AMBAC FINANCIAL GROUP INC

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 the operating subsidiaries that it owns, totaling $211 as of December 31, 2023, and secondarily on distributions and expense sharing payments from its operating subsidiaries.

•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 2022 expenses was approved by OCI and paid to AFG in March 2023.

•Substantial uncertainty remains as to AAC's ability to pay dividends to AFG and the timing of any such dividends.

•Everspan's ability to make future dividend payments will mostly depend on its future profitability relative to its capital needs to support growth. Everspan is not expected to pay dividends in the near term.

•Cirrata does not have any regulatory restrictions on its ability to make distributions. AFG received distributions from Cirrata of $8 and $6 during the years ended December 31, 2023 and 2022.

AFG's principal uses of liquidity are: (i) the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which may include illiquid investments and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses; such capital investments include investments in technology to support the efficient operation of our Specialty Property and Casualty Insurance and Insurance Distribution businesses. AFG may also provide short-term financial support, primarily in the form of loans, to its operating subsidiaries to support their operating requirements. AFG supported the development of the Specialty Property and Casualty Insurance business, and its acquisitions, with cash contributions of $6 and $14 to the Everspan group of companies during the years ended December 31, 2023 and 2022, respectively.

In the opinion of the Company’s management, the net assets of AFG are currently sufficient to meet AFG’s current liquidity requirements. However, events, opportunities or circumstances could arise that may cause AFG to seek additional capital (e.g. through the issuance of debt, equity or hybrid securities).

Operating Companies' Liquidity

Insurance:

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

•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 under existing insurance policies. 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, acquisition costs (Specialty Property and Casualty Insurance segment only), debt service (Legacy Financial Guarantee Insurance segment only), operating expenses, reinsurance payments and purchases of securities and other investments.

•Interest and principal payments on AAC surplus notes are subject to the approval of OCI, which has full discretion over payments regardless of the liquidity position of AAC. 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, 2023. Current principal outstanding on AAC's long-term debt consisted of $519 of surplus notes. AAC's future interest obligations on long-term debt include $475 of accrued and unpaid interest.

•AFS provided interest rate derivatives to financial guarantee customers and used derivatives to provide a partial hedge against interest rate risk in AAC's insurance and investment portfolios. Since June 30, 2023, AFS' only remaining derivative positions include a limited number of legacy customer swaps and their associated hedges. AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and operating expenses. Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI.

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

Insurance Distribution:

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

Consolidated Cash Flow Statement Discussion

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

(1)Because the trusts established under the Puerto Rico restructurings are consolidated VIEs, certain payments made by AAC to accelerate AAC-insured bonds that were deposited into the trusts are reflected as payments of VIE liabilities within financing activities. Cash used in financing activities includes $113 and $311 from such AAC payments for the years ended December 31, 2023 and 2022, respectively.

Operating activities

The following represents the significant cash operating activities during the years ended December 31, 2023 and 2022:

•Cash provided by (i) gross premiums (net of commissions) were $209 and $139 for the years ended December 31, 2023 and 2022, respectively; (ii) non-VIE interest rate derivatives were $22 and $84 for the years ended December 31, 2023 and 2022, respectively; (iii) non-VIE investment portfolio income was $96 and $82 for the years ended December 31, 2023 and 2022, respectively; and (iv) cash settlements from the Puerto Rico restructuring transactions to the consolidated trusts were $47 for the year ended December 31, 2022.

•Payments for accreted interest on redemption of the Tier 2 Notes were $50 for the year ended December 31, 2023. Payments for debt service and accreted interest on redemptions and debt repurchases of the Sitka AAC Note, Tier 2 Notes and Surplus Notes were $59, $70 and $154, respectively, for the year ended December 31, 2022.

•Payments related to (i) operating expenses were $120 and $94 for the years ended December 31, 2023 and 2022, respectively; (ii) reinsurance premiums paid (net of commissions) were $137 and $66 for the years ended December 31, 2023 and 2022, respectively; and (iii) VIE derivative payments were $326 for the year ended December 31, 2022.

•Fraud litigation recoveries of $126 allocated from the BOA Settlement Payment.

•Net Legacy Financial Guarantee Insurance loss and loss adjustment expenses paid (recovered), including commutation payments, during the years ended December 31, 2023 and 2022 are detailed below:

(1)2023 includes Nomura R&W settlement proceeds of $140. 2022 includes the majority of the recoveries from the BOA Settlement Payment except for the portion allocated to fraud litigation recoveries.

Future operating cash flows will primarily be impacted by net premium collections, investment coupon receipts, fee and net commission revenues, operating expenses, net claim and loss expense payments and debt interest payments.

Financing Activities

Financing activities for the year ended December 31, 2023, included payments for the redemption of Tier 2 Notes of $97, share repurchases of $5 and paydowns and maturities of VIE debt obligations of $315.

Financing activities for the year ended December 31, 2022, included payments for repurchase of surplus notes of $191, redemption of the Sitka AAC Note of $1,210, partial redemption of Tier 2 Notes of $143, share repurchases of $14, repurchases of auction market preferred shares of $8 and paydowns and maturities of VIE debt obligations of $591 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

Collateral

AFS hedged a portion of the interest rate risk in the Legacy Financial Guarantee Insurance segment and investment portfolios, along with legacy customer interest rate swaps, with standardized derivative contracts which contain collateral or margin requirements. Since the second quarter of 2023, AFS's only remaining derivative positions include a limited number of legacy customer swaps and their associated hedges. Under these hedge agreements, AFS is required to post collateral in excess of the derivative unrealized loss amount. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral posting or termination have been triggered. AFS may look to re-establish hedge positions that are terminated early, resulting in additional collateral obligations. The amount of additional collateral 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 posted by AFS totaled $50 (cash of $23 and securities at fair value of $27), including independent amounts, under these contracts at December 31, 2023.