing
parties seeking a stay be required to post supersedeas bonds
pending appeal. On February 11, 2022, the District Court
entered an order granting APJ’s motion for voluntary dismissal
of its appeal. The District Court has taken the remaining stay
motions on submission. On February 17, 2022, the Oversight
the District Court’s
Board filed a notice of appeal of
confirmation order, seeking review of the District Court’s
finding regarding the nondischargeability of certain claims
arising under the Takings Clause of the U.S. Constitution.

In re Financial Oversight and Management Board for Puerto
Rico (United States District Court, District of Puerto Rico, No.
1:17- bk-03567). On May 21, 2017, the Oversight Board filed a
petition to adjust PRHTA’s debts under Title III of PROMESA,
resulting in an automatic stay of litigation against PRHTA.

RMBS Litigation
In connection with AAC’s efforts to seek redress for breaches of
representations and warranties and fraud related
the
information provided by both the underwriters and the sponsors
of various transactions and for failure to comply with the
obligation by the sponsors to repurchase ineligible loans, AAC
has filed various lawsuits:

fraudulent

• Ambac Assurance Corporation and The Segregated
Account of Ambac Assurance Corporation v. First Franklin
Financial Corporation, Bank of America, N.A., Merrill
Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch
Mortgage Lending, Inc., and Merrill Lynch Mortgage
Investors, Inc. (Supreme Court of the State of New York,
County of New York, Case No. 651217/2012, filed
April 16, 2012). AAC has asserted claims for breach of
contract,
indemnification,
reimbursement and has requested the repurchase of loans
that breach representations and warranties as required
under the contracts. On July 18, 2013 the court granted in
part and denied in part Defendants’ motion to dismiss (filed
on July 13, 2012). The court dismissed AAC’s claims for
indemnification and limited AAC’s claim for breach of
loan-level warranties to the repurchase protocol, but denied
dismissal of AAC’s other contractual claims and fraudulent
inducement claim. Discovery has been completed. AAC’s
deadline to file a note of issue is April 28, 2022, and
summary judgment motions are due on June 27, 2022.

inducement,

• Ambac Assurance Corporation and The Segregated
Account of Ambac Assurance Corporation v. Countrywide
Securities Corp., Countrywide Financial Corp. (a.k.a. Bank
of America Home Loans) and Bank of America Corp.
(Supreme Court of the State of New York, County of New
York, Case No. 651612/2010, filed on September 28,
2010). AAC’s Second Amended Complaint, filed on May
28, 2013, asserted claims against Countrywide and Bank of
America (as successor to Countrywide’s liabilities) for,
among other things, breach of contract and fraudulent
inducement. In August and October 2018, Defendants filed
various pre-trial motions, including a motion seeking to
limit the loans for which AAC may seek to recover
damages. On December 30, 2018, the court denied all of
these pre-trial motions in their entirety and Defendants
appealed. On September 17, 2019, the First Department
affirmed in part and reversed in part the trial court’s
rulings. As part of this decision, the First Department
affirmed the denial of the motion seeking to limit the loans
for which AAC may seek to recover damages. An appeal is
currently pending at the New York Court of Appeals in an
unrelated RMBS case involving a similar issue. On October
17, 2019, Countrywide filed a motion for leave to appeal
certain issues to the New York Court of Appeals and for
reargument or leave to appeal certain other issues. On
January 16, 2020, the First Department recalled and

| Ambac Financial Group, Inc. 136 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

vacated its September 17, 2019 decision and order and
substituted a new decision and order. On the same date, the
First Department denied Countrywide’s motion seeking
leave to appeal, without prejudice to seeking such leave
from the reissued decision and order. On January 30, 2020,
Countrywide filed a new motion for leave to appeal the
First Department’s denial of its motions, which AAC
opposed. On June 11, 2020, the First Department denied
Countrywide’s motion for leave to appeal. On January 14,
2020, the trial court granted AAC’s motion to supplement
and amend certain of its expert reports. After supplemental
expert discovery, on August 12, 2020, Countrywide filed a
motion to dismiss, or in the alternative for summary
judgment on, AAC’s fraud claim and on December 4, 2020,
the Court granted Countrywide’s motion, resulting in
dismissal of AAC's fraud claim. On May 11, 2021, the
First Department affirmed the dismissal of AAC’s fraud
claim. Trial of this matter is scheduled to commence on
September 7, 2022.

• Ambac Assurance Corporation and The Segregated
Account of Ambac Assurance Corporation v. Nomura
Credit & Capital, Inc. and Nomura Holding America Inc.
(Supreme Court of the State of New York, County of New
York, Case No. 651359/2013, filed on April 15, 2013).
AAC has asserted claims for material breach of contract
and has requested the repurchase of loans that breach
representations and warranties under the contracts. AAC
also asserted alter ego claims against Nomura Holding
America, Inc. Defendants filed a motion to dismiss on July
12, 2013. On September 22, 2014, plaintiffs filed an
amended complaint which added (in addition to the claims
previously asserted) a claim for fraudulent inducement. On
October 31, 2014 defendants filed a motion to strike the
amended complaint and on November 10, 2014 also filed a
motion to dismiss the fraudulent-inducement claim. On
June 3, 2015, the court denied defendants’ July 2013
motion
for breaches of
representations and warranties, but granted the defendants’
motion to dismiss AAC’s claims for breach of the
repurchase protocol and for alter ego liability against
Nomura Holding. On December 29, 2016, the court denied
Nomura’s motion to strike AAC’s amended complaint and
its motion to dismiss the fraudulent-inducement claim.
Nomura appealed the June 2015 decision to the extent it
denied its motion to dismiss, filing its opening appellate
brief on March 23, 2017. On December 7, 2017, the First
Department affirmed the trial court’s June 3, 2015 decision.
On August 25, 2021, AAC filed a note of issue demanding
a jury for its fraud claim and a bench trial for its breach-of-
contract claim. On August 31, 2021, Nomura filed a jury
demand for AAC’s breach-of-contract claim. On December
21, 2021, the parties filed motions for summary judgment.

to dismiss AAC’s claim

• Ambac Assurance Corporation and the Segregated Account
of Ambac Assurance Corporation v. Countrywide Home
Loans, Inc. (Supreme Court of the State of New York,
County of New York, Case No. 652321/2015, filed on June
30, 2015). On June 30, 2015, AAC and the Segregated
Account filed a Summons with Notice in New York
Supreme Court (the “2015 New York Action”), asserting
claims identical to claims they asserted in a litigation filed

on December 30, 2014 in Wisconsin Circuit Court for Dane
County, Case No 14 CV 3511 (the “Wisconsin Action”).
Specifically, in each action AAC asserted a claim for
fraudulent inducement in connection with its issuance of
insurance policies relating to five residential mortgage-
backed securitizations that are not the subject of AAC’s
previously filed lawsuit against the same defendant. On
July 21, 2015, plaintiffs filed a complaint in the 2015 New
York Action and a motion to stay the 2015 New York
Action pending appeal and litigation of the Wisconsin
Action. Countrywide opposed plaintiffs’ motion to stay and
on August 10, 2015, Countrywide filed a motion to dismiss
the complaint. On September 20, 2016, the court granted
AAC’s motion to stay and held Countrywide’s motion to
dismiss in abeyance pending resolution of the Wisconsin
Action. Following the dismissal of the Wisconsin Action
on March 13, 2018, the court in the 2015 New York Action
its stay on March 30, 2018, and restored
vacated
Countrywide’s motion to dismiss to the calendar. On
December 8, 2020, the court granted Countrywide’s motion
to dismiss the complaint. AAC filed a notice of appeal
from this decision on January 7, 2021. The court entered
judgment in Countrywide’s favor on January 29, 2021 and
AAC filed a notice of appeal from the judgment on
February 2, 2021. On February 8, 2022, the decision
granting the motion to dismiss was affirmed.

• Ambac Assurance Corporation and the Segregated Account
of Ambac Assurance Corporation v. Countrywide Home
Loans, Inc., Countrywide Securities Corp., Countrywide
Financial Corp., and Bank of America Corp. (Supreme
Court of the State of New York, County of New York,
Case No. 653979/2014, filed on December 30, 2014).
AAC asserted a claim for fraudulent inducement in
connection with AAC’s issuance of insurance policies
relating to eight residential mortgage-backed securitizations
that are not the subject of AAC’s previously filed lawsuits
against the same defendants. On February 20, 2015, the
Countrywide defendants filed a motion to dismiss the
complaint, which Bank of America joined on February 23,
2015. On December 20, 2016, the court denied defendants’
motion to dismiss. Discovery has been completed, and
AAC filed a note of issue on November 30, 2021.
Countrywide filed a motion for summary judgment on
February 18, 2022, which will be fully submitted on or
about May 4, 2022.

two actions

• Ambac Assurance Corporation v. U.S. Bank National
Association (United States District Court, Southern District
of New York, Docket No. 18-cv-5182 (LGS), filed June 8,
2018 (the “SDNY Action”)); In the matter of HarborView
Mortgage Loan Trust 2005-10 (Minnesota state court,
Docket No. 27-TR-CV-17-32 (the “Minnesota Action”)).
These
to U.S. Bank National
Association’s (“U.S. Bank”) acceptance of a proposed
settlement in a separate litigation that U.S. Bank is
prosecuting, as trustee, related to the Harborview Mortgage
Loan Trust, Series 2005-10 (“Harborview 2005-10”), a
residential mortgage-backed securitization for which AAC
issued an insurance policy. On March 6, 2017, U.S. Bank
filed a petition commencing the Minnesota Action, a trust
instruction proceeding in Minnesota state court concerning

relate

| Ambac Financial Group, Inc. 137 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar Amounts in Millions, Except Share Amounts)

• In re application of Deutsche Bank National Trust
Company as Trustee of the Harborview Mortgage Loan
Trust Mortgage Loan Pass-Through Certificates, Series
2006-9 (Supreme Court of the State of New York, County
of New York, No. 654208/2018), filed August 23, 2018
(the “Trust Instruction Proceeding”). This action relates to
Deutsche Bank National Trust Company’s (“DBNT”)
proposed settlement of claims related to the Harborview
(“Harborview
Mortgage Loan Trust Series 2006-9
2006-9”). On August 23, 2018, DBNT filed a Petition
commencing the Trust Instruction Proceeding, seeking
judicial instruction pursuant to CPLR Article 77, inter alia,
to accept the proposed settlement with respect of claims
relating to Harborview 2006-9. On November 2, 2018,
AAC and other interested persons filed notices of intention
to appear and answers to DBNT’s petition. AAC sought a
period of discovery before resolution on the merits.
Discovery is now complete. Under the operative case
schedule, merits briefing was completed on January 12,
2021. On April 21, 2021, AAC and another interested party
sought leave to file a joint surreply in further opposition to
DBNT’s petition. The court has not yet scheduled a hearing
or oral argument.

the proposed settlement, and on June 12, 2017, U.S. Bank
filed an amended petition. AAC filed a motion to dismiss
the Minnesota Action, which was denied on November 13,
2017, and the denial was affirmed on appeal. On September
6, 2018, U.S. Bank filed its Second Amended Petition, and
AAC and certain other certificateholders objected to, or
otherwise responded to, the petition. On January 14, 2022,
U.S. Bank filed its Third Amended Petition. Trial is
scheduled for May 2, 2022. On June 8, 2018, AAC filed the
SDNY Action asserting claims arising out of U.S. Bank’s
acceptance of the proposed settlement and treatment of
trust recoveries. AAC asserted claims for declaratory
judgment, breach of contract, and breach of fiduciary duty.
On July 16, 2019, the court dismissed AAC's breach-of-
contract and breach-of-fiduciary-duty claims based on U.S.
Bank's acceptance of the settlement; and dismissed AAC's
declaratory judgment claims regarding the occurrence of an
Event of Default and U.S. Bank's future distribution of trust
recoveries through the waterfall. The court denied the
motion to dismiss AAC's breach-of-contract claims based
on U.S. Bank's past distribution of trust recoveries through
the waterfall. On January 17, 2020, U.S. Bank moved for
summary judgment regarding the remaining claim relating
to distributions. On February 7, 2020, AAC cross-moved
for summary judgment. On December 7, 2020, the court
issued a decision granting in part and denying in part the
parties’ cross-motions for summary judgment. The court
granted U.S. Bank’s motion for summary judgment with
respect to Ambac’s repayment right in the trust waterfall,
and granted Ambac’s motion for summary judgment with
respect to the use of a write-up first method and the
On
offsetting of recoveries against realized losses.
December 22, 2020, the court entered final judgment
consistent with its prior decisions, and awarded AAC
nominal damages. On January 12, 2021, AAC appealed
that judgment. On December 20, 2021, Second Circuit
Court of Appeals affirmed the district court's decision.

• Ambac Assurance Corporation v. U.S. Bank National
Association (United States District Court, Southern District
of New York, Docket No. 17-cv-02614, filed April 11,
2017). AAC has asserted claims for breach of contract,
breach of fiduciary duty, declaratory
judgment, and
violation of the Streit Act in connection with defendant’s
failure to enforce rights and remedies and defendant’s
treatment of trust recoveries, as trustee of five residential
mortgage-backed securitizations for which AAC issued
insurance policies. On September 15, 2017, U.S. Bank filed
a motion to dismiss. On June 29, 2018, the court granted in
part and denied in part U.S. Bank’s motion to dismiss. The
court dismissed the breach-of-fiduciary duty claim in part
as duplicative of the breach-of-contract claim; dismissed
the breach-of-contract claim as untimely only to the extent
that it was premised on U.S. Bank's obligation to certify
that mortgage documents were properly delivered to the
Trusts; dismissed the Streit Act claims; and otherwise
denied the motion to dismiss. Fact discovery and Phase 1
expert discovery have concluded, and the parties filed
partial summary judgment motions on Phase 1 issues on
November 9, 2021. Briefing on those motions has been
completed.

| Ambac Financial Group, Inc. 138 2021 FORM 10-K |

Item 9. Changes in and Disagreements with

Accountants on Accounting and
Financial Disclosure — None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Ambac’s
disclosure controls and procedures are designed to ensure that
information required to be disclosed under the Securities
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in
the SEC’s rules and forms, including without limitation that
information required to be disclosed by Ambac in its SEC filings
is accumulated and communicated to management, including the
Chief Executive Officer (CEO) and Chief Financial Officer
(CFO) as appropriate to allow for timely decisions regarding
required disclosure.

Ambac’s Disclosure Committee assists the CEO and CFO in
their responsibilities to design, establish, maintain and evaluate
the effectiveness of disclosure controls and procedures. The
Disclosure Committee is responsible for, among other things,
the oversight, maintenance and implementation of the disclosure
controls and procedures, subject to the supervision and oversight
of the CEO and CFO. Ambac’s management, with the
participation 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 December 31, 2021 and, the CEO
and CFO have concluded that at that date Ambac’s disclosure
controls and procedures were effective at the reasonable
assurance level.

its CEO and CFO, has evaluated

Management of Ambac

Management’s Report on Internal Control Over Financial
Reporting.
is responsible for
establishing and maintaining adequate internal control over
financial reporting. Ambac’s internal control over financial
reporting is a process designed under the supervision of the CEO
and CFO and overseen by Ambac’s Board of Directors to
provide reasonable assurance regarding
the reliability of
financial reporting and the preparation of Ambac’s financial
statements for external reporting purposes in accordance with
U.S. generally accepted accounting principles. Ambac’s internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of assets of Ambac; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of Ambac; and
(iii) provide reasonable assurance regarding the prevention or
timely detection and remediation of unauthorized acquisition,
use or disposition of Ambac’s assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal controls over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

the
Ambac management conducted an assessment of
effectiveness of Ambac’s
internal control over financial
reporting based on the criteria established in the Internal Control
— Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

recognizes

Ambac management
that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives.
Based on its evaluations, Ambac's management have concluded
that, as of December 31, 2021, our internal control over
financial reporting was effective based on the criteria articulated
in the 2013 Internal Control - Integrated Framework. The
effectiveness of our internal control over financial reporting as
of December 31, 2021 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their
report, which expressed an unqualified opinion on
the
effectiveness of Ambac’s
internal control over financial
reporting.

Changes in Internal Control Over Financial Reporting.
There were no changes in the Company’s internal control over
financial reporting that occurred during the fourth quarter of
2021 that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting. We have not experienced any significant change to
our internal controls over financial reporting despite the fact that
our employees are, at times, working remotely due to the
COVID-19 pandemic. We are continually monitoring and
assess the COVID-19 situation on our internal controls to
minimize the impact on their design and operating effectiveness.

Item 9B. Other Information

Pursuant Ambac’s director compensation program, non-
employee directors receive both cash and restricted stock units.
The restricted stock units are awarded on a quarterly basis on or
about the second business day following the issuance of the
Company quarterly earnings release. These quarterly grants vest
on the one-year anniversary of the grant date, subject to
accelerated vesting in certain circumstances. In February of
2022,
and Nominating Committee
recommended, and the Board of Directors approved, a change to
fix the quarterly grant dates to be the first business day of each
calendar quarter. This change in the timing of the grant dates
will commence on April 1, 2022.

the Governance

PART III

Item 10. Directors, Executive Officers and
Corporate Governance

Information relating to AFG’s executive officers and directors,
including its audit committee and audit committee financial
experts will be in AFG’s definitive Proxy Statement for its 2022
Annual Meeting of Stockholders which will be filed within 120
days of the end of our fiscal year ended December 31, 2021 (the
“2022 Proxy Statement”) and
incorporated herein by
reference.

Ambac has a Code of Business Conduct which promotes
management’s commitment to integrity and expresses Ambac’s
standards for ethical behavior by providing guidelines for

| Ambac Financial Group, Inc. 139 2021 FORM 10-K |

Item 12. Security Ownership of Certain
Beneficial Owners and Management and
Related Stockholder Matters

Information relating to security ownership of certain beneficial
owners of AFG’s common stock and information relating to the
security ownership of AFG’s management will be in the 2022
Proxy Statement and is incorporated herein by reference.

handling business situations appropriately. This code can be
found on Ambac’s website at www.ambac.com on
the
“Environmental, Social & Governance”
under
"Governance Documents." Ambac will disclose on its website
any amendment to, or waiver from, a provision of its Code of
Business Conduct that applies to its Chief Executive Officer,
Chief Financial Officer or Chief Accounting Officer. Ambac’s
corporate governance guidelines and the charters for the
committees of the Board of Directors are also available on our
website under the “Governance Documents” page.

page

Item 11. Executive Compensation

Information relating to Ambac’s executive officer and director
compensation will be in the 2022 Proxy Statement and is
incorporated herein by reference.

Equity Compensation Plan Information

The following table provides information as of December 31, 2021, regarding securities issued under our 2013 Incentive Compensation
Plan and 2020 Incentive Compensation Plan.

Equity compensation plans approved by security
holders .....................................................................

Plan
Category

2013 Incentive
Compensation Plan (1)
2020 Incentive
Compensation Plan (1)

Equity compensation plans not approved by
security holders .......................................................

None

Total

Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights

Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and Rights

2,024,480

1,281,048

---
3,305,528(2) (3)

$0.00

---
$0.00 (5)

Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in the
Third Column)

—

1,255,643(4)

---
1,255,643(4)

(1) Our 2020 Incentive Compensation Plan ("2020 Plan") was approved by the stockholders of AFG on June 2, 2020, as a successor to our 2013 Incentive
Compensation Plan ("2013 Plan") which was approved on December 18, 2013. Effective June 2, 2020, awards may no longer be granted under the
2013 Plan; authorized and unissued shares under the 2013 Plan are available for issuance under the 2020 Plan.

(2) Represents, as of December 31, 2021, the number of outstanding restricted stock unit awards and the maximum number of performance stock units that
may be issued if certain performance goals are achieved. Refer to Note 17. Employment Benefit Plans to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K for a description of the grants made under our 2013 and 2020 Incentive Compensation Plans. This amount
includes 837,070 restricted stock units and 2,082,199 performance stock units which are based on the maximum number of shares potentially payable
under the awards. Maximum number of shares potentially payable under performance awards is 220% of target.

(3) Each restricted stock unit and performance stock unit awarded under our 2013 and 2020 Incentive Compensation Plans was granted at no cost to the
persons receiving them. Restricted stock units represent the contingent right to receive the equivalent number of shares of AFG common stock and may
vest after the passage of time. Performance stock units represent the contingent right to receive a number of shares of AFG common stock up to 220%
of the number of units granted depending upon the achievement of certain company-wide performance goals at the end of a specified performance
period.

(4) Represents the number of securities remaining available for future issuance under compensation plans assuming the maximum number of shares are
issued on settlement of performance stock units. The number of securities remaining available for future issuance under compensation plans assuming
the target number of shares are issued on settlement of performance stock units would be 2,691,618.

(5) There are no outstanding options as of December 31, 2020. Performance shares and restricted stock units are not included in determining weighted-

average price as they have no exercise price.

| Ambac Financial Group, Inc. 140 2021 FORM 10-K |

Item 13. Certain Relationships and Related
Transactions, and Director
Independence

to Ambac with respect

to certain
Information relating
relationships and related transactions and director independence
will be in the 2022 Proxy Statement and is incorporated herein
by reference.

Item 14. Principal Accountant Fees and

Services

Information relating to principal accountant fees and services
will be in the 2022 Proxy Statement and is incorporated herein
by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) Documents filed as a part of this report:

1. Financial Statements

The consolidated financial statements included in Part II, Item 8 above are filed as part of this Annual Report on Form 10-K.

2. Financial Statement Schedules

The financial statement schedules filed herein, which are the only schedules required to be filed, are as follows:

Schedule I — Summary of Investments Other Than Investments in Related Parties .............................................................

Schedule II — Condensed Financial Information of Registrant (Parent Company Only) ......................................................

Schedule IV — Reinsurance ...................................................................................................................................................

Page

145

146

151

(b)

Exhibits

Exhibit Description

(3) Articles of Incorporation and bylaws:

Incorporated by Reference
Filing
Date

Exhibit
Number

Form

Filed
Herewith

(4)

3.1

Amended and Restated Certificate of Incorporation of Ambac
Financial Group, Inc. .........................................................................
Amended By-Laws of Ambac Financial Group, Inc. ........................

3.2
Instruments defining the rights of security holders, including indentures:
4.1
4.2
4.3

Description of Capital Stock ..............................................................
Specimen form of common stock certificate .....................................
Warrant Agreement between Ambac Financial Group, Inc. and
Computershare Inc. ............................................................................
Specimen form of warrant certificate (included in Exhibit 4.2) ........
Fiscal Agency Agreement, dated as of July 19, 2010, by and
between the Segregated Account of Ambac Assurance Corporation
and The Bank of New York Mellon, as fiscal agent ..........................
Form of Surplus Note due June 7, 2020 issued by the Segregated
Account of Ambac Assurance Corporation.(included in Exhibit
4.9) .....................................................................................................
Fiscal Agency Agreement, dated as of June 7, 2010, by and
between Ambac Assurance Corporation and The Bank of New
York Mellon, as fiscal agent ..............................................................
Amendment dated as of October 3, 2014 to Fiscal Agency
Agreement dated as of June 7, 2010 by and between Ambac
Assurance Corporation and The Bank of New York Mellon, as
fiscal agent .........................................................................................
Indenture (including the form of Notes), dated as of July 6, 2021,
between Sitka Holdings, LLC and The Bank of New York Mellon,
as trustee and note collateral agent ....................................................

4.4
4.5

4.6

4.7

4.8

4.9

8-A
10-K

05/01/13
03/02/20

8-A
8-A

8-A

05/01/13
05/01/13

05/01/13

3.2
3.2

4.1

4.2

10-K

03/03/14

4.10

8-K

06/08/10

10.3

10-Q

11/09/15

4.1

8-K

07/06/21

4.1

| Ambac Financial Group, Inc. 141 2021 FORM 10-K |

Filed
Herewith

4.10

Exhibit Description
Promissory Note and Security Agreement issued by Ambac
Assurance Corporation in favor of Sitka Holdings, LLC ..................
(10) Material contract and management compensation plans and arrangements:

Incorporated by Reference
Filing
Date

Exhibit
Number

Form

8-K

07/06/21

10.1
10.2

10.3

10.4
10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

8-K

10-K

10-Q

10-K

10-K
10-K

Financial Group,

Inc.'s Long-Term

Ambac Financial, Group, Inc.’s Incentive Compensation Plan ......... DEF 14A
Ambac
Incentive
Compensation Plan ............................................................................
Form of Amended and Restated Restricted Stock Unit Award
Letter for executive officers ...............................................................
Form of Equity Award Letter for directors ........................................
Closing Agreement between Ambac Financial, Group, Inc. and
Commissioner of Internal Revenue, dated April 30, 2013 ................
Form of Expense Sharing and Cost Allocation Agreement among
Ambac Assurance Corporation, Ambac Financial Group, Inc. and
their respective subsidiaries and affiliates .........................................
Lease, dated as of March 1, 2011, by and between One State
Street, LLC and Ambac Assurance Corporation ...............................
Settlement, Discontinuance and Release Agreement, dated as of
March 1, 2011, by and among One State Street, LLC, Ambac
Financial Group, Inc., Ambac Assurance Corporation and the
Segregated Account of Ambac Assurance Corporation ....................
Settlement Agreement, dated as of June 7, 2010, by and among
Ambac Assurance Corporation, Ambac Credit Products LLC,
Ambac Financial Group, Inc. and the parties listed on Schedule A
thereto ................................................................................................
Ambac Financial Group, Inc. Severance Pay Plan (Applicable to
termination on or after December 16, 2021) ......................................
Lease Modification dated as of September 8, 2015 to the Lease
dated as of March 1, 2011, by and between One State Street, LLC
and Ambac Assurance Corporation ...................................................
Employment Agreement dated as of November 1, 2016 by and
among Ambac Financial Group,
Inc., Ambac Assurance
Corporation and David Trick .............................................................
Employment Agreement dated as of December 8, 2016, by and
among Ambac Financial Group,
Inc., Ambac Assurance
Corporation and Claude LeBlanc .......................................................
Employment Agreement dated as of January 4, 2017 by and among
Ambac Financial Group, Inc., Ambac Assurance Corporation and
Stephen Ksenak ..................................................................................
Rehabilitation Exit Support Agreement, by and among Ambac
Assurance Corporation, Ambac Financial Group, Inc. and certain
holders of Ambac Assurance Corporation’s 5.1% Surplus Notes
due 2020 and certain holders of Ambac Assurance Corporation’s
deferred payment obligations, dated as of July 19, 2017 ...................
Tier 2 Commitment Letter, dated as of July 19, 2017 from funds
affiliated with or managed by investors party thereto .......................
First Amendment to the Rehabilitation Exit Support Agreement, by
and among Ambac Assurance Corporation, Ambac Financial
Group, Inc. and certain holders of Ambac Assurance Corporation’s
5.1% Surplus Notes due 2020 and certain holders of Ambac
Assurance Corporation’s deferred payment obligations, dated as of
September 21, 2017 ...........................................................................
Second Amended Plan of Rehabilitation of the Segregated Account
of Ambac Assurance Corporation dated September 25, 2017, and
effective as of February 12, 2018 ......................................................
Order Granting the Rehabilitator’s Motion to Further Amend the
Plan of Rehabilitation and confirming the Second Amended Plan
of Rehabilitation, as amended, Case No. 10-CV-1576 (Dane
County, Wisconsin) dated January 22, 2018 .....................................

10-K

10-Q

8-K

| Ambac Financial Group, Inc. 142 2021 FORM 10-K |

4.3

10.1

10.4
10.5

10.2

11/08/13

08/11/14

03/03/14
03/03/14

05/03/13

09/27/11

10.2

03/16/11

10.34

03/16/11

10.33

11/15/10

10.1

02/29/16

10.27

11/03/16

10.2

12/13/16

10.1

01/06/17

10.1

07/20/17

10.1

10.2

09/26/17

10.1

02/28/18

10.38

02/28/18

10.39

10.20

10.21

10.22

10.23

10.24

10.25

10.26

10.27

10.28

10.29

10.30
10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

Incorporated by Reference
Filing
Date

Exhibit
Number

Filed
Herewith

8-K

10-Q

10-K

Form

Exhibit Description
Stipulation and Order - Office of the Commissioner of Insurance of
the State of Wisconsin, in the Matter of the Rehabilitation of the
Segregated Account of Ambac Assurance Corporation effective as
of February 12, 2018 ..........................................................................
Amendment No. 1 to the Stipulation and Order - Office of the
Commissioner of Insurance of the State of Wisconsin, in the
Matter of the Rehabilitation of the Segregated Account of Ambac
Assurance Corporation effective as of February 12, 2018 ................
Preferred Stock Repurchase and Support Agreement dated as of
June 22, 2018, by and among Ambac Assurance Corporation
(“AAC”), Ambac Financial Group, Inc. and the holders of one or
more series of the AAC’s outstanding Auction Market Preferred
Shares .................................................................................................
Form of 2019 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak ................................................................................................
Form of 2019 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith .........................................................................
Form of 2019 Deferred Stock Unit Award Agreement between
Ambac Financial Group, Inc. and each of the Company’s executive
officers ...............................................................................................
Form of 2019 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak ................................................................................................
Form of 2019 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith .........................................................................
SUBLEASE dated as of January 30, 2019, between Advance
Magazine Publishers Inc. (D/B/A CONDE NAST), and Ambac
Assurance Group Corporation ...........................................................
Amended and Restated Employment Agreement dated as of
February 27, 2020, by and among Ambac Financial Group, Inc.,
Ambac Assurance Corporation and Claude LeBlanc ........................
2020 Incentive Compensation Plan ................................................... Def 14A
Purchase Agreement, by and among, Ambac Assurance
Corporation, Ambac Financial Group, Inc. and certain funds or
accounts affiliated with or managed by CVC Credit Partners, LLC,
CVC Credit Partners Investment Management Limited and EJF
Capital LLC, dated as of January 19, 2021 ........................................
Form of 2020 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak ................................................................................................
Form of 2020 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith .........................................................................
Form of 2020 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak ................................................................................................
Form of 2020 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith .........................................................................
Form of 2021 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak ................................................................................................
Form of 2021 Restricted Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith .........................................................................
Form of 2021 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and
Ksenak ................................................................................................

10-Q

10-K

10-Q

10-K

10-Q

8-K

| Ambac Financial Group, Inc. 143 2021 FORM 10-K |

02/28/18

10.40

02/28/19

10.37

06/25/18

10.1

05/09/19

10.1

05/09/19

10.2

05/09/19

10.5

08/08/19

10.1

08/08/19

10.2

03/02/20

10/45

03/02/20
04/15/20

10.46
Ex. B

01/25/21

10.1

05/11/20

10.1

05/11/20

10.2

05/11/20

10.3

05/11/20

10.4

05/10/21

10.1

05/10/21

10.2

05/10/21

10.3

Filed
Herewith

X
X
X

10.39

10.40
10.41

10.42

Exhibit Description
Form of 2021 Performance Stock Unit Award Agreement between
Ambac Financial Group, Inc. and Messrs. Barranco, Eisman,
Reilly and Ms. Smith .........................................................................
Executive Stock Deferral Plan dated June 24, 2021 ..........................
Financial Guaranty Insurance Policy, dated July 6, 2021, issued by
Ambac Assurance Corporation ..........................................................
Collateral Agreement, dated as of July 6, 2021, made by Sitka
Holdings, LLC in favor of The Bank of New York Mellon, as note
collateral agent and trustee ...............................................................

Incorporated by Reference
Filing
Date

Exhibit
Number

Form

10-Q
8-K

05/10/21
06/30/21

8-K

07/06/21

10.4
10.1

10.1

8-K

07/06/21

10.2

(99) Additional exhibits

99.1

Second Modified Fifth Amended Plan of Reorganization of Ambac
Financial Group, Inc., effective as of May 1, 2013 ...........................

10-K

03/03/14

99.3

Other exhibits, filed or furnished, as indicated:

21.1
23.1
24.1
31.1

31.2

32.1++

List of Subsidiaries of Ambac Financial Group, Inc. ........................
Consent of Independent Registered Public Accounting Firm ............
Power of Attorney for directors of Ambac Financial Group, Inc. .....
Certification of Chief Executive Officer Pursuant to Rules
13a-14(a) and 15d-14(a) Promulgated under
the Securities
Exchange Act of 1934, as amended ...................................................
Certification of Chief Financial Officer Pursuant
to Rules
13a-14(a) and 15d-14(a) Promulgated under
the Securities
Exchange Act of 1934, as amended ...................................................
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 ................................
XBRL Instance Document.

101.INS
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
104

Cover Page Interactive Data File - The cover page interactive data
file does not appear in the Interactive Data File because its XBRL
tags or embedded within the Inline XBRL document

++ Furnished herewith.

| Ambac Financial Group, Inc. 144 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I — SUMMARY OF INVESTMENTS
Other Than Investments in Related Parties
December 31, 2021

Type of Investment
($ in millions)

Cost

Estimated
Fair Value

Amount at Which
Shown in the
Balance Sheet

Municipal obligations ..........................................................................................................

315 $

340 $

Corporate obligations ..........................................................................................................

Foreign obligations ..............................................................................................................

U.S. government obligations ...............................................................................................

Residential mortgage-backed securities ..............................................................................

Collateralized debt obligations ............................................................................................

Other asset-backed securities ..............................................................................................

Short-term ............................................................................................................................
Other(1)
Total

.................................................................................................................................

612

182

128

234

520

594

613

252

128

265

519

683

340

613

252

128

265

519

690

2,734 $

2,947 $

2,955

(1) Excluded from the estimated fair value amount are equity securities with a carrying value of $8 as of December 31, 2021, that do not have readily
determinable fair values and are carried on the balance sheet at cost, less impairment, and adjusted to fair value when observable price changes in
identical or similar investments from the same issuer occur, as permitted under the Investments — Equity Securities Topic of the ASC

| Ambac Financial Group, Inc. 145 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Balance Sheets

($ in millions, except share data) December 31,

Assets:

2021

2020

Fixed maturity securities, at fair value (amortized cost: 2021—$130 and 2020—$76) ............................................................. $

119 $

Short-term investments, at cost (approximates fair value) .........................................................................................................

Other investments .......................................................................................................................................................................

Total investments (net of allowance for credit losses of: 2021— $3 and 2020 — $2) ............................................................

Cash ............................................................................................................................................................................................

Investment in subsidiaries ...........................................................................................................................................................

Investment income due and accrued ...........................................................................................................................................

Other assets .................................................................................................................................................................................

124

254

769

229

349

714

—

Total assets

Liabilities and Stockholders' Equity:

Liabilities:

1,041 $

1,082

Current taxes ............................................................................................................................................................................... $

1 $

Accounts payable and other liabilities ........................................................................................................................................

Total liabilities

Stockholders’ equity:

Preferred stock, par value $0.01 per share; 20,000,000 shares authorized shares; issued and outstanding shares—none .........

Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 46,477,068 and 45,865,081 ..........
Additional paid-in capital ...........................................................................................................................................................
Accumulated other comprehensive income (loss) ......................................................................................................................
Retained earnings ........................................................................................................................................................................
Treasury stock, shares at cost: 172,929 and 55,942 ....................................................................................................................
Total Ambac Financial Group, Inc. stockholders’ equity
Total liabilities and stockholders’ equity

—

—
257
58
726
(3)
1,038
1,041 $

—

—
242
79
759
(1)
1,080
1,082

The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.

| Ambac Financial Group, Inc. 146 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statement of Comprehensive Income

($ in millions) Year Ended December 31,

Revenues:

2021

2020

2019

Investment income ........................................................................................................................................... $

10 $

13 $

Other income....................................................................................................................................................

Net investment gains (losses), including impairments ....................................................................................

Total revenues

Expenses:

Operating expenses ..........................................................................................................................................

Total expenses

Income (loss) before income taxes and equity in undistributed net loss of subsidiaries .................................

Federal income tax provision (benefit) ............................................................................................................
Income (loss) before net income (loss) of subsidiaries ...................................................................................
Net loss of subsidiaries .....................................................................................................................................
Net income (loss)

—

(5)

(14)

2
(16)

(1)

(7)

—
(7)

(430)

(17) $

(437) $

Other comprehensive income (loss), after tax:

Net income (loss) ............................................................................................................................................. $

(17) $

(437) $

Unrealized gains (losses) on securities, net of income tax provision (benefit) of $(2), $1 and $(8) .............

Gains (losses) on foreign currency translation, net of income tax provision (benefit) of $0, $0 and $0 ......
Credit risk changes of fair value option liabilities, net of income tax provision (benefit) of $0, $0 and $0
Changes to postretirement benefit, net of income tax provision (benefit) of $0, $0 and $0 ........................
Total other comprehensive income (loss)

Total comprehensive income (loss) attributable to Ambac Financial Group, Inc.

(12)

(8)
(1)
(1)
(21)
(38) $

23
1
(3)
37
(400) $

The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.

(2)

(5)
7

(223)

(216)

26
—
(1)
91
(125)

| Ambac Financial Group, Inc. 147 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statement of Stockholders' Equity

Total

Retained
Earnings

Accumulated
Other
Comprehensive
Income

Preferred
Stock

Common
Stock

Additional
Paid-in
Capital

Common
Stock Held
in Treasury,
at Cost

($ in millions)
Balance at January 1, 2019

Total comprehensive income (loss) .
Stock-based compensation ..............

Cost of shares (acquired) issued
under equity plan .............................

1,592 $

1,421 $

(49) $

— $

(125)

(3)

(216)

—

(3)

—

Balance at December 31, 2019

1,477 $

1,203 $

42 $

— $

Total comprehensive income (loss) .

(400)

(437)

Adjustment to initially apply ASU
2016-13 ...............................................
Stock-based compensation ..............

Cost of shares (acquired) issued
under equity plan .............................

(4)

(3)

(4)

—

(2)

—

Balance at December 31, 2020

1,080 $

759 $

79 $

— $

Total comprehensive income (loss)
Stock-based compensation ..............
Cost of shares (acquired) issued
under equity plan .............................

Change in redeemable
noncontrolling interest .....................

Balance at December 31, 2021

(38)
14

(6)

(17)
—

(4)

(21)
—

—

—
—

—

(12)
1,038 $

(12)
726 $

—
58 $

—
— $

—

—
—

—

—
—

219 $

—

232 $

—

242 $

—
14

—

—
257 $

—

(1)

—
—

(2)

—
(3)

The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.

| Ambac Financial Group, Inc. 148 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Condensed Statements of Cash Flow

($ in millions) Year Ended December 31,

Cash flows from operating activities:

2021

2020

2019

Net income (loss) ............................................................................................................................................. $

(17) $

(437) $

(216)

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

Equity in undistributed net (income) loss of subsidiaries .............................................................................

Amortization of bond premium and discount ................................................................................................

Net realized gains ..........................................................................................................................................

Increase (decrease) in current income taxes payable .....................................................................................

Share-based compensation ............................................................................................................................

(Increase) decrease in other assets and liabilities ..........................................................................................

Distributions received from majority owned subsidiary ...............................................................................

Other, net .......................................................................................................................................................

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Proceeds from sales and matured bonds ..........................................................................................................

Purchases of bonds ...........................................................................................................................................

Change in short-term investments ....................................................................................................................

Change in other investments ............................................................................................................................

Sale of auction market preferred shares of Ambac Assurance .........................................................................

Acquisition of Xchange, net of cash acquired .................................................................................................

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Capital contribution to subsidiaries ..................................................................................................................

Net cash (used in) financing activities

Net cash flow ...................................................................................................................................................

Cash at beginning of period .............................................................................................................................

(9)

(5)

(6)

(10)

(34)

105

(8)

—

(92)

(6)

423

(6)

(1)

—

(10)

(45)

—

(74)

(29)

(2)

Cash at end of period

1 $

7 $

223

(6)

(8)

—

(6)

(2)

(125)

—

(22)

—

(6)

Supplemental disclosure of cash flow information:

Cash paid during the period for:

Income taxes ................................................................................................................................................. $

— $

The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the following notes.

| Ambac Financial Group, Inc. 149 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II— CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY ONLY)
Notes to Condensed Financial Information
(Dollar Amounts in Millions)

Income Taxes
AFG files a consolidated Federal income tax return with its U.S.
subsidiaries. AFG and its subsidiaries also file separate or
combined income tax returns in various states, local and foreign
jurisdictions. As of December 31, 2021, Ambac had
consolidated U.S. federal loss carryforwards ("NOLs") totaling
approximately $3,744, which, if not utilized, will begin expiring
in 2029, and will fully expire in 2041.

The NOLs allocated to AFG as of December 31, 2021, were
$1,596, and begin expiring in 2029 and fully expire in 2033.

The condensed financial information of Ambac Financial Group,
Inc. (“AFG” or the “Registrant”) as of December 31, 2021 and
2020, and for the three years in the period ended December 31,
2021, should be read in conjunction with the consolidated
financial statements of AFG Financial Group, Inc. and
Subsidiaries and the notes thereto included in this 2021 Annual
Report on Form 10-K for the year ended December 31, 2021.

AFG, headquartered in New York City, is a financial services
holding company incorporated in the state of Delaware on
April 29, 1991.

Business Combination
On December 31, 2020, Ambac completed the acquisition of
80% of the membership interests of Xchange for a purchase
price of $81 in cash. Xchange is a property and casualty
Managing General Underwriter focused on accident and health
products.
the
See Note 3. Business Combination
Consolidated Financial Statements included in Part II, Item 8 in
this Form 10-K for further information.

| Ambac Financial Group, Inc. 150 2021 FORM 10-K |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV— REINSURANCE
Years Ended December 31, 2021, 2020 and 2019

Insurance Premiums Written
($ in millions)

Gross
Amount

Ceded to Other
Companies

Assumed from
Other
Companies

Net
Amount

Percentage of
Amount
Assumed to
Net

Year Ended December 31, 2021 ............... $

2 $

35 $

— $

(33)

—%

Year Ended December 31, 2020 ...............

Year Ended December 31, 2019 ...............

(1)

(28)

(1) $

—

—%

(60)

—%

| Ambac Financial Group, Inc. 151 2021 FORM 10-K |

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

AMBAC FINANCIAL GROUP, INC.

SIGNATURES

Dated: February 24, 2022

By:

/S/ DAVID TRICK
David Trick
Executive Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/S/ JEFFREY S. STEIN*

Chairman of the Board and Director

February 24, 2022

Jeffrey S. Stein

/S/ CLAUDE LEBLANC

President, Chief Executive Officer and Director

February 24, 2022

Claude LeBlanc

(Principal Executive Officer)

/S/ DAVID TRICK

Executive Vice President and Chief Financial Officer

February 24, 2022

David Trick

(Principal Financial Officer)

/S/ ROBERT B. EISMAN

Senior Managing Director and Chief Accounting Officer

February 24, 2022

Robert B. Eisman

(Principal Accounting Officer)

/S/ IAN D. HAFT*

Director

Ian D. Haft

/S/ DAVID L. HERZOG*

Director

David L. Herzog

/S/ LISA G. IGLESIAS*

Director

Lisa G. Iglesias

/S/ C. JAMES PRIEUR*

Director

C. James Prieur

February 24, 2022

/S/ JOAN LAMM-TENNANT*

Director

February 24, 2022

Joan Lamm-Tennant

/S/ STEPHEN M. KSENAK

Attorney-in-fact

February 24, 2022

*By: Stephen M. Ksenak

| Ambac Financial Group, Inc. 152 2021 FORM 10-K |

Appendix A

Non-GAAP Financial Measures

Ambac reports two non-GAAP financial measures: Adjusted Earnings and Adjusted Book Value. A non-GAAP financial measure is a numerical
measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly
comparable measure calculated and presented in accordance with GAAP. We are presenting these non-GAAP financial measures because they
provide greater transparency and enhanced visibility into the underlying drivers of our business.Adjusted Earnings and Adjusted Book Value 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. Below are reconciliations of net income (loss) attributable to common stockholders to the non-
GAAP measure of Adjusted Earnings (Losses) and Total Ambac Financial Group, Inc. stockholders’ equity per share ("Book Value") to the non-
GAAP measure of Adjusted Book Value per share. Each of the reconciling items is more fully defined in our 2021 Annual Report on Form 10-K
within Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading “Non-GAAP Financial
Measures."

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 and other considerations, for purposes of non-GAAP measures, we utilized a 0% effective tax rate; which is subject to
change.

Adjusted Earnings (Loss) ($ in millions)

Net (loss) income attributable to common stockholders .........................................................................
Adjustments:

Non-credit impairment fair value (gain) loss on credit derivatives ..........................................................
Insurance intangible amortization .............................................................................................................
Foreign exchange (gains) losses (1)
...........................................................................................................
Fair value (gain) loss on interest rate derivatives from Ambac CVA ......................................................

Adjusted earnings (losses) (2)

Year Ended December 31,

2017
(329) $

2018
186 $

2019
(216) $

2020
(437) $

2021
(17)

(11)
151
(21)
45
(165) $

1
107
7
—

301 $

(1)
295
(12)
—
66 $

—
57
3
—
(378) $

—
52
7
—
43

Book Value Per Share / Adjusted Book Value Per Share

Total Ambac Financial Group, Inc. Shareholders' Equity (Deficit) .....................................................

$ 30.52 $ 35.12 $ 32.41 $ 23.57 $ 22.42

December 31,

2017

2018

2019

2020

2021

Adjustments:

Non-credit impairment unrealized fair value losses on credit derivatives .............................................
Insurance intangible asset .......................................................................................................................
Net unearned premiums and fees in excess of expected losses ..............................................................
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income ....................

Adjusted book value (2)

0.01
(18.71)
13.20
(0.68)

0.01
(6.91)
6.68
(3.32)
$ 24.34 $ 27.58 $ 28.83 $ 20.05 $ 18.88

0.03
(15.87)
10.19
(1.89)

0.01
(9.37)
9.09
(3.31)

0.01
(8.14)
8.24
(3.63)

(1) Elimination of the foreign exchange gains (losses) on the re-measurement of assets, liabilities and transactions in non-functional currencies. For periods prior to
2016, we eliminated the foreign exchange gains (losses) on the re-measurement of net premium receivables and loss and loss expense reserves in non-functional
currencies. Given the long-duration of a significant portion of these premium receivables and loss reserves, the foreign exchange re-measurement gains (losses)
are not necessarily indicative of the total foreign exchange gains (losses) that Ambac will ultimately recognize. Beginning in 2016, we have eliminated the foreign
exchange gains (losses) on all assets, liabilities and transactions in non-functional currencies. Expanding this adjustment to include all foreign exchange gains
(losses) enables users of our financial statement to better view the business results without the impact of fluctuations in foreign currency exchange rates,
particularly as assets held in non-functional currencies have grown, and facilitates period-to-period comparisons of Ambac's operating performance.

(2) Totals may not add due to rounding differences.

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7/ CORPORATE INFORMATIONCORPORATE OFFICEAmbac Financial Group, Inc.One World Trade Center41st FloorNew York, NY 10007212-658-7470www.ambac.comCOMMON STOCK LISTINGThe common stock of Ambac Financial Group, Inc. trades on the New York Stock Exchange under the symbol “AMBC”.ANNUAL MEETING OF STOCKHOLDERSThe Annual Meeting of Stockholders will be held in a virtual format on Tuesday, May 24, 2022 at 10:30 am Eastern Time and can be accessed at www.virtualshareholdermeeting.com/AMBC2022.INVESTOR SERVICES/ TRANSFER AGENT COMPUTERSHARE P.O. BOX 505000Louisville, KY 40233Inside the USA call 1-800-662-7232Outside the USA call 1-781-575-4238 Hearing impaired call 1-800-952-9245www.computershare.com/investoror overnight correspondence can be sent to:COMPUTERSHARE 462 South 4th Street, Suite 1600Louisville, KY 40202INVESTOR RELATIONSCharles J. SebaskiManaging Director, Head of Investor RelationsAmbac Financial Group, Inc.212-208-3222ir@ambac.comINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMKPMG, LLP345 Park AvenueNew York, NY 10154CORPORATE GOVERNANCEAmbac is committed to maintaining the independence of Ambac’s Board of Directors and its committees and the integrity of its corporate governance processes. Our Corporate Governance Guidelines, Code of Business Conduct and charters that govern our Board committees, all of which are designed to keep Ambac accountable to its shareholders, can be found at www.ambac.com.OFFICER CERTIFICATIONS The certifications of Ambac’s Chief Executive Officer and Chief Financial Officer, required under Section 302 of the Sarbanes-Oxley Act of 2002, have been filed as exhibits to Ambac’s 2021 Annual Report on Form 10-K. AMBAC FINANCIAL GROUP, INC.
One World Trade Center
41st Floor
New York, NY 10007

www.ambac.com

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2021 ANNUAL REPORT