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 $209 as of March 31, 2024, 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 was approved by OCI and will be paid to AFG during the second quarter of 2024.

•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 $2.9 and $1.9 during the three months ended March 31, 2024 and 2023.

AFG's principal uses of liquidity are: (i) the payment of G&A expenses, including costs to explore opportunities to grow and diversify Ambac, (ii) the making of strategic investments, which are generally illiquid and (iii) making capital investments to acquire, grow and/or capitalize new and/or existing businesses. AFG may also provide short-term financial support, primarily in the form of loans, to its operating subsidiaries to support their operating requirements.

In the opinion of the Company’s management the net assets of AFG are sufficient to meet AFG’s current liquidity requirements. However, events, opportunities, including acquisitions, 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 on claim payments; reinsurance recoveries; fees; investment income and maturities and sales of investments.

•See Note 6. Insurance Contracts to the Consolidated Financial Statements included in Part I, Item 1., in this Form 10-Q for a summary of future gross financial guarantee premiums to be collected by AAC and Ambac UK. Termination of financial guarantee policies on an accelerated basis may adversely impact AAC’s liquidity.

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

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

•As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, AAC requested approval from OCI to pay principal of, and interest on, the surplus notes on June 7, 2024, but as of the filing of this Form 10-Q, AAC has yet to receive a response from OCI to such request. 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 $496 of accrued and unpaid interest all or a portion of which would be payable on surplus notes if approved by OCI on the next scheduled payment date of June 7, 2024.

•AFS's remaining derivatives include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings. AAC lends AFS cash and securities as needed to fund payments under these derivative contracts, collateral posting requirements and G&A expenses. Intercompany loans are governed by an established lending agreement with defined borrowing limits that has received non-disapproval from OCI.

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

Insurance Distribution:

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

Consolidated Cash Flow Statement Discussion

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

(1) Because the trusts established under the Puerto Rico restructurings are consolidated VIEs, certain payments made by AAC to accelerate AAC-insured bonds that were deposited into trusts are reflected as payments of VIE liabilities within financing activities. Cash used in financing activities includes $0 and $108 from such AAC payments, for the three months ended March 31, 2024 and 2023, respectively.

Operating activities

The following represents the significant cash operating activity during the three months ended March 31, 2024 and 2023:

•Cash provided by (i) gross premiums were $64 and $48 for the three months ended March 31, 2024 and 2023, respectively; and (ii) investment portfolio income was $25 and $20 for the three months ended March 31, 2024 and 2023, respectively. The increase in gross premiums were driven by the growth in the Specialty Property and Casualty Insurance segment.

•Interest payments, from the accumulated paid-in-kind interest on the Tier 2 Notes, were $50 for the three months ended March 31, 2023.

•Payments related to (i) G&A expenses were $41 and $37 for the three months ended March 31, 2024 and 2023, respectively; and (ii) reinsurance premiums paid were $34 and $31 for the three months ended March 31, 2024 and 2023, respectively. The increase in reinsurance premiums paid were driven by the growth in the Specialty Property and Casualty Insurance segment.

•Net Legacy Financial Guarantee Insurance loss and loss expenses paid (recovered), including commutation payments, during the three months ended March 31, 2024 and 2023 were ($11) and ($140), respectively. 2023 includes Nomura R&W settlement proceeds of $140.

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

Financing Activities

Financing activities for the three months ended March 31, 2024, included paydowns and maturities of VIE debt obligations of $46.

Financing activities for the three months ended March 31, 2023, included payments for redemption of Tier 2 Notes of $97 and paydowns and maturities of VIE debt obligations of $174 (including payments for the accelerations of the VIE trusts created from the Puerto Rico restructuring).

Collateral

AFS hedged a portion of the interest rate risk in the Legacy Financial Guarantee Insurance segment financial guarantee and investment portfolios, along with legacy customer interest rate swaps, with standardized derivative contracts, which contain collateral or margin requirements. Since the second quarter of 2023, AFS's only remaining derivative positions include a limited number of legacy customer swaps and their associated hedges. Under these hedge agreements, AFS is required to post collateral in excess of the derivative unrealized loss amount. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral posting or a termination have been triggered. All collateral obligations are currently met. Collateral posted by AFS totaled a net amount of $44 (cash and securities collateral of $18 and $26, respectively), including independent amounts, under these contracts at March 31, 2024.