1. BACKGROUND AND BUSINESS DESCRIPTION

The following description provides an update of Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, and should be read in conjunction with the complete descriptions provided in the Form 10-K. Capitalized terms used, but not defined herein, and in the other footnotes to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q shall have the meanings ascribed thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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:

~~AFG’s insurance subsidiary,~~ •Financial Guarantee Insurance — Ambac Assurance Corporation ~~(“Ambac Assurance" or "AAC"~~("AAC") and its wholly owned subsidiary, Ambac Assurance UK Limited (“Ambac UK”), ~~are both~~legacy financial guarantee ~~insurance companies~~businesses, both of which have been in ~~run-off. Ambac Assurance~~runoff since 2008. Insurance policies issued by AAC and Ambac ~~UK's outstanding insurance policies~~UK generally guarantee payment when due of the principal and interest on the obligations guaranteed.

~~During the three month period ended September 30, 2020, AFG acquired its insurance subsidiary,~~•Specialty Property & Casualty Program Insurance ("SPCP") — Currently includes admitted insurer Everspan Insurance Company ~~("Everspan"~~and excess and surplus lines insurer Everspan Indemnity Insurance Company (collectively, "Everspan" or the "Everspan Group"),. This platform, which received an A- Financial Strength Rating from ~~AAC repositioning it as~~A.M. Best in February 2021, is expected to launch new underwriting programs in 2021.

•Managing General Agency / Underwriting ("MGA/U") — Currently includes Xchange Benefits, LLC and Xchange Affinity Underwriting Agency, LLC (collectively, “Xchange”) a ~~subsidiary of a new intermediary holding company that is directly owned by AFG. This was done in an effort to optimize the legal organization structure to support potential new~~ property and casualty ~~insurance business initiatives.~~Managing General Underwriter 80% of which AFG acquired on December 31, 2020. Refer to Note 3. Business Combination in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for further information relating to this acquisition.

While SPCP and MGA/U are distinct businesses, they are currently not significant to Ambac's operations to warrant segment presentation. Management ~~reviews financial information, allocates resources~~evaluates its reportable segments at least annually and ~~measures financial performance on a consolidated basis. As a result, the Company has a single reportable segment.~~as facts and circumstances change.

Strategies to Enhance Shareholder Value

The Company's primary goal is to maximize shareholder value through executing the following key strategies:

•Active runoff of ~~Ambac Assurance~~AAC and its subsidiaries through transaction terminations, ~~policy~~ commutations, ~~reinsurance, settlements~~restructurings, and ~~restructurings,~~reinsurance with a focus on our watch list credits and known

and potential future adversely classified credits, that we believe will improve our risk profile, and maximizing the risk-adjusted return on invested assets;

•Ongoing rationalization of Ambac's capital and liability structures;

•Loss recovery through active litigation management and exercise of contractual and legal rights;

•Ongoing review of the effectiveness and efficiency of Ambac's operating platform; and

•~~Evaluation~~Focused growth in the specialty property and casualty program insurance, managing general agency/underwriting and potentially other insurance and insurance related businesses to advance our goal of ~~opportunities in certain business sectors that meet acceptable criteria that will generate~~generating long-term stockholder value with attractive ~~risk-adjusted~~risk adjusted returns.

With respect to our new business strategy, we continue to evaluate and pursue strategic opportunities in insurance, credit, asset management and other financial services that we believe would be synergistic to Ambac and would leverage our core competencies. While we have increased our efforts in evaluating such potential opportunities, we continue to be measured and disciplined in our approach as we seek to deploy our capital on opportunities that will generate sustainable long-term shareholder value. Although we are exploring new business opportunities for AFG, no assurance can be given that we will be able to identify or execute a suitable transaction and/or obtain the financial and other resources that may be required to finance an acquisition or develop any new businesses or assets. As a consequence of the novel coronavirus disease 2019 ("COVID-19") pandemic, risks associated with our new businesses strategy have increased given uncertainties related to the resulting global recession, increase in business risk in our target sectors and disruption to the capital markets. Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities remains speculative.

The execution of ~~AFG’s~~Ambac’s strategy to ~~extract and~~ increase the value of its investment in ~~Ambac Assurance~~AAC is subject to the restrictions set forth in the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among ~~Ambac Assurance,~~AAC, Ambac Credit Products LLC ("ACP"), AFG and certain counterparties to credit default swaps with ACP that were guaranteed by ~~Ambac Assurance,~~AAC, as well as the Stipulation and Order among the ~~OCI (as defined below)~~Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”), AFG and ~~Ambac Assurance~~AAC that became effective on February 12, 2018, as amended (the “Stipulation and Order”), and in the indenture for the Tier 2 Notes ~~issued by Ambac Assurance on February 12, 2018,~~(as defined below), each of which requires ~~the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”)~~OCI and, under certain circumstances, holders of the debt instruments benefiting from such restrictions, to approve certain actions taken by or in respect of ~~Ambac Assurance.~~AAC. In exercising its approval rights, OCI will act for the benefit of policyholders, and will not take into account the interests of AFG. ~~AFG's strategy~~

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 ~~extract~~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 Delaware statutory trust formed by AFG in 2014, (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 ~~increase~~(iii) AAC agreed to exchange the ~~value~~Interests and the Corolla Certificate for AAC’s senior surplus notes (collectively, the “Corolla Note Exchange”). The Note Holders held 100% of ~~its investment in Ambac Assurance is also subject to significantly more risk and uncertainty due~~the outstanding Corolla Notes. Pursuant to the ~~consequences~~Purchase Agreement, each $1.00 principal amount of the ~~COVID-19 pandemic~~Corolla Notes (and the associated amount of accrued and unpaid interest thereon) was exchanged for $0.9125 principal amount of senior surplus notes (and the associated amount of accrued and unpaid interest thereon) on the global economy, issuers of debt insured by Ambac, and issuers of debt and other investments owned by Ambac. These consequences may include material losses in Ambac's insured and investment portfolios, higher earnings volatility, increased liquidity demands and greater counterparty risk.

~~Opportunities for remediating losses on poorly performing insured transactions also depend on market conditions, including the perception of Ambac Assurance’s creditworthiness, the structure~~date of the ~~underlying risk~~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 $0.6400 principal amount of senior surplus notes (and the associated ~~policy as well as~~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 senior surplus notes to consummate the

~~other counterparty specific factors. Ambac Assurance's ability~~Corolla Note Exchange and acquire all of the interests in the Corolla Trust. Subsequent to ~~commute policies or~~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 ~~certain investments may also be limited~~agreement pursuant to which the holder of $15 principal amount of 5.1% junior surplus notes issued by ~~available liquidity.~~AAC agreed to sell such notes to AAC in exchange for senior 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 senior 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 senior 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 existing surplus notes previously issued by AAC. After giving effect to the Corolla Note Exchange and the JSN Exchange, AAC has $853 principal amount of surplus notes outstanding and total principal and accrued and unpaid interest of surplus notes outstanding is $1,414 as of February 11, 2021. Outstanding surplus notes principal amount includes $83 owned by AFG, which amount is eliminated in consolidation for purposes of US generally accepted accounting principles. The Company recorded a gain of $33 for the three months ended March 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 has recorded gain of $4 for the three months ended March 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).

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The Company has disclosed its significant accounting policies in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form 10-K.

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 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. See Note 3. Variable Interest Entities, for a

detailed discussion of Ambac’s involvement in VIEs, Ambac’s methodology for determining whether Ambac is required to consolidate a VIE and the effects of VIEs being consolidated and deconsolidated.

Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Article 10 of

Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments necessary for the fair presentation of the Company’s consolidated financial position and results of operations. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, may not be indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. The December 31, ~~2019,~~2020, consolidated balance sheet was derived from audited financial statements.

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

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 AFG'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 AFG’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 Income in Stockholders' Equity. Functional currency operating results of foreign subsidiaries are translated using average exchange rates.

~~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 $2$(5) and ~~$19~~$1 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 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.

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 transaction price to 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.

~~required CECL disclosures found in~~ ~~Note 8. Investments. AIR at September 30, 2020 was $10.~~

~~Refer to~~ ~~Note 8. Investments~~ ~~for further credit impairment disclosures.~~

~~Amortized cost assets~~

~~For financial assets measured at amortized cost, CECL replaces the "incurred loss" model used~~MGA/U performance obligations consist of placing policies with insurers and, for certain ~~types of assets which generally delayed recognition~~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, recognized upfront, and claims servicing, recognized over the claim period, based on the relative stand-alone selling price of the ~~full amount~~respective performance obligations.

Revenue consists of ~~credit losses until~~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 ~~was probable~~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 occurring, with an "expected loss" model, which reflects an entity's current estimate of all expected lifetime credit losses. The estimate of expected lifetime credit losses should consider 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 decreasesrevenue in the ~~allowance reflected~~future is not probable. MGA/U revenue is reported in ~~net~~other income ~~each period. The CECL measurement approach~~(expense) on the Consolidated Statement of Total Comprehensive Income.

Contract assets represent the Company's right to future consideration for ~~Ambac's affected asset types were not materially different than the approaches under prior GAAP. Refer~~services it has already transferred to the ~~discussion below~~customer, which is also conditional on future performance. Once the right to consideration becomes unconditional, it is reported as a receivable. Contract liabilities represent the Company's obligation to transfer services for ~~each asset type.~~

~~Premium receivables.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~~which it has already received consideration from the ~~issuer. As such, management leverages its existing loss reserve estimation process to evaluate credit impairment for premium receivables. Key factors~~customer. Contract assets and contract liabilities are reported as other assets and other liabilities, respectively, on the Consolidated Balance Sheet.

Redeemable Noncontrolling Interest:

The acquisition by AFG of 80% of the ownership interests of Xchange, is further described in assessing credit impairment include historical premium collection data, internal risk classifications, credit ratings and loss severities. For structured finance transactions involving special purpose entities, we further evaluate the priority of premiums paid to Ambac within the contractual waterfall, as required by bond indentures.

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 ~~6. Financial Guarantee Insurance Contracts~~ ~~for further credit impairment disclosures.~~

~~Loans.~~ The key factors in assessing credit impairment for loans are internal credit ratings and loss severities. Management utilizes a PD/LGD approach, similar to the one described above for premium receivables, which is applied to the loan carrying value.

~~Reinsurance recoverables.~~ Ambac has elected the to use the practical expedient of considering the fair value of collateral posted by reinsurers when evaluating credit impairment. To determine the total unsecured recoverable to be evaluated for3. Business Combinations

~~impairment,~~in the Notes to Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Under the terms of the acquisition agreement, Ambac ~~nets~~received a call option to purchase the ~~reinsurance recoverable amount by ceded premiums payable~~remaining 20% of Xchange from the minority owners (i.e., noncontrolling interests) and the ~~fair~~minority owners received 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 outside the control of Ambac, in accordance with the Distinguishing Liabilities from Equity Topic of the ASC, Ambac reports redeemable noncontrolling interests in the mezzanine section of its consolidated balance sheet.

The redeemable noncontrolling interest is remeasured each period as the greater of:

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

ii.the redemption value of ~~collateral posted,~~the put option under ASC 480 as if ~~any.~~

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, similar to the one described above for premium receivables, which is applied to the net unsecured reinsurance recoverable amount.

~~Refer to~~ ~~Note 6. Financial Guarantee Insurance Contracts~~ ~~for further credit impairment disclosures.~~

~~Fair Value Measurement Disclosures~~

~~In August 2018, the FASB issued ASU 2018-13,~~ ~~Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modified various disclosure requirements on fair value measurements. Relevant disclosures that~~it were ~~removed, modified and added are as follows:~~

•~~Removals~~: 1) Amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2) Policy for timing of transfers between levels, and 3) Valuation processes for Level 3 fair value measurements.

•~~Modifications~~: 1) For investments in certain entities that calculate net asset value, disclosures are required for the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse, only if the investee has communicated the timing to the reporting entity or publicly announced it and 2) Clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date and not possible future changes.

•~~Additions: 1) Changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held~~exercisable at the end of the reporting ~~period and 2) Range and weighted average~~period.

Any increase (decrease) in the carrying amount of ~~significant unobservable inputs used~~the redeemable noncontrolling interest as a result of adjusting to ~~develop Level 3 fair~~the redemption value ~~measurements. Alternatively,~~of the put option is recorded as an ~~entity may disclose other quantitative information (such as the median or arithmetic average) if it determines that it~~offset to retained earnings. The impact of such differences on earnings per share are presented in Note 5. Net Income Per Share.

Following is a ~~more reasonable~~rollforward of redeemable noncontrolling interest.


Three Months Ended March 31,	2021
Beginning balance	$	7
Net income attributable to redeemable noncontrolling interest (ASC 810)	0
Adjustment to redemption value (ASC 480)	$	13
Ending balance	$	20

Reclassifications and ~~rational method~~Rounding

Reclassifications may have been made to ~~reflect~~prior years' amounts to conform to the ~~distribution of unobservable inputs used.~~current year's presentation. Certain amounts and

~~Disclosure amendments related~~

tables in the consolidated financial statements and associated notes may not add due to changes in unrealized gains and losses included in other comprehensive income (loss) for Level 3 instruments, the range and weighted average of significant unobservable inputs, and the narrative description of measurement uncertainty were applied prospectively only for the most recent interim or annual period presented. All other disclosure amendments were applied retrospectively to all periods presented.

~~Refer to~~ ~~Note 7. Fair Value Measurements~~ ~~for further disclosures.~~

~~VIE Related Party Guidance~~

~~In October 2018, the FASB issued ASU 2018-17,~~ ~~Consolidation (Topic 810) - Targeted Improvements to Related Party Guidance for Variable Interest Entities.~~ ~~To determine whether a decision-~~rounding.

~~making fee is a variable interest, under~~Adopted Accounting Standards:

Effective January 1, 2021, the new guidance a reporting entity must consider indirect interests held through related parties under common control on a proportional basis rather than as a direct interest in its entirety (as was previously required under prior GAAP). These amendments create alignment between determining whether a decision making fee is a variable interest and determining whether a reporting entity within a related party group isCompany adopted the ~~primary beneficiary of a VIE. Adoption of this ASU did not impact Ambac's financial statements.~~following accounting standard:

~~Cloud Computing Arrangement Service Contracts~~Simplifying Income Tax Accounting

In ~~August 2018,~~December 2019, the FASB issued ASU ~~2018-15,~~2019-12, ~~Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40)~~Income Taxes (Topic 740) - ~~Customer’s~~Simplifying the Accounting for ~~Implementation Costs Incurred~~Income Taxes. The FASB issued this ASU as part of its initiative to reduce complexity in ~~a Cloud Computing Arrangement That Is a Service Contract.~~ 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 ~~requires~~related to the allocation of consolidated income taxes and evaluating a ~~customer~~step-up in ~~a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if~~ the ~~arrangement was an internal-use software project.~~tax basis of goodwill. The internal-use software guidance requires the capitalization of certain costs incurred only during the application development stage. That guidance also requires entities to expense costs during the preliminary project and post-implementation stages as they are incurred. Adoption of this ASU did not have a consequential impact on Ambac's financial statements.

Future Application of Accounting Standards:

Reference Rate Reform

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 to ease 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, ~~(January 1, 2020 for calendar year companies)~~ or any date thereafter, but does not apply to contract modifications and other transactions entered into or evaluated after December 31, 2022. Management has not determined ~~if and~~ when it will adopt this ASU, and the impact on Ambac's financial statements is being evaluated.

3. VARIABLE INTEREST ENTITIES

Ambac, with its subsidiaries, has engaged in transactions with variable interest entities ("VIEs,") in various capacities.

•Ambac provides financial guarantees, including credit derivative contracts, 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.

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

financial protection 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 athe 2018 Stipulation and Order, ~~the OCI requires Ambac Assurance~~AAC is required to obtain ~~their~~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, ~~Ambac Assurance~~AAC does not have the right to direct the most significant activities of those FG VIEs.

•We determined that Ambac’s subsidiaries 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 that most significantly impact the VIE’s economic performance due to one or more of the following: (i) the transaction 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 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.

•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 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

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, ~~we recognize~~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 and (ii) the carrying amount of the VIE’s assets and liabilities. Gains or losses 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 ceded premium, subrogation 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 ~~securities balance is~~balances are eliminated upon consolidation.

FG VIEs which are consolidated may include non-recourse assets or liabilities. FG VIEs' liabilities (and in some cases assets) that are insured by the Company are with recourse, because the Company guarantees the payment of principal and interest in the event the issuer defaults. FG VIEs' assets and liabilities that are not insured by the Company are without recourse, because Ambac has not issued a financial guarantee and is under no obligation for the payment of principal and interest of these instruments. Therefore, the Company’s economic exposure to consolidated FG VIEs is limited to the financial guarantees issued for recourse assets and liabilities and any additional variable interests held by Ambac. Additionally, Ambac’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 Sponsored Non-consolidated VIEs:

In 1994, Ambac established a VIE to provide certain financial guarantee clients with funding for their debt obligations. This VIE was established as a separate legal entity, demonstrably distinct from Ambac and that Ambac, its affiliates or its agents could not unilaterally dissolve. The permitted activities of this entity are contractually limited to purchasing assets from Ambac, issuing medium-term notes ("MTNs") to fund such purchases, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred. Ambac does not consolidate this entity because the exercise of related control rights in such policies remain subject to OCI approval under the Stipulation and Order, as discussed above. Ambac elected to account for its equity interest in this entity at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC. We believe that the fair value of the investments in this entity provides for greater transparency for recording profit or loss as compared to the equity method under the Investments – Equity Method and Joint Ventures Topic of the ASC. AtOn

~~September 30, 2020~~February 22, 2021 the last investment held, derivative instrument and MTN issued by this entity matured and were paid in full. At March 31, 2021 and December 31, ~~2019,~~2020, the fair value of this entity was $2$1 and ~~$3,~~$1, respectively, and is reported within Other assets on the Consolidated Balance Sheets.

•Total principal amount of debt outstanding was ~~$392 and $403~~$410 at ~~September 30, 2020 and~~ December 31, ~~2019, respectively. In each case,~~2020.

On August 28, 2014, Ambac ~~sold assets to this entity, which are composed~~monetized its ownership of ~~utility obligations with a weighted average rating of BBB+ at September 30, 2020, and weighted average life of 0.4 years. The purchase by this entity of financial assets was financed through~~ the issuance of MTNs, which are cross-collateralized by the purchased assets. The MTNs have the same expected weighted average life as the purchased assets. Derivative contracts (interest rate swaps) are used within the entity for economic hedging purposes only. Derivative positions were established at the time MTNs werejunior surplus note issued to ~~purchase financial assets.~~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 does not consolidate the VIE since it does 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). As ~~of September 30, 2020, Ambac Assurance had financial~~further described in Note 1. Background and Business

~~guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by~~Description, on January 22, 2021, AAC completed the ~~entity.~~

•Insurance premiums paid to Ambac Assurance by this entity are earned in a manner consistent with other insurance policies, over the risk period. Additionally, any losses incurred on such insurance policies are included in Ambac’s Consolidated Statements of Total Comprehensive Income (Loss). Under the terms of an Administrative Agency Agreement, Ambac provides certain administrative duties, primarily collecting amounts due on the obligations and making interest payments on the MTNs.

~~On August 28, 2014, Ambac monetized its ownership~~Corolla Note Exchange transaction whereby it acquired 100% of the ~~junior~~outstanding Notes of the Corolla Trust and the Corolla Certificates for AAC surplus ~~note issued to it by Ambac Assurance by depositing~~notes and subsequently dissolved the junior surplus note into a newly formed VIE trust in exchange for cash and an owner trust certificate, which represents Ambac's right to residual cash flows from the junior surplus note. Ambac does not consolidate the VIE since it does not have a variable interest in the trust. Ambac reports its owner trust 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 $49 and $46 as of September 30, 2020 and December 31, 2019, respectively.Corolla Trust.

On February 12, 2018, Ambac formed a VIE, Ambac LSNI, LLC ("Ambac LSNI"). Ambac LSNI issued Secured Notes in connection with the Rehabilitation Exit Transactions. Ambac does not consolidate the VIE since it does not have a variable

interest in the trust. Ambac reports its holdings of Secured Notes within Fixed ~~Income~~Maturity Securities in the Consolidated Balance Sheets. The carrying value of Secured Notes held by Ambac was ~~$470~~$464 and ~~$535~~$465 at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. Ambac's debt obligation to the VIE (the Ambac Note) had a carrying value of ~~$1,648~~$1,626 and ~~$1,763~~$1,641 at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, and is reported within Long-term debt on the Consolidated Balance Sheets.

5. NET INCOME PER SHARE

As of ~~September 30, 2020, 45,809,139~~March 31, 2021, 46,197,102 shares of ~~Ambac's~~AFG's common stock (par value $0.01) and warrants entitling holders to acquire up to ~~4,877,749~~4,877,693 shares of new common stock at an exercise price of $16.67 per share were issued and outstanding. Common shares outstanding increased by ~~253,739~~387,963 during the ~~nine~~

three months ended ~~September 30, 2020,~~March 31, 2021, primarily due to settlements of employee restricted and performance stock units.

~~Basic~~The numerator of the basic and diluted earnings per share computation represents net income ~~per share~~(loss) attributable to common stockholders adjusted by the retained earnings impact of the noncontrolling adjustment to redemption value under ASC 480. The redemption value adjustment is ~~computed by dividing~~further described Redeemable Noncontrolling Interest section of Note 2. Basis of Presentation and Significant Accounting Policies,

The following table provides a reconciliation of net income attributable to common stockholders byto the ~~weighted-average number~~numerator in the basic and diluted earnings per share calculation, together with the resulting earnings per share amounts:


Three Months Ended March 31,	2021		2020
Net income (loss) attributable to common stockholders	$	17	$	(280)
Adjustment to redemption value (ASC 480)	$	(13)	—
Numerator of basic and diluted EPS	$	4	$	(280)
Per Share:
Basic	$	0.08	$	(6.07)
Diluted	$	0.08	$	(6.07)

The denominator of the basic earnings per share computation represents the weighted average common shares outstanding ~~and~~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 table provides a reconciliation of the weighted average shares denominator used for basic net income per share to the denominator used for diluted net income per share:


Three Months Ended March 31,	2021	2020
Basic weighted average shares outstanding denominator	46,314,049	46,060,324
Effect of potential dilutive shares (1):
Stock options	0	0
Warrants	214,904	0
Restricted stock units	121,215	0
Performance stock units (2)	207,896	0
Diluted weighted average shares outstanding denominator	46,858,064	46,060,324
Anti-dilutive shares excluded from the above reconciliation:
Stock options	0	16,667
Warrants	0	4,877,749
Restricted stock units	165,529	236,189
Performance stock units (2)	0	738,039

(1) For the three months ended March 31, 2020, Ambac had a net loss and accordingly excluded all potentially dilutive securities from the

Diluted net income per share is computed by dividing net income attributable to common stockholders 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.~~


	Future Premiums to be Collected (1)		Future Premiums to be Earned Net of Reinsurance (2)
Three months ended:

June 30, 2021	$	8	$	8
September 30, 2021	9		8
December 31, 2021	8		8
Twelve months ended:
December 31, 2022	34		31
December 31, 2023	33		29
December 31, 2024	32		28
December 31, 2025	30		26
Five years ended:
December 31, 2030	129		110
December 31, 2035	90		71
December 31, 2040	42		29
December 31, 2045	19		11
December 31, 2050	7		4
December 31, 2055	1		0


Total	$	443	$	364

(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.

(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 in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. This results in a different premium receivable balance than if expected 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 different unearned premium than if expected lives were considered. If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

Below is a rollforward of the premium receivable allowance for credit losses as of ~~September 30,~~March 31, 2021 and 2020:


		Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Three Months Ended March 31,						Three Months Ended March 31,	2021		2020
Beginning balance (1)	Beginning balance (1)	$	16	$	9	Beginning balance (1)	$	17	$	9
Current period provision (2)	Current period provision (2)	2		9		Current period provision (2)	(4)		5
Write-offs of the allowance	Write-offs of the allowance	0		0		Write-offs of the allowance	0		0
Recoveries of previously written-off amounts	Recoveries of previously written-off amounts	0		0		Recoveries of previously written-off amounts	0		0
Ending balance	Ending balance	$	18	$	18	Ending balance	$	13	$	14

COVID-19:

In March 2020, the outbreak of COVID-19 pandemic, caused by a novel strain of the coronavirus, was recognized as a pandemic by the World Health Organization, and the outbreak is widespread globally, including in the markets in which we operate. The COVID-19 outbreak had, and continues to have, a notable 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, such as hotels, restaurants, sports and entertainment facilities, airports and other transportation facilities, and retail establishments, mostly due to social distancing guidelines, travel bans and restrictions, and business restrictions and shutdowns.

COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and

investment portfolios has increased. In the insured portfolio, municipal, mortgage-backed, student loan and other asset securitization exposures could be materially adversely impacted.

In the U.S., significant fiscal stimulus measures, monetary policy actions and other relief measures have helped to moderate the negative economic impacts of COVID-19, and have supported the economic recovery which began in the second half of 2020 and continues into 2021. These measures include the March 2021, $1.9 trillion American Rescue Plan Act or ARPA, which together with other fiscal stimulus measures put in place in 2020, provide for, among other things, funding to state and local governments, direct payments to households, support for small businesses, renter assistance and funding for transport, airlines, healthcare and education. Monetary policy decisions have included quantitative easing and the provision of liquidity to financial institutions and credit markets. In addition, housing measures, such as forbearance on mortgages and suspension of foreclosures and evictions, and various executive orders have helped to

Surveillance Categories as of December 31, 2019
I IA II III IV V Total
Number of policies 34 18 11 16 139 3 221
Remaining weighted-average contract period (in years) (1)
8 21 9 17 14 3 15
Gross insured contractual payments outstanding:
Principal $ 668 $ 510 $ 277 $ 857 $ 3,819 $ 37 $ 6,168
Interest 340 507 128 366 1,678 11 3,029
Total $ 1,007 $ 1,016 $ 404 $ 1,223 $ 5,498 $ 48 $ 9,197
Gross undiscounted claim liability $ 2 $ 44 $ 21 $ 541 $ 1,778 $ 48 $ 2,434
Discount, gross claim liability 0 (5) (1) (152) (381) (2) (541)
Gross claim liability before all subrogation and before reinsurance 2 39 20 389 1,397 46 1,893
Less:
Gross RMBS subrogation (2)
0 0 0 0 (1,777) 0 (1,777)
Discount, RMBS subrogation 0 0 0 0 49 0 49
Discounted RMBS subrogation, before reinsurance 0 0 0 0 (1,727) 0 (1,727)
Less:
Gross other subrogation (3)
0 0 0 (41) (666) (13) (720)
Discount, other subrogation 0 0 0 4 47 3 53
Discounted other subrogation, before reinsurance 0 0 0 (37) (620) (10) (666)
Gross claim liability, net of all subrogation and discounts, before reinsurance 2 39 20 353 (950) 36 (501)
Less: Unearned premium revenue (1) (9) (1) (7) (35) 0 (54)
Plus: Loss expense reserves 1 1 1 4 67 0 73
Gross loss and loss expense reserves $ 1 $ 30 $ 20 $ 349 $ (918) $ 36 $ (482)
Reinsurance recoverable reported on Balance Sheet (4)
$ 0 $ 6 $ 7 $ 24 $ (10) $ 0 $ 26

7. INTANGIBLE ASSETS

Insurance intangible asset:

~~The insurance intangible amortization expense is included in the Consolidated Statements of Total Comprehensive Income (Loss), as shown below.~~

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Insurance amortization expense $ 14 $ 17 $ 41 $ 280

The insurance intangible asset and accumulated amortization are included in the Consolidated Balance Sheets, as shown below.


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Gross carrying value of insurance intangible asset	Gross carrying value of insurance intangible asset	$	1,268	$	1,273	Gross carrying value of insurance intangible asset	$	1,282	$	1,281
Accumulated amortization of insurance intangible asset	Accumulated amortization of insurance intangible asset	885		847		Accumulated amortization of insurance intangible asset	927		908
Net insurance intangible asset	Net insurance intangible asset	$	383	$	427	Net insurance intangible asset	$	356	373

Other Intangible Assets:

In connection with the acquisition of Xchange the fair value of identifiable intangible assets were recorded. The majority of these intangible assets relate to existing relationships Xchange maintained with a variety of brokers and distributors across its product lines. The gross carrying value of the identifiable intangibles, accumulated amortization and net identifiable intangibles is $36, $1 and $35, respectively at March 31, 2021 and $36, $0 and $36, respectively at December 31, 2020. The overall weighted average useful life of the identified amortizable intangible assets acquired is 14.0 years.

Amortization Expense:

Amortization expense is included in the Consolidated Statements of Total Comprehensive Income (Loss), as shown below.


Three Months Ended March 31,	2021		2020
Insurance amortization expense	$	19	$	13
Other amortization expense	1		0
Total	$	19	$	13

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 in determining financial 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 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 ~~income~~maturity securities, equity interests in pooled investment funds, derivative instruments,

certain variable interest entity assets and liabilities and interests in Ambac sponsored special purpose entities. 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 the financial instruments valued using 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 senior financial management. Other valuation control procedures specific to particular portfolios are described further below.

Fixed ~~Income~~Maturity Securities:

The fair values of fixed ~~income~~maturity investment securities are based primarily on market prices received from broker quotes or alternative pricing sources. Because many fixed ~~income~~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 ~~income~~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 ~~September 30, 2020,~~March 31, 2021, approximately 4%3%, ~~94%~~95% and 2% of the fixed ~~income~~maturity investment portfolio (excluding variable interest entity investments) was valued using broker quotes, alternative pricing sources and internal valuation models, respectively. At December 31, ~~2019,~~2020, approximately 4%2%, ~~94%~~95% and 2%3% of the fixed ~~income~~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 ~~income~~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 ~~income~~maturity securities classified as Level 3 is included below:

Other asset-backed securities: This security is a subordinated tranche of a ~~re-securitization~~securitization collateralized by Ambac-insured military housing bonds. The fair value classified as Level 3 was ~~$75~~$76 and ~~$72~~$78 at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 include the following:


~~September 30, 2020:~~March 31, 2021:
a. Coupon rate:			5.98%
b. Average Life:			~~15.01~~14.66 years
c. Yield:			~~11.00%~~10.75%

December 31, ~~2019:~~2020:
a. Coupon rate:			5.97%
b. Average Life:			~~15.58~~14.83 years
c. Yield:			~~11.75%~~10.50%

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 9. Investments for additional information about 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 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

~~funds are valued using NAV as a practical expedient as permitted under the Fair Value Measurement Topic of the ASC. Refer to~~ ~~Note 8. Investments~~ ~~for additional information about such investments in pooled funds that are reported at fair value using NAV as a practical expedient.~~

Other investments also includes Ambac's equity interest in a non-consolidated VIE created in connection with Ambac's monetization of Ambac Assurance junior surplus notes. This equity interest is carried under the equity method. Fair value for the non-consolidated VIE equity interest is internally calculated using a market approach and is classified as Level 3.

~~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, right of set-off with the counterparty, the period of time remaining on the derivative and the pricing of recent terminations. The aggregated Ambac CVA impact reduced the fair value of ~~credit~~ derivative liabilities ~~was reduced~~ by less than a million dollars at ~~September 30, 2020~~both March 31, 2021 and December 31, ~~2019,~~2020, respectively as a result of incorporating an Ambac CVA into the valuation model for these contracts. Interest rate swap liabilities are collateralized and are not adjusted with an Ambac CVA at September 30, 2020 and December 31, 2019.

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 provide the same protection at the balance sheet date. Unobservable

inputs used include Ambac's internal reference obligation credit ratings and ~~expected~~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 ~~September 30, 2020.~~March 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 ~~market place,~~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 ~~Ambac Assurance~~AAC surplus notes and junior surplus notes, the Ambac Note and Tier 2 Notes issued in connection with the Rehabilitation Exit Transactions and the Ambac UK debt issued in connection with the Ballantyne commutation. The fair values of surplus notes, the 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 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 ~~income~~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 3. Variable Interest Entities, these FG VIEs are securitization entities which have liabilities and/or assets guaranteed by ~~Ambac Assurance~~AAC or Ambac UK.

The fair values of FG VIE long-term debt are based on price quotes received from independent market sources when 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 sensitivities of investments in fixed ~~income~~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 ~~incorporate~~

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 0 transfers of financial instruments into or out of Level 3 in the periods disclosed.

Ambac’s non-VIE invested assets are primarily comprised of fixed ~~income~~maturity securities classified as available-for-sale and interests in pooled investment funds, which are reported within Other investments on the Consolidated Balance Sheets. 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 ~~include~~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. There are no equity interests held by AFG as of March 31, 2021.

Disclosures in this Note for the ~~period~~periods ended ~~September 30,~~March 31, 2021 and December 31, 2020, 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.~~

~~Fixed Income Securities:~~

~~The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at September 30, 2020 and December 31, 2019, were as follows:~~

| Ambac Financial Group, Inc. 3228 ~~2020 Third~~2021 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

Amortized
Cost Allowance for Credit Losses Gross
Unrealized
Gains in AOCI Gross
Unrealized
Losses in AOCI Estimated
Fair Value
September 30, 2020:
Fixed income securities:
Municipal obligations $ 322 $ 0 $ 29 $ 1 $ 351
Corporate obligations (1)
1,066 0 28 3 1,091
Foreign obligations 76 0 1 0 77
U.S. government obligations 118 0 4 1 122
Residential mortgage-backed securities 251 0 45 0 296
Collateralized debt obligations 74 0 0 1 73
Other asset-backed securities 268 0 33 1 300
2,176 0 140 6 2,311
Short-term 586 0 0 0 586
2,761 0 141 6 2,896
Fixed income securities pledged as collateral:
Short-term 152 0 0 0 152
Total collateralized investments 152 0 0 0 152
Total available-for-sale investments $ 2,914 $ 0 $ 141 $ 6 $ 3,048

Policies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair Value
Non-credit
Other-than
temporary
Impairments (2)
December 31, 2019:
Fixed income securities:
Municipal obligations $ 194 $ 22 $ 0 $ 215 $ 0
Corporate obligations (1)
1,396 36 2 1,430 0
Foreign obligations 44 1 0 44 0
U.S. government obligations 157 2 2 156 0
Residential mortgage-backed securities 200 47 0 248 0
Commercial mortgage-backed securities 49 1 0 50 0
Collateralized debt obligations 147 0 1 146 0
Other asset-backed securities 263 24 0 287 0
2,450 132 5 2,577 0
Short-term 653 0 0 653 0
3,103 132 5 3,230 0
Fixed income securities pledged as collateral:
Short-term 85 0 0 85 0
Total collateralized investments 85 0 0 85 0
Total available-for-sale investments $ 3,187 $ 132 $ 5 $ 3,314 $ 0

Fixed Maturity Securities:

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2021 and December 31, 2020, were as follows:


	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2021:
Fixed maturity securities:
Municipal obligations	$	329	$	0	$	38	$	0	$	366
Corporate obligations (1)	1,106		0		14		13		1,108
Foreign obligations	98		0		0		1		97
U.S. government obligations	109		0		1		2		108

Residential mortgage-backed securities	219		0		50		0		269

Collateralized debt obligations	97		0		0		0		97
Other asset-backed securities (2)	262		0		33		0		295
	2,221		0		136		17		2,341
Short-term	398		0		0		0		397
	2,619		0		136		17		2,738
Fixed maturity securities pledged as collateral:
U.S. government obligations	15		0		0		0		15
Short-term	105		0		0		0		105
	120		0		0		0		120
Total available-for-sale investments	$	2,739	$	0	$	136	$	17	$	2,858


	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2020:
Fixed maturity securities:
Municipal obligations	$	321	$	0	$	37	$	0	$	358
Corporate obligations (1)	1,059		0		24		6		1,077
Foreign obligations	97		0		1		0		98
U.S. government obligations	105		0		2		1		106

Residential mortgage-backed securities	256		0		46		0		302

Collateralized debt obligations	74		0		0		0		74
Other asset-backed securities (2)	263		0		40		0		303
	2,175		0		149		8		2,317
Short-term	492		0		0		0		492
	2,667		0		149		8		2,809
Fixed maturity securities pledged as collateral:
U.S. government obligations	15		0		0		0		15
Short-term	125		0		0		0		125
	140		0		0		0		140
Total available-for-sale investments	$	2,807	$	0	$	149	$	8	$	2,949

(1)Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions.

(2)~~At December 31, 2019, represents~~Consists primarily of Ambac's holdings of the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment. These losses are included in gross unrealized losses at December 31, 2019.military housing and student loan securities.

| Ambac Financial Group, Inc. 3329 ~~2020 Third~~2021 First Quarter FORM 10-Q |

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited 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 ~~September 30, 2020,~~March 31, 2021, by contractual maturity, were as follows:


		Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value
Due in one year or less	Due in one year or less	$	830	$	832	Due in one year or less	$	617	$	618
Due after one year through five years	Due after one year through five years	876		888		Due after one year through five years	906		912
Due after five years through ten years	Due after five years through ten years	432		453		Due after five years through ten years	455		459
Due after ten years	Due after ten years	182		206		Due after ten years	183		209
		2,320		2,379			2,160		2,197
Residential mortgage-backed securities	Residential mortgage-backed securities	251		296		Residential mortgage-backed securities	219		269

Collateralized debt obligations	Collateralized debt obligations	74		73		Collateralized debt obligations	97		97
Other asset-backed securities	Other asset-backed securities	268		300		Other asset-backed securities	262		295
Total	Total	$	2,914	$	3,048	Total	$	2,739	$	2,858

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 ~~Income~~Maturity Securities:

The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at ~~September 30,~~March 31, 2021 and December 31, 2020, did not have an allowance for credit losses under the ~~new~~ CECL ~~standard and, at December 31, 2019, did not have other-than-temporary impairments recorded in earnings under prior GAAP.~~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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


		Less Than 12 Months				12 Months or More				Total					Less Than 12 Months				12 Months or More				Total
		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
September 30, 2020:
Fixed income securities:
March 31, 2021:														March 31, 2021:
Fixed maturity securities:														Fixed maturity securities:
Municipal obligations	Municipal obligations	$	64	$	1	$	6	$	0	$	70	$	1	Municipal obligations	$	19	$	0	$	16	$	0	$	35	$	0
Corporate obligations	Corporate obligations	179		3		0		0		179		3		Corporate obligations	339		13		0		0		339		13
Foreign obligations	Foreign obligations	12		0		0		0		12		0		Foreign obligations	70		1		0		0		70		1
U.S. government obligations	U.S. government obligations	11		1		0		0		11		1		U.S. government obligations	25		2		0		0		25		2

Residential mortgage-backed securities	Residential mortgage-backed securities	19		0		0		0		19		0		Residential mortgage-backed securities	15		0		2		0		17		0

Collateralized debt obligations	Collateralized debt obligations	53		1		15		0		67		1		Collateralized debt obligations	13		0		13		0		26		0
Other asset-backed securities	Other asset-backed securities	1		0		4		1		5		1		Other asset-backed securities	0		0		0		0		0		0
		338		5		25		1		363		6			481		17		31		0		512		17
Short-term	Short-term	152		0		0		0		152		0		Short-term	157		0		0		0		157		0

Total securities	Total securities	$	490	$	5	$	25	$	1	$	515	$	6	Total securities	$	638	$	17	$	31	$	0	$	669	$	17

Less Than 12 Months 12 Months or More Total
Fair Value Gross
Unrealized
Loss Fair Value Gross
Unrealized
Loss Fair Value Gross
Unrealized
Loss
December 31, 2019:
Fixed income securities:
Municipal obligations $ 13 $ 0 $ 10 $ 0 $ 23 $ 0
Corporate obligations 63 2 5 0 68 2
Foreign obligations 20 0 0 0 20 0
U.S. government obligations 36 2 2 0 38 2
Residential mortgage-backed securities 5 0 0 0 5 0
Commercial mortgage-backed securities 7 0 0 0 7 0
Collateralized debt obligations 53 0 63 1 116 1
Other asset-backed securities 2 0 7 0 10 0
200 4 88 1 288 5
Short-term 201 0 0 0 201 0
Total securities $ 401 $ 4 $ 88 $ 1 $ 489 $ 5

(1)Investments consist of UK property to generate income and capital growth.

(2)This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies across a range of asset types.

(3)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.

(4)This class aims to obtain high long-term ~~return~~returns primarily through credit and preferred equity investments with low liquidity and defined term.

(5)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.

(6)This class of funds aim to achieve long term growth through diversified exposure to global ~~equity markets.~~equity-markets.

(7)This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate ~~notes as well as ultra-short term bonds and money market instruments.~~notes.

(8)This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments.

(9)This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets.

(10)These categories include fair value amounts totaling ~~$60~~$99 and ~~$136~~$89 at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products: $3$0 and ~~$81;~~$3; for Equity market investments: ~~$33~~$66 and ~~$55;~~$60; and for Emerging markets debt ~~$23~~$33 and $0$25.

Ambac also holds direct equity interests, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which is accounted for under the equity method.

~~Investment Income (loss):~~

~~Net investment income (loss) was comprised of the following for the affected periods:~~

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Fixed income securities $ 24 $ 33 $ 79 $ 151
Short-term investments 1 4 4 14
Loans 0 0 0 1
Investment expense (1) (1) (4) (4)
Securities available-for-sale and short-term 24 36 80 161
Other investments 14 8 (11) 25
Total net investment income (loss) $ 37 $ 45 $ 69 $ 186

Net investment income (loss) from Other investments primarily represents changes in fair value on securities classified as trading or accounted for under the fair value option, income from investment limited partnerships accounted for under the equity method and the above noted equity interest in an unconsolidated trust accounted for under the equity method.

| Ambac Financial Group, Inc. 3732 ~~2020 Third~~2021 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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:


Three Months Ended March 31,	2021		2020
Fixed maturity securities	$	23	$	30
Short-term investments	0		2

Investment expense	(1)		(2)
Securities available-for-sale and short-term	22		31
Other investments	27		(52)
Total net investment income (loss)	$	49	$	(21)

Net investment income (loss) from Other investments primarily represents changes in fair value on securities classified as trading

or accounted for under the fair value option and income from investment limited partnerships accounted for under the equity method.

The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:

Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net gains (losses) recognized during the period on trading securities $ 3 $ 6 $ (12) $ 19
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period 0 2 (19) 4
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date $ 3 $ 4 $ 7 $ 15


Three Months Ended March 31,	2021		2020
Net gains (losses) recognized during the period on trading securities	$	7	$	(32)
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period	0		(3)
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date	$	6	$	(29)

9.10. 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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~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			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
September 30, 2020:
March 31, 2021:												March 31, 2021:
Derivative Assets:	Derivative Assets:											Derivative Assets:

Interest rate swaps	Interest rate swaps	$	95	$	0	$	94	$	—	$	94	Interest rate swaps	$	73	$	0	$	73	$	—	$	73

Futures contracts												Futures contracts	1		—		1		—		1
Total non-VIE derivative assets	Total non-VIE derivative assets	$	95	$	0	$	95	$	0	$	95	Total non-VIE derivative assets	$	74	$	0	$	74	$	0	$	74
Derivative Liabilities:	Derivative Liabilities:											Derivative Liabilities:
Credit derivatives	Credit derivatives	$	1	$	0	$	1	$	—	$	1	Credit derivatives	$	0	$	0	$	0	$	—	$	0
Interest rate swaps	Interest rate swaps	125		0		125		124		1		Interest rate swaps	85		0		85		85		1

Total non-VIE derivative liabilities	Total non-VIE derivative liabilities	$	126	$	0	$	126	$	124	$	2	Total non-VIE derivative liabilities	$	86	$	0	$	86	$	85	$	1
Variable Interest Entities Derivative Assets:	Variable Interest Entities Derivative Assets:											Variable Interest Entities Derivative Assets:

Currency swaps	Currency swaps	$	53	$	0	$	53	$	—	$	53	Currency swaps	$	38	$	0	$	38	$	—	$	38
Total VIE derivative assets	Total VIE derivative assets	$	53	$	0	$	53	$	0	$	53	Total VIE derivative assets	$	38	$	0	$	38	$	0	$	38
Variable Interest Entities Derivative Liabilities:	Variable Interest Entities Derivative Liabilities:											Variable Interest Entities Derivative Liabilities:
Interest rate swaps	Interest rate swaps	$	1,771	$	—	$	1,771	$	—	$	1,771	Interest rate swaps	$	1,739	$	—	$	1,739	$	—	$	1,739

Total VIE derivative liabilities	Total VIE derivative liabilities	$	1,771	$	0	$	1,771	$	0	$	1,771	Total VIE derivative liabilities	$	1,739	$	0	$	1,739	$	0	$	1,739

December 31, 2019:
Derivative Assets:
Interest rate swaps $ 75 $ 0 $ 75 $ 0 $ 75
Total non-VIE derivative assets $ 75 $ 0 $ 75 $ 0 $ 75
Derivative Liabilities:
Interest rate swaps 89 0 90 89 1
Total non-VIE derivative liabilities $ 90 $ 0 $ 90 $ 89 $ 1
Variable Interest Entities Derivative Assets:
Currency swaps $ 52 $ — $ 52 $ 0 $ 52
Total VIE derivative assets $ 52 $ 0 $ 52 $ 0 $ 52
Variable Interest Entities Derivative Liabilities:
Interest rate swaps $ 1,657 $ — $ 1,657 $ — $ 1,657
Total VIE derivative liabilities $ 1,657 $ 0 $ 1,657 $ 0 $ 1,657

| Ambac Financial Group, Inc. 332021 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)


	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, 2020:
Derivative Assets:

Interest rate swaps	$	93	$	0	$	93	$	0	$	93

Total non-VIE derivative assets	$	93	$	0	$	93	$	0	$	93
Derivative Liabilities:

Interest rate swaps	114		0		114		113		1


Total non-VIE derivative liabilities	$	114	$	0	$	114	$	113	$	1
Variable Interest Entities Derivative Assets:

Currency swaps	$	41	$	—	$	41	$	0	$	41
Total VIE derivative assets	$	41	$	0	$	41	$	0	$	41
Variable Interest Entities Derivative Liabilities:
Interest rate swaps	$	1,835	$	—	$	1,835	$	—	$	1,835

Total VIE derivative liabilities	$	1,835	$	0	$	1,835	$	0	$	1,835

Amounts ~~recognized for~~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 Unaudited Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and posted margin, recorded in “Other assets” were $1$4 and ~~$36~~$1 as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. There were 0 amounts held representing an obligation to return cash collateral as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~

~~| Ambac Financial Group, Inc.~~ 38~~2020 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Millions, Except Share Amounts)~~

2020.

The following tables summarize the location and amount of gains and losses of derivative contracts in the Unaudited Consolidated Statements of Total Comprehensive Income (Loss) for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


		Location of Gain or (Loss) Recognized in Consolidated Statements of Total Comprehensive Income (Loss)			Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income (Loss)																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)
				Three Months Ended September 30,							Nine Months Ended September 30,												Three Months Ended March 31,
				2020			2019				2020				2019								2021			2020
Non-VIE derivatives:	Non-VIE derivatives:																					Non-VIE derivatives:

Credit derivatives	Credit derivatives		Net gains (losses) on derivative contracts				$	0			$	1			$	(1)			$	1		Credit derivatives	Net gains (losses) on derivative contracts			$	0			$	(1)
Interest rate swaps	Interest rate swaps	Net gains (losses) on derivative contracts			7				(1)				(20)				(11)		Interest rate swaps		Net gains (losses) on derivative contracts			17				(29)

Futures contracts	Futures contracts	Net gains (losses) on derivative contracts			0				(10)				(41)				(52)		Futures contracts		Net gains (losses) on derivative contracts			8				(40)

Total Non-VIE derivatives	Total Non-VIE derivatives				$	7			$	(10)			(61)				(61)		Total Non-VIE derivatives					$	25			$	(70)
Variable Interest Entities:	Variable Interest Entities:																		Variable Interest Entities:
Currency swaps	Currency swaps	Income (loss) on variable interest entities			$	(10)			$	10			7				6		Currency swaps		Income (loss) on variable interest entities			$	(2)			$	10
Interest rate swaps	Interest rate swaps	Income (loss) on variable interest entities			(4)				(166)				(177)				(272)		Interest rate swaps		Income (loss) on variable interest entities			97				47
Total Variable Interest Entities	Total Variable Interest Entities				(14)				(156)				(170)				(266)		Total Variable Interest Entities					96				57
Total derivative contracts	Total derivative contracts				$	(7)			$	(166)			$	(231)			$	(327)	Total derivative contracts					$	121			$	(13)

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 relating to an underlying obligation. Credit derivatives issued are insured by ~~Ambac Assurance.~~AAC. The outstanding credit derivative transaction at ~~September 30, 2020,~~March 31, 2021, does not include ~~ratings based~~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.

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 ~~gross~~ principal notional outstanding for credit derivative contracts was ~~$293~~$247 and ~~$280~~$257 as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively, all of which had internal Ambac ratings of AA in both periods.

| Ambac Financial Group, Inc. 342021 First Quarter FORM 10-Q |

Table of Contents

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

(Dollar Amounts in Millions, Except Share Amounts)

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the notional amounts of AFS’s derivatives ~~were~~are as follows:


		Notional					Notional
Type of Derivative	Type of Derivative	September 30, 2020		December 31, 2019		Type of Derivative	March 31, 2021		December 31, 2020
Interest rate swaps—pay-fixed/receive-variable						Interest rate swaps—pay-fixed/receive-variable	$	987	$	726
US Treasury futures contracts—short						US Treasury futures contracts—short	470		240
Interest rate swaps—receive-fixed/pay-variable	Interest rate swaps—receive-fixed/pay-variable	$	240	$	332	Interest rate swaps—receive-fixed/pay-variable	190		195
Interest rate swaps—pay-fixed/receive-variable		726		1,261

US Treasury futures contracts—short		240		755

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, were as follows:


		Notional					Notional
Type of VIE Derivative	Type of VIE Derivative	September 30, 2020		December 31, 2019		Type of VIE Derivative	March 31, 2021		December 31, 2020
Interest rate swaps—receive-fixed/pay-variable	Interest rate swaps—receive-fixed/pay-variable	$	1,164	$	1,194	Interest rate swaps—receive-fixed/pay-variable	$	1,243	$	1,233
Interest rate swaps—pay-fixed/receive-variable	Interest rate swaps—pay-fixed/receive-variable	1,103		1,176		Interest rate swaps—pay-fixed/receive-variable	1,143		1,151
Currency swaps	Currency swaps	298		329		Currency swaps	302		308
Credit derivatives		0		9

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

~~| Ambac Financial Group, Inc.~~ 39~~2020 Third Quarter FORM 10-Q~~ |

~~Table of Contents~~

~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Millions, Except Share Amounts)~~

that ~~Ambac Assurance~~AAC is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the net liability fair value of derivative instruments with contingent features linked to Ambac’s own credit risk was ~~$124~~$85 and ~~$89,~~$113, respectively, related to which Ambac had posted cash and securities as collateral with a fair value of ~~$144~~$103 and ~~$109,~~$130, respectively. All such ratings-based contingent features have been triggered requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all such contracts terminated at fair value on ~~September 30, 2020,~~

March 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.~~11. INCOME TAXES

AFG files a consolidated Federal income tax return with its subsidiaries. AFG and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions. 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			2010
New York State			2013
New York City			2016
United Kingdom			~~2016~~2017
Italy			~~2015~~2016

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~~its deferred tax operating assets and therefore maintains a full valuation allowance.

Consolidated Pretax Income (Loss)

U.S. and foreign components of pre-tax income (loss) were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019
Three Months Ended March 31,										Three Months Ended March 31,	2021		2020
U.S.	U.S.	$	(106)	$	60	$	(412)	$	(61)	U.S.	$	17	$	(257)
Foreign	Foreign	(2)		9		(15)		(11)		Foreign	2		(30)
Total	Total	$	(108)	$	69	$	(427)	$	(72)	Total	$	19	$	(287)

Provision (Benefit) for Income Taxes

The components of the provision for income taxes were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,
		2020		2019		2020		2019
Three Months Ended March 31,										Three Months Ended March 31,	2021		2020
Current taxes	Current taxes									Current taxes
U. S. federal	U. S. federal	$	0	$	0	$	0	$	0	U. S. federal	$	0	$	0
U.S. state and local	U.S. state and local	0		0		0		(3)		U.S. state and local	2		0
Foreign	Foreign	(1)		4		0		38		Foreign	3		(2)
Current taxes	Current taxes	(1)		4		1		35		Current taxes	5		(2)
Deferred taxes	Deferred taxes									Deferred taxes

Foreign	Foreign	1		(1)		(5)		(2)		Foreign	(3)		(5)
Deferred taxes	Deferred taxes	1		(1)		(5)		(2)		Deferred taxes	(3)		(5)
Provision for income taxes	Provision for income taxes	$	0	$	3	$	(5)	$	33	Provision for income taxes	$	2	$	(7)

~~NOL Usage~~

Pursuant to an intercompany tax sharing agreement, to the extent Ambac Assurance generates taxable income after September 30, 2011, which is offset with "Allocated NOLs" of $3,650, it is obligated to make payments (“Tolling Payments”), subject to certain credits, to AFG in accordance with the following NOL usage table, where the “Applicable Percentage” is applied to the aggregate amount of federal income tax liability that would have been paid if the Allocated NOLs were not available. Pursuant to the Closing Agreement between Ambac and the Internal Revenue Service ("IRS"), the IRS will receive 12.5% of Tier C and 17.5% of Tier D payments, if made.

~~NOL Usage Table~~

NOL Usage Tier Allocated NOLs Applicable
Percentage
A The first $479 15%
B The next $1,057 after Tier A 40%
C The next $1,057 after Tier B 10%
D The next $1,057 after Tier C 15%

As of December 31, 2018, Ambac Assurance generated cumulative taxable income of $1,508, leaving $2,142 of the $3,650 Allocated NOLs subject to Tolling Payments. For the year ended December 31, 2019, and nine months ended September 30, 2020, Ambac Assurance generated NOLs of approximately $143 and $197, respectively, which will need to be utilized before any new Tolling Payments will be generated.

If not utilized, the NOLs will begin expiring in 2029, and will fully expire in 2040, with the exception of the tax loss generated during the nine months ended September 30, 2020, of approximately $196, which if Ambac remains in a loss position at year end 2020, will expire in 2041.

As a result of positive income at Ambac Assurance in 2017, Ambac accrued $28 of tax tolling payments. In May 2018, AFG executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make the 2017 tax tolling payment by June 1,

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2018. AFG also agreed to continue to defer receipt of the 2017 tax tolling payment from Ambac Assurance until such time as OCI consents to the payment. OCI has indicated that it will consider a number of factors, including asset quality and loss and reserve trends when considering whether or not to consent to the 2017 tax tolling payment. We can provide no assurance as to whether, or when, OCI will consent to the 2017 tax tolling payment.

~~Ambac's tax positions are subject to review by the OCI, which may lead to the adoption of positions that reduce the amount of tolling payments otherwise available to Ambac.~~

As of September 30, 2020, the remaining balance of the $3,650 NOL allocated to Ambac Assurance, and new NOLs accrued during 2019 and 2020, totaled approximately $2,482. As of September 30, 2020, the consolidated group's NOL was approximately $3,731, of which Ambac's NOL was approximately $1,249.

~~11.~~12. COMMITMENTS AND CONTINGENCIES

The following commitments and contingencies provide an update of those discussed in Note 17: Commitments and Contingencies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.

Litigation Against Ambac

~~Financial Oversight and Management Board for Puerto Rico,~~Monterey Bay Military Housing, LLC, et al. v. ~~Autonomy Master Fund Limited,~~Ambac Assurance Corporation, et al. (United States District Court, Northern District of ~~Puerto Rico,~~California, San Jose Division, Case No. ~~19-ap-00291,~~17-cv-04992-BLF, filed ~~May 2, 2019)~~August 28, 2017). Plaintiffs, the corporate developers of various military housing projects, filed a second amended complaint on December 17, 2018, 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) (civil Racketeer 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. On September 26, 2019, the court issued a decision denying a motion to dismiss filed by defendants and sua sponte reconsidering its previous denial of defendants’ motion to transfer venue to the Southern District of New York (“SDNY”). On ~~May 2,~~October 10, 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 issued by the Commonwealth of Puerto Rico, including Ambac Assurance. The complaint seeks declarations that 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 stayedafter the case ~~until September 1, 2019 as~~was transferred to ~~all defendants; on July 24, 2019,~~ the ~~District Court referred this matter to mediation and ordered it stayed during~~SDNY, the ~~pendency of such mediation. Ambac Assurance filed a statement of position and reservation of rights on February 5, 2020; certain other~~ defendants filed motions in the SDNY to ~~dismiss~~vacate or reconsider the decision by the Northern District of California on ~~this same date. On February 9, 2020,~~ the ~~Oversight Board announced that it intends~~defendants’ motion to ~~file, and to seek to confirm, an amended plan of adjustment (the “Amended POA”).~~dismiss. On March ~~10, 2020,~~31, 2021, the ~~District Court ordered that this case remain stayed while~~court granted defendants’ motions for reconsideration and, upon reconsideration, dismissed the ~~Oversight Board attempts~~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 ~~confirm~~ the ~~Amended POA.~~second amended complaint on April 21, 2021.

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).

Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the team of mediators designated in the Commonwealth’s restructuring cases (the “Mediation Team“), 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~~defendants filed proofs of claim against the Commonwealth relating to PRIFA bonds. The complaint seeks to disallow ~~Defendants’~~defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on ~~motions~~the Oversight Board’s motion for summary judgment was held on September 23, 2020. On January 20, 2021, the District Court granted defendants’ request for deferral of the adjudication of the summary judgment motion until defendants have the opportunity to conduct certain discovery. Discovery is ongoing. On May 5, 2021, monoline defendants Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and National Public

Finance Guarantee Corporation (“Assured and National”) announced an agreement with the Oversight Board with respect to the treatment of bonds issued by the Puerto Rico Highways and Transportation Authority ("PRHTA") and the Puerto Rico Convention Center District Authority (“PRCCDA”) (the “PRHTA/PRCCDA Settlement”). Per the terms of the agreement, AAC anticipates the Oversight Board, Assured, and National will seek to stay this case with respect to Assured and National as a result of the PRHTA/PRCCDA Settlement.

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). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by ~~the Puerto Rico Convention Center District Authority (“PRCCDA”)~~PRCCDA and the PRCCDA bond trustee, all of which ~~Defendants~~defendants filed proofs of claim against the Commonwealth relating to PRCCDA bonds. The complaint seeks to disallow ~~Defendants’~~defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on ~~motions~~the Oversight Board’s motion for summary judgment was held on September 23, 2020. On January 20, 2021, the District Court granted defendants’ request for deferral of the adjudication of the summary judgment motion until defendants have the opportunity to conduct certain discovery. Discovery is ongoing. On May 5, 2021, Assured and National announced an agreement with the Oversight Board with respect to the PRHTA/PRCCDA Settlement. Per the terms of the agreement, AAC anticipates the Oversight Board, Assured, and National will seek to stay this case with respect to Assured and National as a result of the PRHTA/PRCCDA Settlement.

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). Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, on January 16, 2020, the Oversight Board filed an adversary proceeding against monoline insurers insuring bonds issued by ~~the Puerto Rico Highways and Transportation Authority ("PRHTA“),~~PRHTA, certain PRHTA bondholders, and the PRHTA fiscal agent for bondholders, all of which ~~Defendants~~defendants filed proofs of claim against the Commonwealth relating to PRHTA bonds. The complaint seeks to disallow ~~Defendants’~~defendants’ proofs of claim against the Commonwealth in their entirety, including for lack of secured status. Oral argument on ~~motions~~the Oversight Board’s motion for summary judgment was held on September 23, 2020. On January 20, 2021, the District Court granted defendants’ request for deferral of the adjudication of the summary judgment motion until defendants have the opportunity to conduct certain discovery. Discovery is ongoing. On May 5, 2021, Assured and National announced an agreement with the Oversight Board with respect to the PRHTA/PRCCDA Settlement. Per the terms of the agreement, AAC anticipates the Oversight Board, Assured, and National will seek to stay this case with respect to Assured and National as a result of the PRHTA/PRCCDA Settlement.

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).

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Pursuant to an order of the District Court setting out an agreed schedule for litigation submitted by the Mediation Team, 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~~defendants filed proofs of claim against PRHTA relating to PRHTA bonds. The complaint seeks to disallow portions of ~~Defendants’~~defendants’ proofs of claim against the PRHTA, including for lack of secured status. On March 10, 2020, the District Court stayed this case.

~~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, Ambac Assurance became aware~~

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~~(Dollar Amounts in Millions, Except Share Amounts)~~

~~of a new declaratory judgment action filed by certain residual equity interest holders (“NC Owners” or “Plaintiffs”) in fourteen~~May 5, 2021, Assured and National ~~Collegiate Student Loan Trusts (the “Trusts”) against Wilmington Trust Company,~~announced an agreement with the Owner Trustee for the Trusts; U.S. Bank National Association, the Indenture Trustee; GSS Data Services, Inc., the Administrator; and Ambac Assurance. Through this action, Plaintiffs seek a number of judicial determinations. On January 21, 2020, the presiding Vice Chancellor entered an order consolidating the actionOversight Board with ~~previously filed litigation relating~~respect to the ~~Trusts. On February 13, 2020, Ambac Assurance,~~PRHTA/PRCCDA Settlement. Per the Owner Trustee, the Indenture Trustee, and other parties filed declaratory judgment counterclaims. Several parties, including Plaintiffs and Ambac Assurance, 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 allterms of the ~~pending motions for judgment on~~agreement, AAC anticipates the ~~pleadings, which granted certain~~Oversight Board, Assured, and National will seek to stay this case with respect to Assured and National as a result of the ~~parties’ requested judicial determinations and denied others. He deferred judgment on still other declarations pending further factual development.~~PRHTA/PRCCDA Settlement.

~~Ambac Assurance’s~~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.

~~Ambac Assurance~~AAC has periodically received various regulatory inquiries and requests for information with respect to investigations and inquiries that such regulators are conducting. ~~Ambac Assurance~~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.

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 result from unfavorable outcomes. Under some circumstances, adverse results in any such proceedings could be material to our business, operations, financial position, 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.

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.

Puerto Rico

In re 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, Ambac Assurance 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 resolution of claim objections to and 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 “New PSA”) and announced that it intends to file, and seek to confirm, the

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~~(Dollar Amounts in Millions, Except Share Amounts)~~

~~Amended POA. On March 10, 2020, the District Court ordered that this case remain stayed while the Oversight Board attempts to confirm the Amended POA.~~

~~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 Procedures”). 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 Ambac Assurance. The court subsequently ordered certain consolidated procedures permitting parties in interest an opportunity to participate in litigation of the objection. On April 11, 2019, Ambac Assurance 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 New PSA and announced that it intends to file, and seek to confirm, the Amended POA. 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 attempts to confirm the Amended POA. 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 of adjustment in light of COVID-19. On September 1, 2020, Ambac Assurance filed a partial joinder to the Committee’s motion. On September 17, 2020, the District Court denied 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 light of materials released by the parties to the New 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 consideration. 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.

~~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 to Strike Certain Provisions of the Plan Support Agreement By and Among the Financial Oversight and Management Board for Puerto Rico, Certain GO Holders, and Certain PBA Holders ~~(Dkt.~~(Dkt. No. 13573, filed July 7, 2020) (“Amended Motion to Strike PSA”). 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. On July 16, 2019, ~~Ambac Assurance~~AAC filed a motion to strike certain provisions of the PSA that it believes violate PROMESA, including the potential payment of a breakup fee to creditors who have supported the PSA (Dkt. No. 8020) (Original Motion to Strike PSA). On February 9, 2020, the Oversight Board executed the ~~New~~Amended PSA and on March 10, 2020, the District Court denied the Original Motion to Strike PSA without prejudice given the execution of the ~~New~~Amended PSA. On July 7, 2020, ~~Ambac Assurance~~AAC filed the Amended Motion to Strike PSA seeking similar relief with respect to the ~~New~~Amended PSA. ~~Briefing~~On February 23, 2021, the Oversight Board announced that it entered into a further revised PSA (the “Second Amended PSA”), and that all parties to the Amended PSA had jointly terminated the Amended PSA, and on March 31, 2021, the District Court denied the Amended Motion to Strike PSA ~~concluded on October 20, 2020, and~~without prejudice given the ~~District Court has taken~~execution of the ~~matter on submission.~~Second Amended PSA.

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, ~~Ambac Assurance~~AAC filed a motion seeking an order that the automatic stay does not apply to certain lawsuits Ambac Assurance 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 Ambac Assurance's collateral. On July 24, 2019, the District Court referred this matter to mediation and ordered it stayed during the pendency of such mediation. On January 31, 2020, the District Court granted a motion filed by Ambac Assurance, together with Assured Guaranty Corporation, Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company to amend the PRIFA Stay Motion in order to allow the PRIFA bond trustee to join the amended motion and to allow movants to address recent, controlling precedent from the First Circuit, and Ambac Assurance filed the amended motion the same day. On July 2, 2020, the Court denied the motion to lift the stay on certain grounds. Briefing regarding additional grounds on which Ambac Assurance 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, Ambac Assurance and the other movants appealed this decision to the First Circuit. Briefing is expected to be completed by December 21, 2020, with argument heard in February 2021.

~~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~~

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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. Per the terms of the agreement, AAC anticipates the Oversight Board, Assured, and National will seek to stay this case with respect to Assured and National as a result of the PRHTA/PRCCDA Settlement.

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.~~(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, ~~Ambac Assurance,~~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 ~~Ambac Assurance~~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, ~~Ambac Assurance~~AAC and the other movants appealed this decision to the First Circuit. ~~Briefing is expected~~On March 3, 2021, the First Circuit affirmed the District Court’s opinions denying the motion to ~~be completed by December 21, 2020,~~lift the stay. On May 5, 2021, Assured and National announced an agreement with ~~argument heard in February 2021.~~the Oversight Board with respect to the PRHTA/PRCCDA Settlement. Per the terms of the agreement, AAC anticipates the Oversight Board, Assured, and National will seek to stay this case with respect to Assured and National as a result of the PRHTA/PRCCDA Settlement.

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.~~(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, ~~Ambac Assurance,~~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 ~~Ambac Assurance~~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 CCDA-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. Per the terms of the agreement, AAC anticipates the Oversight Board, Assured, and National will seek to stay this case with respect to Assured and National as a result of the PRHTA/PRCCDA Settlement.

Ambac Assurance Corporation v. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, ~~Citigroup Global Markets Inc.,~~ 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., ~~Raymond James & Associates, Inc., and~~Santander Securities LLC; UBS Financial Services Inc.; and UBS Securities LLC

~~(Commonwealth~~ (Commonwealth of Puerto Rico, Court of First Instance, San Juan Superior Court, Case No. ~~CV-000248923,~~SJ-2020-CV-01505, filed February 19, 2020). On February 19, 2020,~~Ambac Assurance~~ 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 proprios and Unilateral Declaration of Will. ~~Ambac Assurance~~AAC alleges defendants engaged in inequitable conduct in underwriting Ambac-insured bonds issued by PRIFA and PRCCDA, including failing to investigate and adequately disclose material information in the official statements for the bonds that defendants provided to ~~Ambac Assurance~~AAC regarding systemic deficiencies in the Commonwealth’s financial reporting. ~~Ambac Assurance~~AAC seeks damages in compensation for claims paid by ~~Ambac Assurance~~AAC on its financial guaranty insurance policies insuring such bonds, pre-judgment and post-judgment interest, and attorneys’ fees. On March 20, 2020, ~~Defendants~~defendants removed this case to the Title III Court. On April 20, 2020, ~~Ambac~~AAC moved to remand the case back to the Court of First Instance. On July 29, 2020, the District Court granted ~~Ambac Assurance’s~~AAC’s motion to remand the case to the Commonwealth court.~~Ambac Assurance~~ 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 had underwritten these bonds. Defendants filed motions to dismiss on

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December 8 and 14, 2020; briefing on the motions to dismiss was completed on March 5, 2021.

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, ~~Ambac Assurance~~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 for 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. ~~Ambac Assurance~~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 ~~Ambac Assurance~~AAC to withdraw its complaint. ~~Ambac Assurance~~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. ~~Ambac Assurance’s~~AAC’s opening appeal brief was filed before the First Circuit on October 19, 2020; ~~opposition briefs are due to be filed~~briefing was completed on ~~December 18, 2020.~~

~~Ambac Assurance Corporation v. Financial Oversight~~February 12, 2021 and ~~Management Board for Puerto Rico~~ (United States District Court, District of Puerto Rico, No. 3:20-bk-00068, filed May 26, 2020). On May 26, 2020, Ambac Assurance 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

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~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Millions, Except Share Amounts)~~

~~the pending Title III petitions. On August 17, 2020, the Oversight Board filed a motion to dismiss the complaint;~~oral argument was held 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 motion to dismiss on October 2, 2020. Briefing on the motions to dismiss are expected to conclude on November 23, 2020, with a hearing on January 12,March 8, 2021.

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) (“~~HTA~~PRHTA Trustee Motion”). On July 17, 2020, ~~Ambac Assurance,~~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 ~~HTA~~PRHTA against the Commonwealth of Puerto Rico. The ~~HTA~~PRHTA Trustee Motion attached a proposed complaint detailing the avoidance claims that movants would pursue. On August 11, 2020, the District Court denied the ~~HTA~~PRHTA Trustee Motion; on August 24, 2020, movants noticed an appeal of the denial of the ~~HTA~~PRHTA Trustee Motion to the First Circuit. ~~On September 30, 2020, movants filed a motion with~~Movants’ opening brief before the First Circuit was filed on February 17, 2021; briefing is expected to ~~hold this appeal in abeyance pending the First Circuit’s resolution of the appeal from the District Court’s denial of the HTA Lift-Stay Motion.~~conclude on May 24, 2021. On ~~October 13, 2020,~~May 5, 2021, Assured and National announced an agreement with the Oversight Board ~~opposed~~with respect to the ~~motion to hold~~PRHTA/PRCCDA Settlement. Per the ~~appeal in abeyance and cross-moved to dismiss~~terms of the appeal as moot, arguing that the statute of limitations on the avoidance actions movants wish to pursue has expired. On October 20, 2020, movants filed a reply in support of their motion to hold the appeal in abeyance, and opposed the Oversight Board’s cross-motion to dismiss the appeal as moot. On October 27, 2020,agreement, AAC anticipates the Oversight Board, ~~filed~~Assured, and National will seek to stay this case with respect to Assured and National as a ~~reply in support~~result of ~~its cross-motion to dismiss~~ the ~~appeal as moot.~~PRHTA/PRCCDA Settlement.

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~~On March 19, 2020, intervenor Transworld Systems Inc. filed a motion to dismiss this action by the Consumer Financial Protection Bureau (“CFPB”) ~~filed a complaint~~ against fifteen National Collegiate Student Loan Trusts, regarding

alleged improprieties and deficiencies in servicing practices. 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. Ambac Assurance guaranteed certain securities issued by three of the Trusts and indirectly insures six other Trusts. On September 20, 2017, Ambac Assurance 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~~practices for lack of subject matter jurisdiction. On July 10, 2020, ~~Ambac Assurance~~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. ~~Briefing on both motions to dismiss is complete.~~ Additionally, on July 2, 2020, the CFPB submitted an application for entry of default against the Trusts. ~~Ambac Assurance~~On March 26, 2021, the court granted intervenors’ motion to dismiss for failure to state a claim and denied the ~~Owner Trustee opposed~~motion to dismiss for lack of subject matter jurisdiction. The court also denied as moot the CFPB’s application ~~which remains pending.~~for entry of default against the Trusts. The CFPB filed an amended complaint on April 30, 2021.

RMBS Litigation

In connection with ~~Ambac Assurance’s~~AAC’s efforts to seek redress for breaches of representations and warranties and fraud related to 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, ~~Ambac Assurance~~AAC has filed various lawsuits:

•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). ~~Ambac Assurance’s Second Amended Complaint, filed~~Oral argument on ~~May 28, 2013, asserted claims against Countrywide and Bank~~AAC’s appeal of ~~America (as successor to Countrywide’s liabilities) for, among other things, breach~~the court’s dismissal on December 4, 2020, of contract and fraudulent inducement. In August and October 2018, Defendants filed various pre-trial motions. 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. On October 17, 2019, Countrywide filed a motion for leave to appeal certain issuesits fraud claim was held on April 20, 2021. We can provide no assurance as to the ~~New York Court~~outcome of ~~Appeals and for reargument or leave to appeal certain other issues. On January 16, 2020,~~ the First Department recalled and 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 Ambac Assurance opposed. On June 11, 2020, the First Department denied Countrywide’s motion for leave to appeal. On January 14, 2020, the trial court granted Ambac Assurance’s motion to supplement and amend certain of its expert reports, and expert discovery is ongoing. On June 25, 2020, the trial court scheduled trial to commence on February 22, 2021 (which couldInvestors should not assume that AAC's fraud claim will be rescheduled if the COVID-19 pandemic prevents the court system from holding jury trials or there are other intervening causes of delay). On August 12, 2020, Countrywide filed a motion to dismiss Ambac’s fraud claim. The court has scheduled oral argument on that motion for November 13, 2020. reinstated.

•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,

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~~AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~Notes to Unaudited Consolidated Financial Statements~~

~~(Dollar Amounts in Millions, Except Share Amounts)~~

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 two actions relate 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 Ambac Assurance 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 the proposed settlement, and on June 12, 2017, U.S. Bank filed an amended petition. Ambac Assurance 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. Bank9, 2021, AAC filed its ~~Second Amended Petition, and Ambac Assurance and certain other certificateholders objected to, or otherwise responded to,~~opening brief for its appeal of the ~~petition. Trial, which was previously scheduled to begin October 14, 2020, has been rescheduled to February 1 through 5, 2021. On June 8, 2018, Ambac Assurance filed~~granting by the court in the SDNY Action ~~asserting claims arising out~~ of U.S. Bank’s acceptance of the proposed settlement and treatment of trust recoveries. Ambac Assurance asserted claims for declaratory judgment, breach of contract, and breach of fiduciary duty. On July 16, 2019, the court dismissed Ambac Assurance's breach-of-contract and breach-of-fiduciary-duty claims based on U.S. Bank's acceptance of the settlement; and dismissed Ambac Assurance'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 Ambac Assurance'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~~with respect to AAC’s repayment right in the ~~remaining claim relating to distributions. On February 7, 2020, Ambac Assurance cross-moved for summary judgment. These summary judgment motions are fully briefed.~~trust waterfall.

•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 Mortgage Loan Trust Series 2006-9 (“Harborview 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, ~~Ambac Assurance~~AAC and other interested persons filed notices of intention to appear and answers to DBNT’s petition. ~~Ambac Assurance~~AAC sought a period of discovery before resolution on the merits. Discovery is now complete. Under the ~~current~~operative case schedule, merits briefing ~~is to be~~was completed ~~by November 23, 2020. The parties have submitted a stipulation and proposed scheduling order pursuant to which merits briefing would be completed by~~on January 12, 2021. On April 21, 2021, AAC and another interested party sought leave to file a joint surreply

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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES

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(Dollar Amounts in Millions, Except Share Amounts)

in further opposition to DBNT’s petition. The court has not yet scheduled a hearing or oral argument.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Following this summary is a discussion addressing the consolidated results of operations and financial condition of Ambac Financial Group, Inc. (“AFG”) for the periods indicated. References to “Ambac,” the “Company,” “we,” “our,” and “us” are to AFG and its subsidiaries, as the context requires. This discussion should be read in conjunction with Ambac’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, the Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995 below and Risk Factors set forth in Part II, Item 1A of this Form 10-Q and in Ambac’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain financial measures, in particular the presentation of Adjusted Earnings and Adjusted Book Value, which are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business. We do not intend for these non-GAAP financial measures to be a substitute for any GAAP financial measure and they may differ from similar reporting provided by other companies. Readers of this Form 10-Q should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Adjusted Earnings and Adjusted Book Value are non-GAAP financial measures that adjust for the impact of certain non-recurring or non-economic GAAP accounting requirements and include the addition of certain items that the Company has or expects to realize in the future, but that are not reported under GAAP. We provide reconciliations to the most directly comparable GAAP measures; Adjusted Earnings to Net income attributable to common stockholders and Adjusted Book Value to Total Ambac Financial Group, Inc. stockholders’ equity.

CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Management has included in Parts I and II of this Quarterly Report on Form 10-Q, including this MD&A, 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~~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 the ~~2019~~2020 Annual Report on Form 10-K and in Part II, Item 1A of this quarterly Report on Form 10-Q.

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’s 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~~Ambac's inability to realize the ~~Company’s ability to achieve value for holders of~~expected recoveries, including RMBS litigation recoveries, included in its ~~securities, whether from~~financial statements which would have a materially adverse effect on Ambac Assurance ~~Corporation~~Corporation's ("~~Ambac Assurance"~~AAC") financial condition and ~~its subsidiaries or from transactions or opportunities apart from Ambac Assurance and its subsidiaries, including new business initiatives;~~may lead to regulatory intervention; (3) ~~changes in Ambac’s estimated representation and warranty recoveries or loss reserves over time; (4)~~ failure to recover claims paid on Puerto Rico exposures or ~~incurrence~~realization of losses in amounts higher than expected; ~~(5) adverse effects on AFG’s share price resulting from future offerings of debt or equity securities that rank senior~~(4) increases to AFG’s common stock; (6) potential of rehabilitation proceedings against Ambac Assurance; (7) dilution of current shareholder value or adverse effects on AFG’s share price resulting from the issuance of additional shares of common stock; (8)loss and loss expense reserves; (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; ~~(9)~~(6) uncertainty concerning the Company’s ability to achieve value for holders of its securities, whether from AAC and its subsidiaries or from transactions or opportunities apart from AAC and its subsidiaries, including new business initiatives relating to the specialty property and casualty program insurance business, the managing general agency/underwriting business, or related businesses; (7) potential of rehabilitation proceedings against AAC; (8) increased fiscal stress experienced by issuers of public finance obligations or an increased incidence of Chapter 9 filings or other restructuring proceedings by public finance issuers, including an increased risk of loss on revenue bonds of distressed public finance issuers due to judicial decisions adverse to revenue bond holders; (10) Ambac's inability to realize the expected recoveries included in its financial statements; (11) insufficiency or unavailability of collateral to pay secured obligations; (12) credit risk throughout Ambac’s business, including but not limited to credit risk related to residential mortgage-backed securities, student loan and other asset securitizations, public finance obligations (including obligations of the Commonwealth of Puerto Rico and its instrumentalities and agencies) and exposures to reinsurers; (13) credit risks related to large single risks, risk concentrations and correlated risks; (14) the risk that the Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss; (15) risks associated with adverse selection as Ambac’s insured portfolio runs off; (16) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce risks in its insured portfolio; (17) disagreements or disputes with Ambac's insurance regulators; (18)(9) our inability to mitigate or remediate losses, commute or reduce insured exposures or achieve recoveries or investment objectives, or the failure of any transaction intended to accomplish one or more of these objectives to deliver anticipated results; ~~(19)~~(10) insufficiency or unavailability of collateral to pay secured obligations; (11) credit risk throughout Ambac’s ~~substantial indebtedness could adversely affect its financial condition~~business, including but not limited to credit risk related to residential mortgage-backed securities, student loan and ~~operating flexibility; (20) Ambac may not be able to obtain financing or raise capital on acceptable terms or at all~~

~~| Ambac Financial Group, Inc.~~ 47~~2020 Third Quarter FORM 10-Q~~ |

~~due to its substantial indebtedness and financial condition; (21) Ambac may not be able to generate the significant amount of cash needed to service its debt and financial~~other asset securitizations, public finance obligations and ~~may not be able~~exposures to refinance its indebtedness; (22) restrictive covenants in agreements and instruments may impair Ambac's ability to pursue or achieve its business strategies; (23) loss of control rights in transactions for which we provide insurance due to a finding that Ambac has defaulted; (24)reinsurers; (12) the impact of catastrophic environmental or natural events, including catastrophic public health events like the COVID-19 pandemic, on significant portions of our insured and investment portfolios; ~~(25)~~(13) credit risks related to large single risks, risk concentrations and correlated risks; (14) the risk that Ambac’s risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss; (15) risks associated with adverse selection as Ambac’s insured portfolio runs off; (16) Ambac’s substantial indebtedness could adversely affect its financial condition and operating flexibility; (17) 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; (18) Ambac may not be able to generate the significant

| Ambac Financial Group, Inc. 402021 First Quarter FORM 10-Q |

amount of cash needed to service its debt and financial obligations, and may not be able to refinance its indebtedness; (19) restrictive covenants in agreements and instruments may impair Ambac’s ability to pursue or achieve its business strategies; (20) adverse effects on operating results or the Company’s financial position resulting from measures taken to reduce risks in its insured portfolio; (21) disagreements or disputes with Ambac's insurance regulators; (22) default by one or more of Ambac's portfolio investments, insured issuers or counterparties; (23) loss of control rights in transactions for which we provide insurance due to a finding that Ambac has defaulted; (24) adverse tax consequences or other costs resulting from the characterization of ~~Ambac Assurance’s~~the AAC’s surplus notes or other obligations as equity; ~~(26)~~(25) risks attendant to the change in composition of securities in the Ambac’s investment portfolio; ~~(27)~~(26) adverse impacts from changes in prevailing interest rates; (27) our results of operation may be adversely affected by 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; (28) risks associated with the expected discontinuance of the London Inter-Bank Offered Rate; (29) factors that may negatively influence the amount of installment premiums paid to the Ambac; (30) ~~default by one or more of Ambac's portfolio investments, insured issuers or counterparties; (31)~~ market risks impacting assets in the Ambac’s investment portfolio or the value of our assets posted as collateral in respect of interest rate swap transactions; ~~(32)~~(31) risks relating to determinations of amounts of impairments taken on investments; ~~(33)~~(32) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on Ambac’s business, operations, financial position, profitability or cash flows; ~~(34)~~(33) actions of stakeholders whose interests are not aligned with broader interests of the Ambac's stockholders; ~~(35)~~(34) system security risks, data protection breaches and cyber attacks; ~~(36)~~(35) changes in accounting principles or practices that may impact Ambac’s reported financial results; ~~(37)~~(36) 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 ~~economic and regulatory impact~~amount of ~~“Brexit”; (38)~~value we ultimately realize; (37) operational risks, including with respect to internal processes, risk and investment models, systems and employees, and failures in services or products provided by third parties; ~~(39)~~(38) Ambac’s financial position that may prompt departures of key employees and may impact the its ability to attract qualified executives and employees; ~~(40)~~(39) fluctuations in foreign currency exchange rates could adversely impact the insured portfolio in the event of loss reserves or claim payments denominated in a currency other than US dollars and the value of non-US dollar denominated securities in our investment portfolio; (40) disintermediation within the insurance industry that negatively impacts our managing general agency/underwriting business; (41) changes in law or in the functioning of the healthcare market that impair the business model of our accident and ~~(41)~~health managing general underwriter; and (42) other risks and uncertainties that have not been identified at this time.

EXECUTIVE SUMMARY ($ in millions)

Company Overview:

See Note 1. Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q and Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, for a description of the Company and our key strategic priorities to achieve our primary goal to maximize stockholder value.

~~Ambac Assurance~~AFG

During 2021, AFG continued its progress in the development of its specialty property and ~~Subsidiaries:~~casualty program insurance and activities included the following:

•AFG contributed additional capital to the Everspan Group in the amount of $82 million.

•The Everspan Group platform received an A- Financial Strength Rating from A.M. Best in February 2021.

AFG Net Assets

As of March 31, 2021, net assets of AFG, excluding its equity investments in subsidiaries, were $274.


Cash and short-term investments	$	147
Other investments (1)	123
Other net assets	5
Total	$	274

(1)Includes surplus notes (fair value of $114) 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 ~~Ambac Assurance~~AAC by actively managing its assets and liabilities. Asset management primarily entails maximizing

the ~~risk adjusted~~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.

Asset ~~Management:~~Management

Investment portfolios are subject to internal investment guidelines, as well as limits on types and quality of investments imposed by ~~applicable~~ insurance laws and regulations. The investment portfolios of ~~Ambac Assurance~~AAC and Ambac UK also hold fixed ~~income securities, including distressed Ambac-insured~~maturity securities and various pooled investment funds. Refer to Note 8.9. Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further details of fixed ~~income~~maturity investments by asset category and pooled investment funds by investment type.

At ~~September 30, 2020,~~March 31, 2021, Ambac and its subsidiaries owned ~~$603 million~~$615 of distressed Ambac-insured bonds, including significant concentrations of insured Puerto Rico and RMBS bonds, and excluding Ambac's holdings of secured notes issued by Ambac LSNI. Subject to ~~applicable~~ internal and regulatory guidelines, market

| Ambac Financial Group, Inc. 412021 First Quarter FORM 10-Q |

conditions and other constraints, Ambac may continue to opportunistically purchase or sell Ambac-insured securities.

Liability and Insured Exposure ~~Management:~~Management

~~Ambac Assurance's~~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 prioritize policies, or portions thereof, for commutation, 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 ~~2020,~~2021, successful risk reduction transactions included:

•~~A commutation in~~In January ~~2020, via~~2021, AAC completed the purchase of quota share reinsurance on a ~~refunding,~~portfolio of ~~a watch list~~ public finance ~~transaction~~credits with net par outstanding of ~~$171 million~~approximately $823 at December 31, ~~2019;~~2020. Par ceded included general obligation ($347), lease and tax-backed revenue ($234), higher education ($161) and transportation ($81) and included $158 of watch list and adversely classified credits.

•~~A refinancing in~~In February ~~2020 of~~2021, AAC's exposure to an adversely classified ~~asset-backed leasing transaction with net par outstanding of $86 million at December 31, 2019;~~

•~~Purchasing quota share reinsurance in June 2020 on a transportation revenue credit with net par outstanding of $33 million at December 31, 2019;~~

•~~A refinancing in August 2020 of an international~~ stadium transaction with net par outstanding of ~~$217 million~~$540 at December 31, ~~2019;~~2020, was eliminated through the combination of a refinancing and

•~~Partial commutations of $32 million of adversely classified credits over the course of 2020.~~ quota share reinsurance.

The following table provides a comparison of total, adversely classified ("ACC") and watch list credit net par outstanding in the insured portfolio at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~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.

~~| Ambac Financial Group, Inc.~~ 48~~2020 Third Quarter FORM 10-Q~~ |


	March 31, 2021		December 31, 2020		Decrease
Total	$	31,447	$	33,888	$	(2,441)	(6)	%
ACC	7,603		8,458		(855)		(10)	%
Watch list	4,532		4,720		(188)		(4)	%

($ in millions) September 30,
2020 December 31,
2019 Variance
Total $ 34,751 $ 38,018 $ (3,267) (9) %
ACC 8,576 7,535 1,041 14 %
Watch list 4,961 6,752 (1,791) (27) %

The decrease in total net par outstanding resulted from active de-risking initiatives, including the transactions noted above, as well as scheduled maturities, amortizations, refundings and calls. ~~Additionally, total net par outstanding reduced as a result of the weakening of British Pounds as compared to US Dollars.~~

The ~~increase~~decrease in ACC exposures is primarily due to the ~~addition~~de-risking of ~~credits impacted by COVID-19 (including $975 million of~~an adversely classified stadium transaction with net par outstanding ~~from~~of $540 at December 31, 2020 and the ~~Watch List category), such as hotel tax, stadium, convention center and public house insured transactions, partially offset by active de-risking and issuer paydowns and calls.~~aforementioned purchase of quota share reinsurance in the amount of $59.

The decrease in Watch List net par outstanding resulted from ~~active de-risking initiatives (including the transactions noted above), downgrades to ACC due to COVID-19, and~~ scheduled maturities, amortizations, refundings and ~~calls.~~calls and the aforementioned purchase of quota share reinsurance in the amount of $99.

~~In addition, as a result of the economic impacts from the~~COVID-19

The COVID-19 pandemic $2,651 million of net par outstanding in sectors such as mass transit, toll roads, and private higher education, among others, have been added to the Survey List. The Survey List is a categorization for enhanced monitoring of currently performing credits.

~~We also continue to experience stress in our exposure to Puerto Rico that consists of several different issuing entities (all below investment grade). Each issuing entity~~ has its own credit risk profile attributable to discreet revenue sources, direct general obligation pledges and general obligation guarantees. Refer to Part 1, Item 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

~~COVID-19~~

In March 2020, the outbreak of COVID-19, caused by a novel strain of the coronavirus, was recognized as a pandemic by the World Health Organization, and the outbreak is widespread globally, including in the markets in which we operate. The COVID-19 outbreak had, and continues to have, a notable 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, such as hotels, restaurants, sports and entertainment facilities, airports and other transportation facilities, and retail establishments, mostly due to social distancing guidelines, travel bans and restrictions, and business restrictions and shutdowns. While many U.S. states and territories have eased restrictions more recently and provided clear social distancing guidelines to support businesses, challenges remain, including the recent rise of new COVID-19 cases.

In the U.S., significant monetary policy ~~and~~actions, fiscal stimulus ~~particularly~~measures and other relief measures have helped to moderate the negative economic impacts of COVID-19, and have supported the economic recovery which began in the second half of 2020 and continues into 2021. These measures include monetary policy decisions, such as quantitative easing, providing liquidity to financial institutions, providing liquidity to credit markets and the Paycheck Protection Program Lending Facility; Congressional fiscal stimulus and other actions, such as the $1.9 trillion American Rescue Plan Act or ARPA, which was enacted in March 2021, and a number of programs enacted in 2020, including the $2.4 trillion Coronavirus Aid, Relief and Economic Security ("CARES")

Act, the $483 billion Paycheck Protection Program And Health Care Enactment Act, the $190 billion Families First Coronavirus Response Act, and the $920 billion 2021 Consolidated Appropriations Act. Collectively, these programs provide, among other things, direct payments to households, support for small businesses, renter assistance and funding for transport, airlines, healthcare, education and state and local governments. In addition, housing measures, such as forbearance on mortgages and suspension of foreclosures and evictions, and various executive orders have ~~temporarily~~ helped to provide relief. Outside of the U.S., and in the United Kingdom and Italy in particular, where Ambac has insured portfolio exposure, various monetary policy, fiscal stimulus measures and other actions have helped to moderate the economic ~~impact of COVID-19, along with stimulus and other actions taken by governments outside~~impact.

In the U.S.

Nonetheless, the U.S. and most large global economies materially contracted through the third quarter of the year. While a recovery is currently underway led by an increase in retail sales in North America and the Eurozone since May, the trajectory and sustainability of, the economic recovery, ~~is uncertain~~which began in the second half of 2020, continues through the first quarter of 2021, supported by the aforementioned monetary policy and fiscal stimulus measures as well as a rapidly increasing COVID 19 vaccination rate. Economic recovery and, in particular, fiscal stimulus measures such as the $350 billion of assistance earmarked for state and local governments under ARPA and other funding to support households under ARPA and other programs, should be an overall benefit to most issuers in Ambac's insured portfolio negatively impacted by the COVID-19 pandemic. Nonetheless, credit risk in the insured portfolio remains elevated due to, among other things, uncertainty over the ~~magnitude~~trajectory and continuity of ~~job losses, cooler weather that will curb outdoor activity, uncertainty regarding continued government support measures,~~ the ~~recent rise~~economic recovery due to still high COVID-19 infection rates globally as well as the spread of new virus variants. In addition, the near-term efficacy of fiscal stimulus and related measures on certain exposures in the insured portfolio impacted by the COVID-19 ~~cases and uncertainty related~~pandemic, such as those with exposure to the ~~timing~~performance of hotels, restaurants, and ~~efficacy of a vaccine. For the Ambac insured portfolio, credit risk remains elevated due to the historical and future economic and financial impact related to the COVID-19 crisis.~~entertainment centers, is uncertain.

COVID-19 has also impacted Ambac's operating environment. Ambac has implemented a COVID-19 response plan designed to ensure the safety of our staff and business continuity. Our employees have transitioned to working remotely while maintaining full operational capabilities. Since ~~July~~ 2020, Ambac opened certain of its offices to allow a portion of the workforce to safely return on a voluntary basis. We have not experienced and do not anticipate incurring material net incremental operating expenditures to maintain the current operating environment. Although many of Ambac's critical third-party service providers are operating with employees working remotely, we have not presently identified or experienced any limitations or operational constraints with respect to services provided. Ambac does not believe that our current operating environment has resulted in a significant change to our disclosure controls or internal controls over financial reporting.

COVID-19 has adversely impacted Ambac's financial position and results of operations as credit risk in the insured and investment portfolios has increased. ~~The~~In the insured portfolio, municipal, ~~project finance,~~ mortgage-backed and ~~student loan sectors, as well as~~ other asset ~~securitizations, in particular,~~securitization exposures have been adversely impacted and, despite the ongoing economic recovery, could still be materially adversely impacted ~~and as a result, with~~in the exception of the mortgage-backed sector, we have increased loss reserves across each of these and other sectors during the nine months ended September 30, 2020. In the mortgage-backed sector, much lower interest rates have increased excess spread recoveries on previously paid claims and largely offset the impact of higher projected mortgage delinquencies and losses resulting from the COVID-19 pandemic.future. We are continuously evaluating and updating our

| Ambac Financial Group, Inc. 422021 First Quarter FORM 10-Q |

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. The overall financial impact from COVID-19 has been and will be a function of (i) the willingness and ability of issuers of insured ~~obligations~~debt and other counterparties to pay their obligations when ~~due, whether due to operational or financial reasons;~~due; (ii) the impact of changes to interest rates on policy and derivative payments; and (iii) the performance of the investment portfolio.

•Ambac’s insurance policies will be drawn in the event that the issuers of insured obligations do not make payments on

~~| Ambac Financial Group, Inc.~~ 49~~2020 Third Quarter FORM 10-Q~~ |

their obligations when due. As a result of the COVID-19 related economic impact on issuers and markets where Ambac provides financial guarantees; including lower tax, project, and business revenues and increases in forbearances or delinquencies on mortgage and student loan payments, we ~~have~~ increased our loss reserves ~~and may further increase them in the future depending on the duration and severity of the crisis.~~across affected exposures. The crisis may also impair certain issuers' ability to pay premiums owed to Ambac; however, we believe such issuers currently have the ability to continue to pay such premiums timely, but this is subject to change.

•Ambac has exposure to reinsurance counterparties for their portions of future claim payments. Ambac has reinsured approximately ~~13.3%~~15.8% of its gross par outstanding to ~~four~~five reinsurance counterparties. Each of these reinsurance counterparties is experienced in the business of reinsuring and/or writing financial guaranty insurance. All have current ratings of A+ (by S&P) or better and have ~~sufficient~~ collateralization or replacement triggers upon downgrade. 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.

•Ambac is exposed to the risk that contractual counterparties (including those under our RMBS litigations and derivative counterparties) may default inon their financial obligations, whether as the result of insolvency, lack of liquidity, operational failure, fraud or other reasons. At present, Ambac has no concerns about the ability of our contractual counterparties, which include certain regulated exchanges in the case of interest rate swaps and futures, to perform under their contracts, but this is subject to change.

•Asset prices declined substantially during the first quarter, particularly in directly affected industries such as tourism, airlines, hospitality, commercial real estate and manufacturing. While Ambac does not have significant investments in these asset classes, we did experience a negative total return for the investment portfolio of approximately (4.4)% during the three month period ending March 31, 2020. We evaluated and did not recognize credit impairments on the investment portfolio as of such date. However, in early April 2020, we monetized a material portion of our investments in certain assets classes; including corporate securities rated below the 'A' rated category, all directly owned CMBS (other than Military Housing bonds), and approximately 50% of all CLOs (all rated investment grade). While these positions were sold at a net gain, future investment losses and impairments may be possible. Asset prices partially recovered during the second and third quarters of 2020. Ambac recognized a total return for the investment portfolio of approximately 2.4% and 2.3% for the three and nine months ended September 30, 2020, respectively.

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," "Results of Operations" and "Balance Sheet Commentary" for further financial details on the current impact from COVID-19.

With regard to Ambac's new business strategic objective, we continue to evaluate opportunities in a disciplined manner. Our evaluation process has been revised to incorporate consideration of the impact of COVID-19 on new business prospects as well as Ambac's existing business and operations. While we continue to pursue new business opportunities, we believe that the COVID-19 pandemic has caused a general slow down in activity as potential targets evaluate the financial and strategic impact of the pandemic on their businesses and due to the practical constraints of shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns.

~~AFG:~~

~~As of September 30, 2020 the net assets of AFG, excluding its equity investments in subsidiaries, were $465 million.~~


~~($ in millions)~~
~~Cash and short-term investments~~ ~~(1)~~	$	~~313~~
~~Other investments~~ ~~(2)~~	~~114~~
~~Other net assets~~ ~~(3)~~	38
~~Total~~	$	~~465~~

(1) During the three months ended September 30, 2020, AFG purchased Everspan Insurance Company, from Ambac Assurance and repositioned it as a subsidiary of a new intermediary holding company that is directly owned by AFG. This acquisition required a cash payment from AFG to Ambac Assurance of approximately $14 million.

~~(2) Includes surplus notes (fair value of $59 million) issued by Ambac Assurance that are eliminated in consolidation.~~

(3) Includes accruals for tolling payments from Ambac Assurance in accordance with the Amended Tax Sharing Agreement of $28 million. Refer to Note 10. Income Taxes for discussion over the timing of collection.

Financial Statement Impact of Foreign Currency:

The impact of foreign currency as reported in Ambac's Unaudited Consolidated Statement of Total Comprehensive Income for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, included the following:


~~($ in millions)~~
Net income (1)	$	2(5)
Gain (loss) on foreign currency translation (net of tax)	~~(20)~~6
Unrealized gains (losses) on non-functional currency available-for-sale securities (net of tax)	5—
Impact on total comprehensive income (loss)	$	~~(13)~~1

(1) A portion of Ambac UK's, and to a lesser extent ~~Ambac Assurance's,~~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 Unaudited Consolidated Statement of Total Comprehensive Income (Loss). ~~Refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Unaudited Consolidated Financial Statements~~

included in Ambac’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~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 insuring variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC. Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded and excludes exposure of the policy that insures the notes issued by Ambac LSNI as defined in

Note ~~1. Background and Business Description~~3. Variable Interest Entities in the Notes to the Unaudited Consolidated Financial Statements included in Part ~~II,~~I, Item 81 in ~~the Company's Annual~~this Quarterly Report on Form ~~10-K for the year ended December 31, 2019:~~10-Q:


($ in millions)		September 30, 2020		December 31, 2019
							March 31, 2021		December 31, 2020
Public Finance (1) (2)	Public Finance (1) (2)	$	16,041	$	17,653	Public Finance (1) (2)	$	13,942	$	15,497
Structured Finance	Structured Finance	6,614		7,508		Structured Finance	6,066		6,337
International Finance	International Finance	12,096		12,857		International Finance	11,439		12,054
Total net par outstanding	Total net par outstanding	$	34,751	$	38,018	Total net par outstanding	$	31,447	$	33,888

(1)Includes ~~$5,596~~$5,555 and ~~$5,654~~$5,575 of Military Housing net par outstanding at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

(2)Includes ~~$1,070~~$1,067 and ~~$1,123~~$1,070 of Puerto Rico net par outstanding at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. 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.

~~| Ambac Financial Group, Inc.~~ 51~~2020 Third Quarter FORM 10-Q~~ |

increasingly concentrated to large and/or below investment grade exposures.

COVID-19

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. Governments outside the US, in markets in which Ambac operates, also implemented similar measures to the US. Ambac undertook a detailed analysis of the potential impact of the closure of certain portions of the US economy and certain other economies, including the UK, Italy, and Australia, to assess the impact of the resulting global economic contraction on its insured financial guarantee portfolio.

The economic contraction and the subsequent ~~but still uncertain~~ recovery; actions such as fiscal stimulus and related programs and monetary policy ~~and fiscal stimulus, including the CARES Act in the US that was signed into law on March 27, 2020, and future fiscal stimulus programs;~~decisions; and our insured obligors' financial flexibility and ability to mitigate the operational and economic impact of the recession will determine the ultimate impact to Ambac's insured portfolio.

~~CARES Act~~Fiscal Stimulus and ~~Other Relief Measures:~~Monetary Policy

~~The $2.4 trillion Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provides relief and~~In the U.S., significant fiscal stimulus ~~funds for American consumers, businesses and industries impacted by COVID-19.~~

~~The CARES Act has several~~ measures, ~~that impacted US municipalities~~monetary policy actions and other ~~borrowers, including consumers, such as mortgage~~relief measures have helped to moderate the negative economic impacts of COVID-19 and ~~student loan borrowers, represented~~have supported the economic recovery which began in ~~our insured portfolio, including:~~

•~~A program~~the second half of 2020 and continues into 2021. These measures include the $1.9 trillion American Rescue Plan Act or ARPA, signed into law in March 2021, which together with other fiscal stimulus measures put in place in 2020, provide for, ~~direct lending, loans, loan guarantees and investments to eligible businesses, states and municipalities, including to passenger airlines and cargo airlines;~~

•~~A program for small business loans (Paycheck Protection Program, as amended by the Paycheck Protection Program and Health Care Enhancement Act (“PPP & HCE Act”));~~

•~~Business tax breaks, including payroll tax deferral~~

•~~An allocation of direct aid~~among other things, funding to state and local governments, ~~to reimburse them for the costs of dealing with COVID-19;~~

•~~The Public Health and Social Services Fund for distribution of grants to healthcare providers and hospitals (as amended by the PPP & HCE Act);~~

•~~Grants for transit agencies;~~

•~~Grants for airport authorities; and~~

•~~Direct~~direct payments to households, support for small businesses, renter assistance and funding for ~~unemployment insurance.~~transport, airlines, healthcare and education. Monetary policy decisions have included quantitative easing and the provision of liquidity to financial institutions and credit markets. In addition, housing measures, such as forbearance on mortgages and suspension of foreclosures and evictions, and various executive orders have helped to provide relief. Outside of the US, and in the United Kingdom and Italy in particular, where Ambac has insured portfolio exposure, various monetary policy, fiscal stimulus measures and other actions have helped to moderate the negative economic impact and support recovery.

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.

Despite the above ~~provisions,~~measures, which are designed to help mitigate the economic impact of the COVID-19 pandemic generally, ~~the CARES Act contains~~ certain ~~provisions that~~of these measures may adversely affect Ambac.

~~The CARES Act temporarily suspended payments on all student loans held by the Department of Education through September 30, 2020. Although the CARES Act provision did not~~ These include the private student loans owned by special purpose entities that have their securitized obligations guaranteed by Ambac Assurance, we have incorporated into our loss reserves analysis assumptions related to increased delinquencies for borrowers with private student loans who often also have federal student loans and have elected not to pay altogether. Despite the assumed increase in delinquencies and losses related to this phenomena as well as the general deterioration in consumer credit related to the economic downturn, Ambac Assurance does not anticipate making substantial claim payments on insured student loan transactions for several years due to the structures governing the insured bonds.

~~Additionally, the federal government has provided~~government's temporary relief measures to which servicers of mortgage loans must adhere. The Federal Housing Administration ("FHA") of the US Department of Housing and Urban Development and the Federal Housing Finance Agency ("FHFA") are providing temporary relief measures that require mortgage loan servicers to offer relief to borrowers who suffer hardship as a result of COVID-19. The relief measures include moratoriums on foreclosures and

evictions as well as the expansion of forbearance and subsequent repayment options. Such servicers are generally applying these guidelines to non-FHFA loans, including those loans owned by special purpose entities that have their securitized obligations guaranteed by Ambac Assurance. Moreover, several State agencies have issued similar guidance to mortgage loan servicers concerning loan forbearances and other relief for borrowers. Depending on the trajectory and strength of the economic recovery, there may still be pressure to extend the duration of forbearances and subsequently to offer generous repayment plans.AAC. Forbearances increased sharply across the ~~Ambac Assurance's~~AAC's insured first lien RMBS obligations during the second quarter of 2020 and early in the third quarter of 2020, but then dropped later in the third quarter of 2020 through March 31, 2021, albeit to still elevated levels. The ultimate impact of forbearances and other relief measures, such as foreclosure and eviction moratoriums,

~~| Ambac Financial Group, Inc.~~ 52~~2020 Third Quarter FORM 10-Q~~ |

on ~~Ambac Assurance's~~AAC's insured RMBS obligations are still unclear. However, we have assumed that such measures ~~as well as the residual impact of the global recession,~~ will have an adverse impact on our insured RMBS transactions. Consequently, we have anticipated that we will experience an increase in claim payments for certain of our insured RMBS ~~obligations. However, we also anticipate that the significant decline in interest rates experienced during 2020 will likely generate additional excess spread recoveries on insured RMBS~~ obligations ~~that will mostly compensate for such adverse effects.~~

~~In addition to,~~ as well as in connection with, the CARES Act, the Federal Reserve has implemented a number of programs to improve liquidity and the functioning of the financial markets in an effort to help mitigate the impact of the COVID-19 pandemic on financial markets and the macro economy as well as certain displaced sectors of the economy, including those in which Ambac operates, including, but not limited to:

•~~$500 billion for the Municipal Liquidity Facility;~~

•~~$750 billion for the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility; and~~

•~~$100 billion in loans for the Term Asset-backed Securities Facility~~

In the UK all non-essential leisure, food and retail operations, including public houses were closed from March 20, 2020, as a consequence of the COVID-19 pandemic. Premises were allowed to gradually reopen from June 1, 2020, such that by July 4, 2020, the majority of outlets were permitted to reopen. The UK Government introduced a number ofthese measures to mitigate the impact of these enforced closures including rebating employers 80% of staff salaries (up to a £2,500 per month per employee cap), tax deferrals, business loan schemes and property tax relief. On November 5, 2020 the UK Government reimposed the closure the closure of non-essential leisure food and retail operations with the expectation that this closure will continue for the four weeks to December 2, 2020. The mitigating measures noted above will continue through this period before then being slowly withdrawn by March 31, 2021.are unwound.

While Ambac expects the foregoing measures to help mitigate economic damage and aid the functioning of the capital markets, Ambac's exposure to credit risk as a result of the economic fallout from the COVID-19 pandemic remains elevated, and we could still experience material losses that would adversely impact our future results of operations and financial condition.

Insured Portfolio:

~~Ambac established~~The U.S. economy continues to recover from COVID-19 pandemic, aided by rapid vaccine diffusion, increased fiscal stimulus, and a ~~set~~continued reopening of ~~base case assumptions that included a deep recession during~~ the ~~first half of~~economy. After contracting in 2020, ~~with a modest recovery in the second half of 2020 that still leaves~~ the U.S. ~~with an overall contraction~~economy is projected to grow strongly in ~~GDP for the full year. Economic growth for~~ 2021, ~~while positive, is expected to be tempered by the continued uncertainty related to the rising infection rate of COVID-19 in the U.S. Recovery to~~exceeding 2019 levels of economic output ~~are not expected until 2022. Consequently, we expect pressure will remain on U.S. states~~during the course of the year. Unemployment has recovered 80% from the highs of about 15% in April 2020, but still remains elevated at about 6% relative to pre-pandemic levels of about 3.5%. Potential headwinds include rising COVID-19 infection rates globally and the spread of COVID-19 variants.

The improving economy, increased fiscal stimulus and other relief measures should benefit the overall credit quality of Ambac's insured portfolio. In particular, the expanded fiscal stimulus resulting from March 2021's $1.9 trillion ARPA should significantly benefit state and local governments ~~which are currently facing~~that have faced significant budget ~~deficits~~constraints as tax revenues ~~have~~ faltered as a result of COVID-19 related shutdowns, job losses and travel restrictions. ~~State and local governments have~~

shed an estimated 1.5 million jobs and are facing tough choices to close budget gaps, including tax increases, furloughs, public safety cuts, planned capital expenditure cuts, pension funding holidays, and other measures. In addition states may need to cut aid to local municipalities that are also under pressure from lost revenues. Monetary policy and federal stimulus through the CARES Act (and potential subsequent CARES Act programs) and other programs has benefited and is expected to continue to benefit in the overall economic recovery and more specifically provide some reliefARPA provides $350 billion to state and local governments, including to Public Finance issuers ~~of municipal~~with debt insured by Ambac. However, the ultimate impact of ARPA and the economic recovery in general on the Ambac ~~although the sufficiency of such benefits~~insured portfolio remains ~~uncertain.~~to be seen, as it will not benefit all insured exposures equally and may not benefit certain exposures at all.

As part of ~~the~~a detailed analysis of the insured portfolio, we have identified certain Public Finance sectors that are most susceptible to potential claims or impairments as a result of a prolonged or uneven recovery from the COVID-19 ~~crisis.~~pandemic. Our near-term concerns are concentrated on exposures substantially reliant on narrow, economically sensitive revenue streams. The ability of issuers of these obligations to pay is expected to be stressed although several issuers expressed a willingness to use their balance sheets to support their obligations and avoid defaults in the near-term. Ambac's insured par outstanding, net of reinsurance ("NPO"), to these Public Finance sectors are as follows:

($ in millions)
Market / Sector Total NPO Total Debt Service Due Next Twelve Months
Hotels / Convention Centers $ 247 $ 43.1
Stadiums 634 41.4
Airports 124 21.8
Dedicated Tax 384 69.8
Higher Education Auxiliary 241 25.0
Rail / Mass Transit 328 30.3
Toll Roads / Bridges 457 42.8
Total Public Finance $ 2,415 $ 274.2

| Ambac Financial Group, Inc. 452021 First Quarter FORM 10-Q |


Market / Sector	Total NPO		Total Debt Service Due Next Twelve Months

Toll Roads / Bridges	$	457	$	43
Dedicated Tax	345		51
Rail / Mass Transit	289		15
Higher Education Auxiliary	190		21
Hotels / Convention Centers	188		39
Stadiums	92		8
Airports	22		15
Total Public Finance	$	1,583	$	192

The RMBS ~~and student loan~~ insured portfolios ~~are expected to be~~were adversely impacted by the previously mentioned forbearances and the moratorium on foreclosures as well as the general ~~economic downturn in~~uncertainty about the ~~first half~~trajectory of the ~~year~~economic recover and the ~~developing but uncertain recovery in~~impact of fiscal stimulus on the ~~second half of the year where unemployment is still elevated and job participation rates are depressed. Expected to~~U.S. households. This has been offset ~~such impact for RMBS exposures is~~by the benefit to excess spread within the securitization structures as a result of the ~~significant~~ reduction in interest rates over the past year, which will result in higher ~~recoveries.~~excess spread recoveries to Ambac.

Ambac insured exposure includes a number of international policies where the revenue of the issuer is demand dependent. Such transactions have been impacted by the reduction of revenue due to the COVID-19 pandemic. Ambac and its advisors are working closely with impacted issuers to review their plans and liquidity facilities in light of these events. ~~In connection with these efforts Ambac de-risked an international stadium transaction in the three months ended September 30, 2020 with $217 million of NPO at December 31, 2019.~~ Ambac's remaining NPO with respect to these international demand dependent policies are as follows:

~~| Ambac Financial Group, Inc.~~ 53~~2020 Third Quarter FORM 10-Q~~ |


($ in millions) Market / Sector		Total NPO		Total Debt Service Due for Twelve Months
Market / Sector						Market / Sector	Total NPO		Total Debt Service Due for Twelve Months

Higher Education		$	168	$	9.0
Airports		200		6.2
Asset Securitizations	Asset Securitizations	949		81.9		Asset Securitizations	$	961	$	87
Toll Roads / Bridges	Toll Roads / Bridges	750		59.5		Toll Roads / Bridges	738		59
Airports						Airports	212		7
Higher Education						Higher Education	179		10
Total	Total	$	2,067	$	156.6	Total	$	2,090	$	163

At this time, there are still significant uncertainties surrounding the ultimate number of claims and scope of damage resulting from this pandemic. Actual losses from these events may vary materially from Ambac's loss and loss expense reserves due to several factors, including the inherent uncertainties in making such determinations and the evolving nature of this pandemic. Potential losses from the economic consequences of the COVID-19 pandemic could be material and therefore may have a material adverse effect on our results of operations and financial condition.

Puerto Rico

~~Ambac has~~We continue to experience stress in our exposure to ~~the Commonwealth of~~ Puerto Rico (the "Commonwealth") ~~and its instrumentalities across~~that consists of several different issuing entities (all below investment grade) with total net par exposure of ~~$1,070~~$1,067 as of ~~September 30, 2020.~~March 31, 2021. Each issuing entity has its own credit risk profile attributable to, as applicable, ~~discrete~~discreet revenue sources, direct general obligation pledges ~~and/or~~and general obligation

guarantees. Refer to Part 1, Item 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for additional information regarding the different issuing entities that encompass Ambac's exposures to Puerto Rico.

COVID-19

~~At this time, it remains very difficult to predict what the shape and timing of the post~~The COVID-19 ~~recovery will be for the~~pandemic had a significant impact on Commonwealth of Puerto Rico ~~not least because~~much as it did in the ~~depth~~50 U.S. states and length of COVID-19's impact is still uncertain. In the short-term, it is known that tax revenue to the Commonwealth’s general fund collections lagged projections by nearly $1.8 billion, or 16.8%, in fiscal year 2020 and were roughly $2.5 billion below fiscal year 2019 collections, according toother U.S. territories. However, the Puerto Rico ~~Fiscal Agency~~economy is currently in recovery with vaccination rates increasing and ~~Financial Advisory Authority’s June 26, 2020, Treasury Single Account report. However,~~infection rates declining. Hotel occupancy in the first week of April 2021 reached 84%, which is the highest level since March 2019. Overall, the Commonwealth's general fund ~~net~~ revenues ~~totaled $1.259~~in the eight-month period ending February 2021 were up 1.8% year-on-year to $6.75 billion from $6.63 billion and were $1.18 billion higher than the budgeted amount for the period. As reported in the April 23, 2021, Commonwealth Fiscal Plan, Puerto Rico is also expected to benefit from about $43.5 billion in ~~July and August~~COVID-19-related federal funds from the initial CARES related measures in 2020 ~~outpacing projections for~~through the ~~first two months of fiscal year 2021 by $255 million, or 25.5%.~~ recently enacted ARPA.

It is unclear if ~~this trend~~the recovery will hold, what this implies for the Commonwealth’s ability and willingness to pay debt service, and what if any lasting effects COVID-19 will have on the economic and financial profile of Puerto Rico.

Over the longer-term, Puerto Rico's recovery profile will be impacted by a wide range of factors as well as financial considerations including, but not limited to:

•the fiscal and monetary policies of the federal government which will shape the trajectory of the U.S. economy;

•the speed and efficacy of targeted federal aid packages to (1) help Puerto Rico address the negative economic effects of the pandemic and (2) rebuild better and more resilient infrastructure post-Hurricanes Irma and Maria in 2017 and earthquakes in 2020;

•supplemental Medicaid funding relief; and

•the willingness and ability of the Commonwealth government to implement much needed fiscal and structural reforms.

~~Fiscal Plans~~

Commonwealth Fiscal Plan

On ~~May 27, 2020,~~April 23, 2021, the Oversight Board certified its own version of a new Commonwealth Fiscal Plan. ~~The Oversight Board’s new~~This most recent Commonwealth Fiscal Plan purports to incorporate the impact of the $120 billion of federal recovery money stemming from the 2017 hurricanes, 2019-2020 earthquakes, and COVID-19 onpandemic, including the ~~Commonwealth economy, and projects diminished growth, budget surplus, and debt capacity as compared to previous versions of the~~recently enacted American Rescue Plan Act or ARPA. The current certified Commonwealth Fiscal ~~Plan. The positive $19.7~~Plan projects a surplus of $15.2 billion ~~30-year cumulative surplus from the~~in years 2022-2035, with deficits beginning in 2036, whereas as May ~~2019~~2020's COVID-19 affected certified Commonwealth Fiscal Plan ~~is now~~projected a ~~negative $22.2~~surplus of $5.8 billion over a similar period. Debt sustainability analysis in the new ~~Fiscal Plan base case and negative $40~~plan suggests a modest increase to $5.6 billion from $5.0 billion (based upon mid-point of ranges shown in the ~~downside case. This is due to~~plan).

As with previous fiscal plans, the ~~Oversight Board’s projected impact of COVID-19 on the Puerto Rico economy and tax collections as well as related general uncertainty on the economic outlook. The~~current certified Commonwealth Fiscal Plan ~~will~~may significantly inform the Commonwealth Plan of Adjustment ~~and the diminished economic performance described~~ in the ~~new Fiscal Plan implies worse outcomes than had been previously disclosed for creditors under the~~ Commonwealth's ~~Plan of Adjustment.~~

~~The Oversight Board asked the~~ Title III court in September 2020 to allow it to provide a status update in late October 2020, which was granted. The period until late October is needed to assess the assumptions of the Commonwealth Fiscal Plan, according to the Oversight Board's status report filed in September 2020. Both the Oversight Board and mediation team “will realize in short order” if a modified Plan can be negotiated, and the additional time will also enable the Oversight Board and AAFAF to know “whether any remaining hurdles of such plan can be overcome or if the electoral process will need to be completed before that might occur”.

In the October 2020 status update the Oversight Board indicated that it was premature to schedule consideration of the Disclosure Statement and Commonwealth Plan of Adjustment, as the Fiscal Plan assumptions continue to be tested and conversations are ongoing with the Puerto Rico Fiscal Agency and Financial Advisory Authority concerning amending the current Commonwealth Plan of Adjustment. The next status update is due December 4, 2020. On October 28, 2020, the Court ordered the Oversight Board to file, by February 10, 2021, either (i) an informative motion with a term sheet disclosing the economic and structural terms and features of a proposed amended Commonwealth Plan of Adjustment, or (ii) the proposed amended Commonwealth Plan of Adjustment itself, together with a proposed timeline for disclosure statement and confirmation hearings.

~~PRHTA Fiscal Plan~~

On June 26, 2020, the Oversight Board certified its own version of the Fiscal Plan for PRHTA. The PRHTA Fiscal Plan states agency reform measures are critical to PRHTA’s sustainability, and that in fiscal year 2020, implementation significantly fell behind the performance goals for fiscal measures established by the 2019 PRHTA Fiscal Plan. The 2020 PRHTA Fiscal Plan shows the improvements in PRHTA’s operating and capital performance over various revenue and expense categories due to

| Ambac Financial Group, Inc. 5446 ~~2020 Third~~2021 First Quarter FORM 10-Q |

III proceeding. However, as was also the $4.7 billion benefit that would be achieved if PRHTA fully and timely implements the outlined fiscal measures. Implementing these measures would reduce PRHTA’s projected pre-Commonwealth transfer deficit to approximately $1.7 billion from approximately $6.4 billion projected in the baseline scenario. An annual transfercase with previous versions of ~~approximately $2.2 billion from~~ the Commonwealth to PRHTA would fund the capital deficit not covered by the operating surplus, resulting in a net 30-year budget surplus of $461 million – which would presumably be the starting point for recoveries to PRHTA creditors.

~~The cumulative and annual budget surplus post-measures in the 2020 PRHTA~~ Fiscal Plan, is drastically lower than the budget surplus post-measures in the 2019 PRHTA Fiscal Plan: fiscal year 2022 surplus of $33 million vs. $120 million and fiscal year 2023 surplus of $1 million vs. $154 million. Since the document form and projection structure/line items are different in the 2020 PRHTA Fiscal Plan vs. 2019 PRHTA Fiscal Plan, comparability and reconciliation between the two versions is difficult and as such understanding the full extent of the decrease in the budget surplus in the latest plan remains challenging. COVID-19 is likely a driver, but it also appears that the 2020 PRHTA Fiscal Plan may not include Act 30 license fees ($130 million annually) or all of the $400 to $500 million in annual revenues that come from various excise taxes that also support the PRHTA debt insured by Ambac Assurance (e.g. gas tax, diesel tax, petroleum products tax, cigarette tax, motor vehicle license fees). Without these revenues, it unlikely PRHTA will be able to service its existing debt in any meaningful way.

PRHTA has defaulted on its debt service payments since 2016, and based on the 2020 PRHTA Fiscal Plan projections of cash flow, the existing PRHTA debt service may need to be reduced through a Title III plan of adjustment, unless the PRHTA Fiscal Plan projections change again. The amount of net revenues available for other needs in the 2020 PRHTA Fiscal Plan besides implementation of the capital improvement program, such as the payment of debt service, are highly dependent on PRHTA achieving additional positive cash flow to enable PRHTA eventually to operate at a surplus without the need for projected Commonwealth financial support to meet HTA budget gaps. However, the 2020 PRHTA Fiscal Plan projects a declining subsidy from the Commonwealth over the next 30 years. If the Act 30 licenses fees and/or the various excise taxes were re-incorporated into the 2020 Fiscal Plan, recoveries for Ambac Assurance insured debt may be materially higher than inferred from the current version of the ~~2020 PRHTA~~Commonwealth Fiscal ~~Plan.~~

~~It is unknown if~~Plan lacks a high degree of transparency regarding the underlying data, assumptions and ~~when a PRHTA Plan of Adjustment will be filed by the Oversight Board or confirmed by the court overseeing the Title III proceedings of PRHTA. It is also unknown if~~rationales supporting those assumptions, making reconciliation and when other Puerto Rico instrumentalities, which have debt outstanding insured by Ambac Assurance, will be filed under Title III and what effect their fiscal plans and/or plans of adjustment may have on Ambac's financial position.due diligence difficult.

No assurances can be given that Ambac's financial condition will not suffer a materially negative impact as an ultimate result of decisions based on the Commonwealth Fiscal Plan ~~the Commonwealth Plan of Adjustment,~~ or any future changes or revisions to the Commonwealth ~~fiscal plans~~Fiscal Plan or future fiscal plans ~~and/or plans of adjustment~~ for ~~PRHTA~~Puerto Rico Highways and Transportation Authority ("PRHTA") or other Puerto Rico instrumentalities.

Commonwealth Plan of Adjustment

On February ~~9, 2020,~~23, 2021, 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 publicly disclosed the Second Amended Plan Support Agreement ("Second Amended PSA"). Assured Guaranty Corp. and Assured Guaranty Municipal Corp. ("Assured") and National Public Finance Guarantee Corporation ("National") conditionally agreed to the Second Amended PSA. On February 23, 2021, the Oversight Board announced ~~it reached an~~that the Second Amended PSA had the support of 70% of all GO and PBA bonds claims, including the conditional support of Assured and National.

Assured and National originally had until March 31, 2021, to terminate their agreement ~~in principle ("Plan Support Agreement") with~~to the Second Amended PSA, however, that date was extended a number of times, including most recently to May 5, 2021, due to ongoing negotiations between the Oversight Board and the two monolines regarding the treatment of certain ~~creditors supporting the restructuring~~revenue bond claims. The Government of the ~~Commonwealth's General Obligation~~Commonwealth of Puerto Rico and ~~PBA debt, and intended~~Ambac Assurance are not currently parties to ~~file an amended Commonwealth Plan of Adjustment ("~~the second Amended ~~POA") reflecting the terms of this agreement.~~ PSA.

On ~~February 28, 2020,~~March 8, 2021, the Oversight Board filed anwith the Title III court a Second Amended ~~POA and an amended Disclosure Statement~~Title III Joint Plan of Adjustment of the Commonwealth ("Second Amended POA") that purports to restructure approximately $35 billion of debt (including GO and PBA bonds) and other claims against the ~~Commonwealth~~government of Puerto Rico ~~PBA, ERS,~~ and ~~other issuers as well as more than~~certain entities and $50 billion in pension ~~liabilities.~~obligations. The Second Amended POA ~~would reduce Commonwealth debt and other claims from $35 billion~~includes the terms of the settlement relating to ~~less than $11 billion, a 70% haircut and would also reduce~~ the ~~Commonwealth’s annual debt service by 56%. Treatment for pension claims would include a reduction~~GO bonds embodied in ~~pension payments by as much as 8.5% for retirees who currently receive at least $1,200 a month, such that approximately 75% of current and future retirees would not face any cuts, and~~ the ~~establishment of a pension reserve fund to help support retirement payments in future years. The~~Second Amended POA disproportionately disadvantaged claims against the Commonwealth related to certain revenue bonds issued by Puerto Rico instrumentalities, including those insured by Ambac Assurance, providing for an estimated recovery of 3.9% on claims against the Commonwealth related to PRHTA bonds, Puerto Rico Infrastructure Financing Authority (PRIFA) Special Tax Revenue (Rum Tax) bonds, and Puerto Rico Convention Center District Authority (PRCCDA) bonds.PSA, dated February 22, 2021.

On ~~September 20, 2020,~~April 12, 2021, the Oversight Board announced that it had reached an agreement in principle with Assured and ~~principal creditor parties~~National regarding the PRHTA claims, the Convention Center District Authority ("CCDA") claims and the Commonwealth treatment of deficiency claims. In conjunction with this agreement in principle, the two monolines were granted further extensions to terminate their conditional support for the Second Amended PSA while the agreement in principle was further negotiated and documented.

In general, the Second Amended PSA provides for lower Commonwealth debt service payments per annum relative to the Plan Support Agreement ~~agreed~~signed in February 2020 (Amended PSA), extends the tenor of new recovery bonds, increases the amount of cash distributed to ~~release documents~~creditors, and provides additional consideration in the form of a contingent value instrument ("CVI"). This CVI is intended to provide creditors with additional

returns tied to outperformance of the Puerto Rico Sales and Use Tax ("SUT") against certified 2020 Commonwealth Fiscal Plan projections. More specifically, fixed consideration as part of the Second Amended POA includes a combination of cash, new GO current interest bonds as well as new GO capital appreciation bonds. Recovery derived from fixed consideration is estimated to vary between approximately 67% and 77% (as of petition date) for GO creditors, and between approximately 75% and 80% (as of petition date) for PBA creditors.

Under the May 5, 2021, PRHTA/CCDA PSA, consideration for revenue bond creditors such as PRHTA, CCDA, or Puerto Rico Infrastructure Financing Authority ("PRIFA") Special Tax Revenue ("Rum Tax") bonds, on account of their deficiency claims ("Clawback claims") against the Commonwealth, consists of CVI tied to the outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan projections. For years one through 30, a portion of the CVI consideration to be made available to the revenue bond creditors reflects a 40% share of cumulative outperformance, starting July 1, 2021, subject to a combined 95% outperformance limit with the subsequently mentioned amounts subject to a waterfall. The other portion of the CVI consideration receives, on an annual basis, the lesser of (i) 50% of cumulative outperformance, less payments previously made, and (ii) 75% of annual outperformance, subject to a waterfall with the GO creditors receiving the first $100 of annual payments in years one through 22 and the Clawback creditors receiving the next $11.1 and any amount thereafter split pro rata with 90% going to GO creditors and 10% going to Clawback creditors. For years 23 through 30, subject to the limits in (i) and (ii) above, 100% of the outperformance goes to the Clawback creditors. Overall, CVI recoveries are subject to a lifetime cap of 75% of deficiency amounts. The value of the Clawback CVI is highly uncertain given the contingent, outperformance-driven structure of the instrument coupled with the likely back-ended potential cash flows (years 23 through 30). Changes in our assumed values of the Clawback CVI will cause a change in our reserves.

In addition, under the PRHTA/CCDA PSA, the PRHTA creditors would receive 'hard currency' in the form of new PRHTA bonds totaling $1,245 with maturities of up to 40 years and an average interest rate of 5.0%. Of the $1,245 in new bonds, approximately $646.4 would be allocated to holders of PRHTA '68 bonds and approximately $598.6 would be allocated to holders of PRHTA '98 bonds. PRHTA creditors would also share $389 of cash proceeds, including a $264 interim distribution, payable at the effective date of the Commonwealth plan of adjustment, and $125 of restriction fees and consummation costs, payable at the effective date of the PRHTA plan. 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 and subject to interpretation due to the current lack of clarity related to the ongoing debt restructuring negotiations under Title III of PROMESA. The materials include an August 18, 2020, fiscal plan macroeconomic overview and revised Plan of Adjustment proposal from the Oversight Board and an August 24, 2020, Plan Support Agreement counterproposal from creditors. According to a press release from the Oversight Board, notwithstanding the information release, the Oversight Board andaforementioned uncertainty related ~~creditors continue to negotiate and the Plan Support Agreement has not been terminated.~~

~~The revised Commonwealth Plan of Adjustment proposed by the Oversight Board and a counterproposal by the principal creditor parties~~ to the ~~Commonwealth Plan Support Agreement both call for a $2 billion increase in~~value of the Clawback CVI.

Under the May 5, 2021 PRHTA/CCDA PSA, CCDA creditors would also receive $112 of cash, consideration for general obligation/Public Buildings Authority bondholders and lower caps on maximum annual debt service compared with the current Plan Support Agreement. The blended general obligation/Public Buildings Authority bond recovery under the Oversight Board’s proposal (which appearsinclusive of up to have been offered to related creditors on July 30, 2020) would range from 52.7% to 58.4%, while the PSA creditors’ counterproposal contemplates a blended recovery based on such claims at 73.6%. Implied recoveries$15 related to ~~certain revenue bonds insured by Ambac Assurance would be below 3%.~~

~~It is unclear if~~restriction fees and ~~how~~consummation costs payable at the Commonwealth Plan of Adjustment will be ultimately modified or how the final adjustments will impact revenues available to the Puerto Rico instrumentalities addressed in the Amended POA or the recoveries on claimseffective

| Ambac Financial Group, Inc. 5547 ~~2020 Third~~2021 First Quarter FORM 10-Q |

~~against~~date of the Commonwealth ~~by creditors~~plan of ~~those instrumentalities, including Ambac~~adjustment. PRIFA was not part of the May 5, 2021 PRHTA/CCDA PSA and, ~~Ambac-insured bondholders.~~consequently, there are no additional recoveries provided for in the agreement in principle or Second Amended POA for PRIFA beyond the proposed treatment of deficiency claims.

While we expect the Second Amended POA to be modified to reflect the settlements agreed in the PRHTA/CCDA PSA, it is unclear if the Second Amended POA will be otherwise modified further. However, if the Second Amended POA were confirmed in its current form, Ambac's financial condition would suffer a material negative impact. Refer to Note 6. Financial Guarantee Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for the possible increase in loss reserves under stress or other adverse conditions, including the impact of the Second Amended POA. There can be no assurance that losses may not exceed such estimates.

~~Political Developments~~

~~On August 31, 2020, the terms of Oversight Board members Carlos M. García and José Ramón González expired, and on October 5, 2020, the term of Oversight Board Chairman José Carrión expired.~~

On October 6, 2020, the four remaining members of the Oversight Board at that time (David A. Skeel, Arthur J. González, Ana J. Matosantos and Andrew Biggs) voted unanimously to designate Skeel as the new Oversight Board Chairman. On October 7, 2020, President Donald J. Trump appointed Justin Peterson to replace Arthur J. González as member of the Oversight Board.

The four current members of the Oversight Board continue to carry out all functions and duties while awaiting the potential appointment of additional or replacement members. However, under section 206(b) of PROMESA, an affirmative vote of no fewer than five members of the board is required to issue a restructuring certification.

On August 16, 2020, Governor Wanda Vázquez acknowledged losing the primary of her pro-statehood party to Pedro Pierluisi, who briefly served as the governor last year amid political turmoil. Pierluisi faced Mayor Carlos Delgado among other candidates during the gubernatorial election held on November 3, 2020. No winner has been declared.

~~It is unclear how the Oversight Board member turnover and local elections will impact the debt restructuring process, negotiations, timing and ultimate outcome for Ambac.~~

Ambac Title III Litigation Update

~~Ambac Assurance~~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.

On January 16, 2020, ~~Ambac Assurance,~~AAC, together with other monoline insurers, filed motions which sought to lift the automatic stay and allow Ambac and others to enforce their rights related to ~~HTA,~~PRHTA, CCDA and PRIFA in an alternative forum. Through orders issued on July 2 and September 9, 2020, Judge Swain largely denied the motions, while holding in abeyance further proceedings in the CCDA motion relating to a particular account over which it is undisputed the monolines have a lien. ~~Ambac Assurance~~AAC and the other movants ~~have~~ appealed the ~~HTA~~PRHTA and PRIFA decisions. ~~Briefing is expected~~On March 3, 2021, the First Circuit affirmed the District Court’s opinions denying the motions to lift the stay with respect to bonds issued by HTA and bonds issued by PRIFA on procedural grounds, leaving the question of whether the monolines have a lien with respect to such bonds to be ~~completed by December 21, 2020, with argument heard~~resolved in ~~February 2021. Ambac is unable to predict when and how~~ the ~~issues raised in these cases will be resolved. If Ambac~~

~~Assurance is unsuccessful in any of these~~pending summary judgment proceedings ~~Ambac’s financial condition, including liquidity, loss reserves and capital resources may suffer a material negative impact.~~before the District Court.

On January 16, 2020 the Oversight Board filed four adversary proceeding complaints against ~~Ambac Assurance,~~AAC, and other monoline insurers, seeking to disallow their proofs of claim against the Commonwealth as they relate to HTA, CCDA, and PRIFA bonds. On April 28, 2020, the Oversight Board filed partial motions for summary judgment. Briefing has concluded on those motions for summary judgment and oral argument was held on September 23, 2020. ~~A decision~~On January 20, 2021, the District Court granted defendants’ request for deferral of the adjudication of the summary judgment motion until defendants have the opportunity to conduct certain discovery. Discovery is ~~pending.~~ongoing.

~~Ambac Assurance,~~AAC, along with other monoline insurers, filed a motion seeking appointment as trustees under Section 926 of the Bankruptcy Code to pursue certain avoidance actions on behalf of HTA against the Commonwealth of Puerto Rico. The motion attached a proposed complaint detailing the avoidance claims that movants would pursue. On August 11, 2020 the Court denied the motion and ~~Ambac Assurance~~AAC and the other movants have appealed that denial. ~~Ambac Assurance and the other movants filed a motion to hold that appeal in abeyance pending~~Movants' opening brief before the First ~~Circuit’s resolution~~Circuit was filed on

February 17, 2021; briefing is expected to conclude on May 24, 2021.

If AAC is unsuccessful in any of ~~the appeal from the Court’s denial of the HTA Lift-Stay Motion. Briefing has concluded on the motion to hold the appeal in abeyance~~these proceedings, Ambac’s financial condition, including liquidity, loss reserves and capital resources may suffer a ~~decision is pending.~~material negative impact.

Refer to "Financial Guarantees in Force" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 and Note ~~11.~~12. Commitments and Contingencies to the Consolidated Financial Statements, included in Part I, Item 1 of this Form 10-Q for further information about Ambac's litigation relating to Puerto Rico.

Mediation

The status, timing and subject of any ~~subsequent~~past or future mediation discussion has not yet been publicly disclosed. However, Judge Swain issued a scheduling order on June 30, 2020, setting monthly omnibus hearings through the end of 2021. On October 28, 2020, Judge Swain ordered the Oversight Board to engage with all relevant parties in responsible and meaningful negotiations in an effort to arrive at a substantially consensual Plan of Adjustment. The timeline for resolution of Puerto ~~Rico’s~~Rico's debt restructuring process is ~~uncertain and will extend into 2021.~~uncertain.

The Oversight Board disclosed, in a status report filed with the Title III court in September 2020, that it has resumed formal discussions with creditors with the guidance of the mediation team led by Judge Houser. Prior to the talks with creditors, the Oversight Board held discussions with AAFAF concerning the terms of a Commonwealth Plan of Adjustment and what, if any, modifications or amendments needed to be proposed. ~~The status report also said that~~

On February 10, 2021, the Oversight Board ~~considered it premature to propose a schedule for consideration of~~disclosed that mediation resulted in an agreement in principle with certain GO and PBA bondholders. The Second Amended PSA was publicly disclosed on February 23, 2021.

On April 12, 2021, the Oversight board disclosed that mediation resulted in an agreement in principle with Assured and National regarding the PRHTA claims, the CCDA claims and the Commonwealth ~~Plan~~treatment of ~~Adjustment and Disclosure Statement due to several factors, including the upcoming November election. More specifically, the report states~~deficiency claims. On May 5, 2021, the Oversight Board ~~“and its advisors have engaged~~published the PRHTA/CCDA PSA finalizing this agreement in ~~active dialogue with individual creditors and their respective advisors, both those party to the~~

~~| Ambac Financial Group, Inc.~~ 56~~2020 Third Quarter FORM 10-Q~~ |

Plan Support Agreement as well as other notable parties in interest. While parties have re-engaged, both formally and informally, in light of (a) the nascent stage of such discussions, (b) the current state of material litigations before the court, the determinations of which shall influence the tenor of such discussions, and (c) the political and electoral process on-Island, the Oversight Board submits it is premature to propose a schedule for consideration of the Commonwealth Plan of Adjustment and Disclosure Statement.” The Oversight Board filed an updated status report in October 2020 which also indicated that it was premature to propose a schedule for consideration of the Commonwealth Plan of Adjustment and Disclosure Statement due to several factors, including the upcoming November election. On October 28, 2020, the Court ordered the Oversight Board to file, by February 10, 2021, either (i) an informative motion with a term sheet disclosing the economic and structural terms and features of a proposed amended Commonwealth Plan of Adjustment, or (ii) the proposed amended Commonwealth Plan of Adjustment itself, together with a proposed timeline for disclosure statement and confirmation hearings.principle.

No assurances can be given that debt restructuring negotiations will be successfully concluded, that the Commonwealth, Oversight Board and creditor parties will reach definitive agreements on debt restructurings, that any additional negotiated transaction, debt restructuring, definitive agreement or Plan of Adjustment will be approved by the court and completed, or that any transaction or Plan of Adjustment will not have a materially adverse impact on Ambac's financial condition or results of operations.

Federal Aid

The Commonwealth of Puerto Rico is projected to benefit from over $60 billion of federal disaster aid for infrastructure improvement initiatives or recovery efforts, as a result of the damage cause by hurricanes Irma and Maria as well as the earthquakes that began in late December 2019.

On September 18, 2020, the White House announced plans for FEMA to award almost $13 billion in new disaster aid, primarily for rebuilding Puerto Rico's electrical grid that was damaged by hurricanes Maria and Irma three years ago. The majority of the grants ($9.6 billion) will flow to the Puerto Rico Electric Power Authority to repair and replace transmission and distribution lines, substations, generation systems and general grid improvements as part of its strategic transformation. About $2.3 billion in grants will flow to the Puerto Rico’s Department of Education for school construction projects. This aid allocation will raise the amount the federal government has obligated to Puerto Rico to approximately $38 billion for Puerto Rico’s recovery. However, distribution of disaster aid to date post-hurricanes has been slower than expected. Only one-third, or $16.9 billion, of previously allocated funds have been disbursed to the Commonwealth, according to COR (the Puerto Rico government's Central Recovery and Reconstruction Office).

The slow pace of distribution, primarily for HUD grants, reflects a complicated project approval process but also increased oversight of funds following allegations of Puerto Rico’s mismanagement of aid last year. To date, HUD has only distributed a fraction of disaster relief funds to Puerto Rico,

about 0.5% of funds previously approved by Congress. Of the funds received by the Commonwealth, the bulk flowing from FEMA include monies for public assistance projects, including rebuilding roads, bridges, police stations and hospitals damaged during the hurricanes. Individuals have also received close to $3 billion in FEMA assistance to date, including funding housing assistance for residents that have lost their homes as a result of the disaster, but also for certain home repair, medical, child care and clean-up expenses.

~~The~~ full extent of federal government support to Puerto Rico is ~~still uncertain as existing federal stimulus has not been fully disbursed and additional measures are likely~~estimated to be ~~enacted. A new U.S. President, Puerto Rico governor, or Oversight Board makeup could accelerate~~$120 billion per the ~~aid distribution process if there was a higher comfort level~~April 23, 2021, certified Commonwealth Fiscal Plan and stretch from FY 2018 to FY 2035. The federal government support includes FEMA, HUD and other disaster relief funds stemming from the ~~federal government regarding~~2017 hurricanes and 2019-2020 earthquakes and includes about $43 billion of support related to the ~~local management and efficacy of federal disaster resources.~~ COVID-19 pandemic, including funding form the recently enacted ARPA.

While the previously allocated federal disaster relief funds ~~Medicaid money,~~ and the more recent COVID-19 crisis related funds are all expected to support economic recovery and growth and in Puerto Rico, there

| Ambac Financial Group, Inc. 482021 First Quarter FORM 10-Q |

can be no assurances as to the certainty, timing, usage, efficacy or magnitude of benefits to creditor outcomes related to disaster aid and ensuing economic growth, if any.

Summary

Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. During the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of ~~$263 million,~~$9, which was impacted by ~~lower discount rates,~~ the continued uncertainty and volatility of the situation in Puerto Rico, including the potential impact of the ~~COVID-19 crisis on the Commonwealth~~Second Amended PSA and the developing potential impact of the COVID-19 crisis on other sectors in the Domestic Public Finance insured portfolio; and loss adjustment expenses related to the cost of defending our rights and pursuing recoveries.PRHTA/CCDA PSA. 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 and the overall uncertain impact of the COVID-19 crisis on the Commonwealth and the Domestic Public Finance Insured Portfolio in general. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition.

Exposure Currency

The table below shows the distribution by currency of ~~Ambac Assurance’s~~AAC’s insured exposure as of ~~September 30, 2020:~~March 31, 2021:


Currency (Amounts in millions)		Net Par Amount Outstanding in Base Currency		Net Par Amount Outstanding in U.S. Dollars
Currency						Currency	Net Par Amount Outstanding in Base Currency		Net Par Amount Outstanding in U.S. Dollars
U.S. Dollars	U.S. Dollars	$	23,033	$	23,033	U.S. Dollars	$	20,259	$	20,259
British Pounds	British Pounds	£	7,403	9,550		British Pounds	£	6,584	9,072
Euros	Euros	€	1,518	1,778		Euros	€	1,451	1,702
Australian Dollars	Australian Dollars	A$	545	390		Australian Dollars	A$	545	414

Total	Total			$	34,751	Total			$	31,447

~~| Ambac Financial Group, Inc.~~ 57~~2020 Third Quarter FORM 10-Q~~ |

Ratings Distribution

The following charts provide a rating distribution of net par outstanding based upon internal Ambac credit ratings(1) and a distribution by bond type of Ambac's below investment grade ("BIG") net par exposures at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. BIG is defined as those exposures with an Ambac internal credit rating below BBB-:

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

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

Net Par Outstanding
Summary of Below Investment
Grade Exposure ($ in millions) September 30,
2020 December 31,
2019
Public Finance:
Lease and tax-backed (1)
$ 1,199 $ 1,109
General obligation (1)
336 525
Housing (2)
309 311
Stadium 540 —
Transportation 30 27
Other 38 42
Total Public Finance 2,452 2,014
Structured Finance:
RMBS 2,941 3,362
Student loans 540 620
Other 1 33
Total Structured Finance 3,482 4,015
International Finance:
Other 1,537 1,455
Total International Finance 1,537 1,455
Total $ 7,471 $ 7,484

| Ambac Financial Group, Inc. 492021 First Quarter FORM 10-Q |


	Net Par Outstanding
Summary of Below Investment Grade Exposure	March 31, 2021		December 31, 2020
Public Finance:
Lease and tax-backed (1)	$	1,181	$	1,194
General obligation (1)	322		325
Housing (2)	493		308
Stadium	—		540
Transportation	29		30

Other	38		38
Total Public Finance	2,063		2,435
Structured Finance:
RMBS	2,657		2,800

Student loans	484		512

Total Structured Finance	3,141		3,312
International Finance:
Other	1,507		1,574
Total International Finance	1,507		1,574
Total	$	6,711	$	7,321

(1)Lease and tax-backed revenue includes ~~$969~~$965 and ~~$1,014~~$969 of Puerto Rico net par at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. General obligation includes $101 and ~~$109~~$101 of Puerto Rico net par at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. Components of Puerto Rico net par outstanding includes 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.

(2)Relates to military housing net par.

The net decline in below investment grade exposures is primarily due to ~~commutation~~the de-risking of certain general obligation exposures, the partial commutation of a structured finance transaction mostly offset by the addition of certain exposures driven by the COVID-19 pandemic (lease and tax-backed, stadiums and an ~~international structured finance exposure).~~adversely classified stadium transaction.

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.

~~RESULTS OF OPERATIONS~~

Net loss attributable to common stockholders for the three months ended September 30, 2020, was $108 million compared to net income attributable to common stockholders of $66 million for the three months ended September 30, 2019. The decrease in net income was primarily driven by (i) receipt of $142 million arising from the settlement between the SEC and Citigroup which was recognized as a gain in Other income for the three months ended September 30, 2019, (ii) higher losses and loss expenses, (iii) lower net realized investment gains, (iv) lower income on variable interest entities, and (v) lower net investment income, partially offset by: (a) lower

~~| Ambac Financial Group, Inc.~~ 58~~2020 Third Quarter FORM 10-Q~~ |

~~interest and operating expenses and (b) higher net gains on derivative contracts.~~

~~Net loss attributable to common stockholders for the nine months ended September 30, 2020, was $423 million compared to a net loss attributable to common stockholders~~Results of ~~$106 million for the nine months ended September 30, 2019. The increase~~Operations
($ in loss was primarily driven by: (i) higher loss and loss expenses, (ii) receipt of $142 million arising from the settlement between the SEC and Citigroup which was recognized as a gain in Other income for the nine months ended September 30, 2019, (iii) lower net investment income, (iv) lower net realized investment gains, and (v) lower income on variable interest entities, partially offset by (a) lower insurance intangible amortization and (b) lower interest and operating expenses.millions)

A summary of our financial results is shown below:

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2020 2019 2020 2019
Revenues:
Net premiums earned $ 15 $ 10 $ 36 $ 46
Net investment income 37 45 69 186
Net realized investment gains (losses) 2 18 20 71
Net gains (losses) on derivative contracts 7 (10) (61) (61)
Other income (expense) 2 141 2 133
Income (loss) on variable interest entities — 11 3 30
Expenses:
Losses and loss expenses (benefit) 83 37 216 (84)
Insurance intangible amortization 14 17 41 280
Operating expenses 23 26 67 80
Interest expense 50 67 172 202
Provision for income taxes — 3 (5) 33
Net income (loss) attributable to common stockholders $ (108) $ 66 $ (423) $ (106)


Three Months Ended March 31,	2021		2020
Revenues:
Net premiums earned	$	14	$	10
Net investment income	49		(21)

Net realized investment gains (losses)	2		8

Net gains (losses) on derivative contracts	25		(70)
Net realized gains (losses) on extinguishment of debt	33		—
Other income (expense)	5		—
Income (loss) on variable interest entities	—		3
Expenses:
Losses and loss expenses (benefit)	8		117
Insurance intangible amortization	19		13
Operating expenses	33		24
Interest expense	50		63


Provision for income taxes	2		(7)



Net income (loss) attributable to common stockholders	$	17	$	(280)

Ambac's results of operations and financial position have been 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. Credit driven losses were also recognized in the three months ended March 31, 2020, within losses incurred (primarily from public finance insurance policies) and losses infrom counterparty credit adjustments on derivative asset valuations. Financial market disruptions were reflected through lower valuations of certain fixed ~~income~~maturity securities (recorded through other comprehensive income) and the majority of other investments (recorded through net investment income). During the ~~second and third~~remaining quarters of 2020 and into 2021, credit spreads ~~partially~~

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 affects of the COVID-19 pandemic. For additional information on the risks posed by COVID-19, refer to “Part II, Item 1A-Risk Factors” in this Quarterly Report on Form 10-Q.

During 2019, Ambac executed on a number of restructuring/commutation transactions that had significant impacts to the consolidated results of operations. As described further below, the completion of the these transactions, including the related changes to invested assets, intangible assets, loss reserves and debt of the Company, had a significant impact on the comparability of the results of operation for the nine months ended September 30, 2020 and 2019. The most significant transactions, which are more fully discussed in "Financial Guarantees in Force" in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2019 were:

~~Puerto Rico COFINA Plan of Adjustment ("POA").~~On February 12, 2019, the POA, including certain related commutation transactions, and subsequent distributions, became effective, resulting in a significant reduction of Ambac Assurance's insured net par exposure to COFINA. Pursuant to the COFINA POA, approximately 75% of holders of Ambac Assurance-insured senior COFINA bonds (including Ambac) elected to commute their insurance policy.

~~Ballantyne Re plc ("Ballantyne") Restructuring.~~ On April 25, 2019, Ballantyne commenced, under Irish law, a restructuring transaction ("Restructuring") in respect of its obligations, including obligations that were guaranteed by Ambac UK. The arrangement was approved on June 17, 2019. With the successful implementation of the Restructuring, Ambac UK has ceased to have any exposure with respect to the obligations of Ballantyne.

The following paragraphs describe the consolidated results of operations of Ambac and its subsidiaries for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

Net Premiums Earned. Net premiums earned primarily represent the amortization into income of insurance premiums. We present accelerated premiums, which result from calls and other accelerations of insured obligations separate from normal net premiums earned. When an insured bond has been retired, any remaining unearned premium revenue ("UPR") is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, we offset the

| Ambac Financial Group, Inc. 502021 First Quarter FORM 10-Q |

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.

Net premiums earned increased ~~$5 million and decreased $10 million~~$4 for the three ~~and nine~~ months ended ~~September 30,~~

~~| Ambac Financial Group, Inc.~~ 59~~2020 Third Quarter FORM 10-Q~~ |

~~2020, respectively,~~March 31, 2021, compared to the same periods in the prior year. Normal net premiums earned and accelerated premiums are reconciled to total net premiums earned in the table below. The following table provides a breakdown of normal premiums earned by market:


		Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)		2020		2019		2020		2019
Three Months Ended March 31,										Three Months Ended March 31,	2021		2020
Normal premiums earned	Normal premiums earned									Normal premiums earned
Public finance	Public finance	$	5	$	7	$	15	$	21	Public finance	$	5	$	5
Structured finance	Structured finance	2		2		6		8		Structured finance	3		1
International finance	International finance	3		—		9		9		International finance	7		4
Total normal premiums earned	Total normal premiums earned	10		8		30		38		Total normal premiums earned	15		10

Accelerated earnings	Accelerated earnings	5		2		6		8		Accelerated earnings	—		—
Total net premiums earned	Total net premiums earned	$	15	$	10	$	36	$	46	Total net premiums earned	$	14	$	10

The increase in normal premiums earned for the three months ended ~~September 30, 2020,~~March 31, 2021, is primarily due to changes in allowances for credit losses on premium receivables, partially offset by the continued runoff of the insured portfolio in all markets. The decrease in normal premiums earned for the nine months ended September 30, 2020, is primarily attributable to (i) the continued runoff of the insured portfolio in all markets and (ii) changes to allowance for credit losses on premiums receivables. Ambac adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("CECL"), on January 1, 2020, and assesses the allowance for credit losses on premium receivables on a quarterly basis. ~~Prior to adoption of ASU 2016-13, Ambac assessed collectability of premium receivables in accordance with ASC 944 and recorded an allowance for uncollectible premiums.~~ The three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, includes ~~an increase~~a decrease in the allowance for credit losses ~~since adoption~~ of ~~CECL of $2 million and $5 million, respectively,~~$4 as ~~compared~~compared to an increase of ~~$6 million and $7 million~~$2 for the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~March 31, 2020. Terminations and accelerations, including those which occurred in prior periods, result in lower normal premiums earned in current and future periods. Public Finance normal earned premiums for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, were also impacted by reinsurance cessions in the ~~second half~~first quarter of ~~2019.~~2021.

The increase in accelerated earnings in the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, is primarily driven by the termination of an international credit. The decrease in accelerated earnings in the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, is primarily related to the COFINA restructuring, partially offset by negative accelerations related to the Ballantyne commutation and two international commercial asset-backed exposures, all of which occurred in 2019.

Net Investment Income. Net investment income primarily consists of interest and net discount accretion on fixed ~~income~~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 ~~income~~maturity securities include investments in Ambac-insured securities that are made opportunistically based on their risk/reward and asset-liability management characteristics. As described further below, investment income from holdings of Ambac-insured securities (including Secured Notes issued by Ambac LSNI, LLC) for the periods presented have primarily been affected by restructuring transactions involving Puerto Rico and Ballantyne bonds. Investments in pooled investment funds and certain other investments are either classified as trading securities with changes in fair value recognized in earnings or are reported under the equity method. These funds and other investments are reported in Other investments on the Unaudited Consolidated Balance Sheets, which consists primarily of pooled fund investments in diversified asset classes. For further information about investment funds held, refer to Note 8. Investments to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q.

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

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2020 2019 2020 2019
Securities available-for-sale: Ambac-insured (including Secured Notes) $ 15 $ 18 $ 47 $ 104
Securities available-for-sale and short-term other than Ambac-insured 9 19 33 57
Other investments (includes trading securities) 14 8 (12) 25
Net investment income $ 37 $ 45 $ 69 $ 186


Three Months Ended March 31,	2021		2020
Securities available-for-sale: Ambac-insured (including Secured Notes)	$	15	$	16
Securities available-for-sale and short-term other than Ambac-insured	7		15
Other investments (includes trading securities)	27		(52)
Net investment income	$	49	$	(21)

Net investment income ~~decreased $7 million and $117 million~~increased $70 for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, respectively, compared to the same periods in the prior year. As described further below, the variances were primarily driven by pricing volatility within fund investments resulting from the impact of the COVID-19 pandemic on financial markets and re-allocation of the ~~impact of de-risking transactions in 2019, including lower subsequent allocations to higher yielding~~investment portfolio during 2020 toward pooled funds and Ambac-insured bonds from investment grade corporate bonds, commercial mortgage backed securities and ~~a lower overall invested asset base.~~certain CLOs.

•Other investments income (loss) increased ~~$6 million and decreased $37 million for the three and nine months ended September 30, 2020, respectively, compared to the~~

~~| Ambac Financial Group, Inc.~~ 60~~2020 Third Quarter FORM 10-Q~~ |

~~same periods in the prior year. The increase in other investment income (loss)~~$79 for the three months ended ~~September 30, 2020,~~March 31, 2021, compared to the same period in the prior year, ~~period, resulted from stronger average~~reflecting strong performance and a larger allocation to this sector. Third quarter 2020 gains reflect the continued price recovery on asset classes most significantly impacted by fair value losses in the first quarter of 2020, including hedge funds and funds investing in high-yield bonds, leveraged loans and equities. Other investment income for the three months ended ~~September 30,~~March 31, 2021, particularly in hedge funds and equity funds. Losses on Other investments for the three months ended March 31, 2020, ~~also reflected gains on additional~~were in hedge and other fund investments ~~made during the period. The loss for the nine months ended September 30, 2020, was~~focusing on asset-backed securities, equities, high-yield, leveraged loans and private credit. These losses were primarily driven by adverse changes in fair values, ~~experienced in the first quarter of the year~~rather than realized losses, stemming from an increase in risk premiums ~~(including~~(particularly credit spreads) as a consequence of the initial economic and financial market impact of the COVID-19 pandemic, partially offset by fair value recoveries and gains on new investments in subsequent quarters. Other investment income for the three and nine months ended September 30, 2019, was driven primarily by gains on equity and high-yield and loan funds, partially offset by losses on insurance-linked securities.pandemic.

•~~Investment income~~Income from Ambac-insured securities was lower ~~in both~~for the three ~~and nine month periods~~months ended ~~September 30, 2020,~~March 31, 2021, as compared to the ~~prior year periods~~three months ended March 31, 2020, due ~~primarily~~ to the effects ~~of 2019 de-risking activities,~~ ongoing ~~early~~ redemptions of Secured Notes issued by Ambac LSNI, LLC and ~~the effects of declining interest rates. The decline of income from Ambac-insured securities for the three months ended September 30, 2020, was driven by redemptions and~~ lower LIBOR indexed coupon rates, ~~on the Secured Notes compared~~partially offset by a higher allocation to ~~the three months ended September 30, 2019. Lower income from~~ Ambac-insured securities for the nine months ended September 30, 2020 compared to the same period of 2019, primarily resulted from accelerated discount accretion on Ballantyne bonds, recognized in connection with the Restructuring in the second quarter of 2019. Other contributing factors to the decrease from the first nine months of 2019 are redemptionsRMBS and ~~lower rates on the Secured Notes and lower holdings of Ambac insured-RMBS.~~Puerto Rico bonds.

•Net investment income from available-for-sales securities other than Ambac-insured securities decreased as a result of the favorable impact on income for the three and nine months ended September 30, 2019, of high yielding uninsured COFINA bonds received under the POA, as well as the impact of a smaller asset base and lower average yields in 2020. All of the uninsured COFINA bonds were sold from Ambac's non-VIE investment portfolio by December 31, 2019. Use of funds for early debt redemptions and operating cash needs, combined with portfolio allocation toward other investments and Ambac-insured bonds from lower rated investment grade corporates, commercial mortgage backed securities and certain CLOs in 2020 resulted in a lower asset base inand average yield for this portion of the portfolio. ~~This reallocation along with steadily declining reinvestment~~

~~rates on short-term holdings~~The lower asset base resulted primarily from re-allocation of the portfolio in ~~lower averages~~2020 toward pooled funds and Ambac-insured bonds from investment grade corporate and certain asset-backed securities. Additionally, cash has been used to fund operations, early debt redemptions, and Ambac's acquisition of Xchange. Lower yields ~~on available-for-sale securities other than Ambac-insured~~in the three months ended March 31, 2021, compared to the ~~prior year periods.~~three months ended March 31, 2020, reflect the higher rated securities purchased during the 2020 portfolio re-allocation, lower relative yields on new investments and near-zero short term rates prevailing during the first quarter of 2021.

Net Realized Investment Gains (Losses). The following table provides a breakdown of net realized gains (losses) for the periods presented:

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2020 2019 2020 2019
Net gains (losses) on securities sold or called $ 4 $ 12 $ 20 $ 42
Net foreign exchange gains (losses) (2) 7 — 30
Credit impairments — — — —
Intent / requirement to sell impairments — — — —
Total net realized gains (losses) $ 2 $ 18 $ 20 $ 71

| Ambac Financial Group, Inc. 512021 First Quarter FORM 10-Q |


Three Months Ended March 31,	2021		2020
Net gains (losses) on securities sold or called	$	6	$	6
Net foreign exchange gains (losses)	(4)		2
Credit impairments	—		—
Intent / requirement to sell impairments	—		—
Total net realized gains (losses)	$	2	$	8

Net realized gains on securities sold or called for the three ~~and nine~~ months ended ~~September 30, 2020, are~~March 31, 2021, included a gain of $4 realized on the sale AFG's equity interest in the Corolla Trust in connection with the Corolla Exchange Transaction. Other net realized gains on securities sold or called during both periods were primarily from sales in connection with routine portfolio management. Net realized gains on securities sold or called for the three and nine months ended September 30, 2019, included $7 million and $33 million, respectively, of net gains related to the impact of the COFINA Plan of Adjustment, including sales of Ambac-insured Puerto Rico COFINA bonds and new uninsured COFINA bonds received in the commutation. Also included in realized gains for the nine months ended September 30, 2019, are $23 million of realized foreign exchange gains arising from the settlement of Ballantyne bonds held in the investment portfolio.

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 include results from the Company's interest rate derivatives portfolio and its runoff credit derivatives 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. ~~As forward rates and interest rate exposures elsewhere in the company have declined over the course of 2019 into the first half of 2020, the economic hedge position has been adjusted.~~ Net gains (losses) 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.

~~| Ambac Financial Group, Inc.~~ 61~~2020 Third Quarter FORM 10-Q~~ |

Net gains (losses) on interest rate derivatives for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, were ~~$6 million and $(61) million, respectively,~~$25 compared to ($~~10) million and $(63) million~~68) for the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~March 31, 2020. The net gain for the three months ended ~~September 30, 2020,~~March 31, 2021, reflects ~~a gain~~changes in fair value from ~~reduced~~rising forward interest rates and lower counterparty credit ~~adjustments.~~adjustments on certain derivative assets. The net loss for ~~nine~~the three months ended ~~September 30,~~March 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. The net losses for three and nine months ended September 30, 2019, reflect the impact of declines in forward interest rates, partially offset by negative net carrying costs driven by an inverted yield curve.

•Counterparty credit adjustments are generally applicable for uncollateralized derivative assets that may not be offset by derivative liabilities under a master netting agreement. Inclusion of counterparty credit adjustments in the valuation of interest rate derivatives resulted in gains (losses) within Net gains (losses) on derivative contracts of $6 million and $(15) million for the three and nine months ended September 30, 2020, respectively, and $(5) million and $(8) million for the three and nine months ended September 30, 2019, respectively. The gain$9 for the three months ended ~~September 30, 2020, was~~March 31, 2021, and $(30) for the three months ended March 31, 2020. In addition to the impact of interest rates on the underlying derivative asset values, the changes in counterparty credit adjustments were driven by ~~narrower~~narrowing credit spreads ~~and a decrease~~ in the ~~underlying net asset value of the derivative assets as long term interest rates began to rise. The loss for the nine~~three months ended ~~September 30, 2020, was driven by wider credit spreads, including the effect of a credit rating downgrade of a derivative counterparty by Ambac during~~March 31, 2021, compared to spread widening experienced in the first quarter ~~simultaneous~~of 2020 associated with ~~an increase in~~ the ~~underlying asset value as interest rates declined. The losses on counterparty credit adjustments for~~market disruption from the ~~2019 periods are primarily due to increases in the underlying asset values as interest rates declined.~~COVID-19 pandemic.

Other income (expense). Other income (expense) includes commission revenues of Xchange, various financial guarantee fees ~~primarily consent~~ and ~~waiver fees, as well as~~ foreign exchange gains/(losses) unrelated to investments or loss reserves. For the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, other income ~~(expense) included foreign exchange~~includes Xchange revenues of $7.

Net Realized Gains on Extinguishment of Debt. Net realized gains on extinguishment of debt was $33 for the three months ended March 31, 2021, resulting from the exchanges of junior surplus notes below their carrying values. Refer to Note 1. Background and ~~amortization~~Business Description for further discussion of ~~fee income. Other income also includes proceeds received by Ambac Assurance in September 2019 in connection with an SEC action against Citigroup Global Markets Inc. in~~ the ~~amount of $142 million.~~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 if such policy changes do not result in deconsolidation of the VIE.

Income (loss) on variable interest entities was ~~a loss~~income of less than a million and income of $3 ~~million~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~respectively, compared to income of $11 million and $30 million for the three and nine months ended September 30, 2019,~~ respectively. Results for the three months ended September 30, 2020, reflect a modest reduction in value of net assets of a VIE related to the ongoing shut-down of parts of the UK economy resulting from COVID-19. Results for the nine months ended September 30, 2020, were due primarily toMarch 31, 2021, included realized gains of ~~$8 million~~$1 on sales of assets from one VIE (the COFINA Trust) partially offset by the lower valuation of net assets on a VIE impacted by ~~COVID-19.~~credit downgrades. Results ~~for the three and nine months ended September 30, 2019, were driven by the impact of the COFINA Trust created in connection with the restructuring of Puerto Rico COFINA debt. Income from COFINA Trust~~ for the three months ended ~~September 30, 2019, was $11 million,~~March 31, 2020, were due primarily ~~from~~to realized gains of $8 on sales of assets from the ~~trust used for early redemptions of debt. Income from~~ COFINA Trust ~~for nine months ended September 30, 2019, was $26 million, including $15 million from consolidation and $13 million from realized investment gains,~~ partially offset by the lower valuation of net ~~interest expense and fees. The three and nine months ended September 30, 2019, also included~~assets on a ~~$2 million loss from deconsolidation of a VIE.~~VIE impacted by COVID-19.

Refer to Note 3. Variable Interest Entities to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q for further information on the accounting for VIEs.

Losses and Loss Expenses. Losses and loss expenses are based upon estimates of the aggregate losses inherent in the non-derivative financial guarantee portfolio for insurance policies issued to beneficiaries, including unconsolidated VIEs.

| Ambac Financial Group, Inc. 522021 First Quarter FORM 10-Q |

Ambac records as a component of its loss reserve estimate subrogation recoveries related to securitized loans in RMBS transactions with respect to which ~~Ambac Assurance~~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. Generally, the sponsor of an RMBS transaction provided representations and warranties with respect to the securitized loans, including representations with respect to the loan characteristics, the absence of borrower fraud in the underlying loan pools or other misconduct in the origination process and attesting to the compliance of loans with the prevailing underwriting policies. Ambac has recorded representation and warranty subrogation recoveries, net of

~~| Ambac Financial Group, Inc.~~ 62~~2020 Third Quarter FORM 10-Q~~ |

reinsurance, of ~~$1,731 million~~$1,722 and ~~$1,702 million~~$1,725 at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively. ~~The increase in these recoveries was primarily driven by lower discount rates used to discount estimated cash flows.~~ Refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, for more information regarding the estimation process for R&W subrogation recoveries.

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


		Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)		2020		2019		2020		2019
Three Months Ended March 31,										Three Months Ended March 31,	2021		2020
RMBS	RMBS	$	27	$	(25)	$	(91)	$	(133)	RMBS	$	(8)	$	(83)
Domestic Public Finance	Domestic Public Finance	43		77		263		197		Domestic Public Finance	9		178
Student Loans	Student Loans	6		(16)		24		(23)		Student Loans	—		14
Ambac UK and Other Credits	Ambac UK and Other Credits	8		—		20		(125)		Ambac UK and Other Credits	6		7

Totals (1)	Totals (1)	$	83	$	37	$	216	$	(84)	Totals (1)	$	8	$	117

(1) Includes loss expenses incurred of ~~$46~~$10 and ~~$83~~$3 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~respectively, and $23 and $52 for the three and nine months ended September 30, 2019,~~ respectively.

Losses and loss expenses (benefit) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, were driven by higher projected losses in domestic public finance from adverse development related to Puerto Rico, partially offset by the positive impact of higher discount rates. The underlying assumptions impacting our reserves for Puerto Rico during the three months ended March 31, 2021, were within the range of assumptions underlying our probability weighted reserves as of December 31, 2020.

Losses and loss expenses (benefit) for the three months ended March 31, 2020, were driven by the following:

•Higher projected losses in domestic public finance driven by lower discount rates (primarily relating to Puerto Rico), ~~loss expenses incurred~~ and incurred losses related to transactions directly impacted by the economic impact from COVID-19;

•An increase in student loan losses as a result of lower discount rates and the impact from COVID-19; ~~and~~partially offset by,

•~~Increased~~Favorable RMBS ~~losses for the three months ended September 30, 2020, related to expected losses from COVID-19 related delinquencies and improved RMBS losses for the nine months ended September 30, 2020,~~development as a result of the positive impact of lower interest rates on excess spread, reduced by the negative impact of lower discount rates and expected losses from COVID-19 related delinquencies.

~~Losses and loss expenses (benefit) for the three and nine months ended September 30, 2019, were driven by the following:~~

•~~For the nine months ended September 30, 2019, favorable development within Ambac UK and Other Credits primarily due to the Ballantyne commutation completed in June 2019;~~

•Favorable RMBS development as a result of credit improvement, the impact on excess spread from declines in interest rates, and additionally for the nine months ended September 30, 2019, a trustee settlement related to Lehman sponsored transactions partially offset by,

•~~Higher projected losses in domestic public finance driven mostly by a lower discount rates and additions to Puerto Rico loss reserves.~~

~~Insurance~~ Intangible ~~Amortization.~~Amortization

Insurance intangible amortization for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, was ~~$14 million and $41 million, respectively, a decrease~~$19 an increase of ~~$4 million and $239 million~~$5 over the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~March 31, 2020. The ~~decrease from~~increase was driven primarily by de-risking activity. Other intangible amortization for the ~~nine~~three months ended ~~September 30, 2019, is primarily due to accelerated amortization as a result of the Ballantyne commutation that occurred in the second quarter of 2019.~~March 31, 2021, was $1.

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

Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2020 2019 2020 2019
Compensation $ 13 $ 14 $ 38 $ 46
Non-compensation 10 11 29 33
Gross operating expenses 23 26 67 80
Reinsurance commissions, net — — — —
Total operating expenses $ 23 $ 26 $ 67 $ 80


Three Months Ended March 31,	2021		2020
Compensation	$	16	$	14
Non-compensation	17		9
Gross operating expenses	33		24
Reinsurance commissions, net	—		—

Total operating expenses	$	33	$	24

Gross operating expenses ~~decreased $3 million and $13 million~~increased $9 for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021 compared to the same ~~periods~~period in the prior year. ~~Operating expenses incurred relating to COVID-19 have not been significant for the three and nine months ended September 30, 2020.~~

The ~~decrease~~increase in operating expenses during the three months ended ~~September 30, 2020,~~March 31, 2021, as compared to the three months ended ~~September 30, 2019,~~March 31, 2020, was due to the following:

•~~Lower~~Higher compensation costs ~~primarily related~~due to the inclusion of Xchange compensation costs for the first time since its acquisition, accelerated expense recognition for retirement eligible stock-based compensation awards and lower ~~salaries resulting from continued right sizing of staffing levels and~~capitalization for internal software projects, partially offset by lower bonus expense recognized in the three months ended March 31, 2021.

•~~Lower~~Higher non-compensation costs primarily due to ~~reduced premises costs as~~the inclusion of Xchange's commissions to sub-producers of $4, consulting and legal fees associated with the surplus note exchange transactions and a ~~result of re-locating our corporate headquarters.~~

~~The decrease in operating expenses during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was due to the following:~~

•Lower compensation costs primarily due to lower salaries and severance resulting from continued right sizing of staffing levels and lower incentive compensation costs primarily related to the Ballantyne restructuring in 2019 and

•~~Lower non-compensation costs primarily due to a~~$1 UK Value Added Tax (VAT) refund ~~recognized in~~which lowered expenses for the ~~nine~~three months ended ~~September 30, 2020, reduced consulting services and lower premises costs as a result of re-locating our corporate headquarters, offset by increased legal fees.~~March 31, 2020.

~~Legal and consulting services provided for the benefit of OCI were flat at $2 million during the nine months ended September 30, 2020 and 2019.~~

~~| Ambac Financial Group, Inc.~~ 63~~2020 Third Quarter FORM 10-Q~~ |

Interest Expense. Interest expense includes accrued interest on the Ambac 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:


		Three Months Ended September 30,				Nine Months Ended September 30,
($ in millions)		2020		2019		2020		2019
Three Months Ended March 31,										Three Months Ended March 31,	2021		2020
Surplus notes (1)	Surplus notes (1)	$	17	$	25	$	67	$	73	Surplus notes (1)	$	18	$	26

Ambac note	Ambac note	25		35		83		110		Ambac note	25		31
Tier 2 notes	Tier 2 notes	7		7		21		19		Tier 2 notes	7		7
Other	Other	—		—		1		—		Other	—		—

Total interest expense	Total interest expense	$	50	$	67	$	172	$	202	Total interest expense	$	50	$	63

(1)Includes junior surplus notes

The decrease in interest expense for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, compared to the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, was primarily driven by lower discount accretion on surplus notes, together with optional redemptions and lower rate

resets of the floating rate Ambac Note, ~~and lower discount accretion on surplus notes,~~ partially offset by interest compounding on the surplus notes and the Tier 2 Notes. The first quarter 2021 transactions resulting in the acquisition and retirement of all junior surplus notes in exchange for re-issuance of surplus notes did not significantly impact the interest expense for the three months ended March 31, 2021, compared to the prior year period.

Surplus note principal and interest payments require the approval of OCI. 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 in connection with (a) increasing the percentage of deferred policy payments of the Segregated Account of Ambac Assurance from 25% to 45% in 2014 and (b) a one-time payment of approximately six months of interest on the surplus notes (other than junior surplus notes) outstanding immediately after consummation of the Rehabilitation Exit Transactions in 2018. In accordance with their terms, Ambac Assurance has not requested to pay interest on any junior surplus notes since their issuance.payments.

In ~~April 2020,~~May 2021, OCI declined the request of ~~Ambac Assurance~~AAC to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on the next scheduled ~~maturity~~payment date of June 7, ~~2020.~~2021. As a result, the scheduled payment date for interest, and the scheduled maturity date for payment of principal of the surplus notes, shall 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 and junior surplus notes were accrued for and ~~Ambac Assurance~~AAC is accruing interest on the interest amounts following each scheduled payment date. Total accrued and unpaid interest for surplus notes ~~and junior surplus notes~~ outstanding to third parties were ~~$334 million and $165 million, respectively,~~$516 at ~~September 30, 2020.~~March 31, 2021.

Provision for Income Taxes. The provision for income taxes for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, was ~~$0 million and a benefit~~$2, an increase of ~~$5 million, a decrease of $3 million and $38 million~~$9 compared to the provision for income taxes reported for three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020. The change for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, as compared to the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, was primarily driven by state income tax related to the gains on the surplus note exchanges, whereas 2020 was attributable to Ambac UK, which had ~~higher~~a taxable ~~income in 2019 due~~loss, related to ~~the Ballantyne restructuring and commutation.~~investment losses on pooled funds.

LIQUIDITY AND CAPITAL RESOURCES
($ in millions)

Ambac Financial Group, Inc. ("AFG") Liquidity. AFG's liquidity is primarily dependent on its cash, investments (excluding equity investments in subsidiaries), and net receivables totaling ~~$465 million~~$274 as of ~~September 30, 2020,~~March 31, 2021, and secondarily on ~~its~~dividends and expense sharing ~~and other arrangements with Ambac Assurance.~~payments from its subsidiaries.

•During the three months ended ~~September 30, 2020,~~March 31, 2021, AFG ~~purchased~~further capitalized the Everspan Group with a cash contribution to Everspan Indemnity Insurance Company ~~from Ambac Assurance and repositioned it as a subsidiary of a new intermediary holding company that is directly owned by AFG. This acquisition required a cash payment from AFG to AAC~~ of approximately ~~$14 million.~~

•Pursuant to the amended and restated tax sharing agreement among AFG, Ambac Assurance and certain affiliates (the "Amended TSA"), Ambac Assurance is required to make payments ("tolling payments") to AFG with respect to the utilization of net operating loss carry-forwards (“NOLs”). AFG has accrued $28 million of tolling payments based on NOLs used by Ambac Assurance in 2017. In May 2018, AFG executed a waiver under the intercompany tax sharing agreement pursuant to which Ambac Assurance was relieved of the requirement to make this payment by June 1, 2018. AFG also agreed to defer the tolling payment for the use of net operating losses by Ambac Assurance in 2017 until such time as OCI consents to the payment.$82.

•Under an inter-company cost allocation agreement, AFG is reimbursed by ~~Ambac Assurance~~AAC for a portion of certain operating costs and expenses and, if approved by OCI, entitled to an additional payment of up to $4 ~~million~~ per year to cover expenses not otherwise reimbursed. ~~OCI approved this~~The $4 ~~million~~ reimbursement for ~~2019~~2020 expenses ~~which~~ was approved (by OCI) and paid (by AAC) in ~~March 2020.~~April 2021.

AFG's investments include securities directly and indirectly issued by and/or insured by ~~Ambac Assurance,~~AAC, some of which are eliminated in consolidation. Securities issued and/or insured by ~~Ambac Assurance~~AAC are generally less liquid than investment grade and other traded investments.

AFG has not received dividends from any of its subsidiaries during the first quarter of 2021 or the full year of 2020.

•It is highly unlikely that ~~Ambac Assurance~~AAC will be able to make dividend payments to AFG for the foreseeable ~~future and therefore cash and investments,~~future. Therefore, payments under the intercompany cost allocation agreement ~~and tolling payments, if any,~~ will be AFG’s principal sources of liquidity from AAC in the ~~near term.~~near-term. Refer to Part I, Item 1, “Insurance Regulatory Matters — Dividend Restrictions, Including Contractual Restrictions” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, and Note 8. Insurance Regulatory Restrictions to the Consolidated Financial Statements included

and the increase in ~~unemployment,~~unemployment) may not have sufficient cash inflows to pay debt service on Ambac-insured debt. Refer to "Financial Guarantees in Force" in this Management's Discussion and Analysis for further discussion of the potential impact of the COVID-19 pandemic on claim payments.

•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 ~~Ambac Assurance.~~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. See Note 13. Long-term Debt in the Notes to Consolidated Financial Statements, included in Part II, Item 8, in the Company's Annual Report on Form 10-K for

the year ended December 31, ~~2019,~~2020, for further discussion of the payment terms and conditions of the Tier 2 Notes. As discussed more fully in "Results of Operations" above in this Management's Discussion and Analysis, OCI declined ~~Ambac Assurance's~~AAC's request to pay the principal amount of the surplus notes, plus all accrued and unpaid interest thereon, on June 7, ~~2020.~~2021 and on each prior scheduled payment date.

~~Ambac Assurance's~~AAC's intercompany loans are with Ambac Financial Services ("AFS"). AFS uses interest rate derivatives (primarily interest rate swaps and US Treasury futures) as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on ~~Ambac Assurance’s~~AAC’s financial guarantee exposures. AFS's derivatives include interest rate swaps previously provided to asset-backed issuers and other entities in connection with their financings. ~~Ambac Assurance~~AAC loans cash and securities to AFS 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.

~~Ambac Assurance~~AAC manages its liquidity risk by maintaining comprehensive analyses of projected cash flows and maintaining specified levels of cash and short-term investments at all times.

~~Ambac Assurance~~AAC is limited in its ability to pay dividends pursuant to the terms of its Auction Market Preferred Shares (“AMPS”), which state that dividends may not be paid on the common stock of ~~Ambac Assurance~~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 for such purposes, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS. ~~Ambac Assurance~~AAC has not paid dividends on the AMPS since 2010. ~~Ambac Assurance~~AAC is also subject to additional restrictions on the payment of dividends pursuant to certain contractual and regulatory restrictions. Refer to Part I, Item 1, “Insurance Regulatory Matters - Dividend Restrictions, Including Contractual Restrictions” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, and Note 8.9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8, in the Company’s Annual

Report on Form 10-K for the year ended December 31, ~~2019,~~2020, for more information on dividend payment restrictions.

Our ability to realize RMBS representation and warranty ("R&W") subrogation recoveries is subject to significant uncertainty, including risks inherent in ~~litigation;~~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 law that impact our own claims; collectability of such amounts from counterparties (and/or their respective parents and affiliates); timing of receipt of any such recoveries, including uncertainty due to delays in court proceedings as a result of the COVID-19 pandemic; 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 we are unable to recover any amounts or recover materially less


Three Months Ended March 31,	2021		2020
Net loss and loss expenses paid (recovered):
Net losses paid (1)	$	30	$	44
Net subrogation received	(25)		(25)
Net loss expenses paid	20		20
Net cash flow	$	25	$	39

(1)Net losses paid include commutation payments of ~~$13~~$0 and ~~$214~~$2 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

~~(2)~~For or the nine months ended September 30, 2019, subrogation received includes $36 of settlement proceeds related to Lehman sponsored RMBS transactions and $23 related to the COFINA Plan of Adjustment.

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

Financing Activities

Financing activities for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, include paydowns of the Ambac Note of ~~$115 million~~$16 and paydowns / maturities of VIE debt obligations of ~~$143 million.~~$48.

Financing activities for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, include paydowns of the Ambac Note of ~~$29 million~~$77 and paydowns of VIE debt obligations of ~~$510 million, proceeds of $19 million from the re-issuance of 1,386 shares of Ambac owned AMPS and proceeds of $12 million from issuance of Ambac UK debt.~~$66.

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 ~~$154 million~~$124 (cash and securities collateral of ~~$1 million~~$4 and ~~$152 million,~~$120, respectively), including independent amounts, under these contracts at ~~September 30, 2020.~~March 31, 2021.

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

BALANCE SHEET
($ in millions)

Total assets decreased by approximately ~~$507 million~~$380 from December 31, ~~2019,~~2020, to ~~$12,812 million~~$12,840 at ~~September 30, 2020,~~March 31, 2021, primarily due to the payment of loss and loss ~~adjustment~~ expenses; interest and operating expenses; ~~redemptions of long-term debt;~~lower subrogation recoverables; and lower VIE assets caused by ~~redemptions, the economic effects of the COVID-19 pandemic~~lower

valuation on certain ~~consolidated VIEs~~fixed maturity assets and the impact ~~of currency changes (weakening of pound sterling).~~Corolla Trust Exchange described in Note 1. Background and Business Description to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q. Other significant changes during the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, were ~~higher subrogation recoverables primarily related to increases in excess~~

Item 1 in this Form 10-Q for information about fixed maturity securities and pooled funds by asset class.

The following charts provide the ratings (1) distribution of the fixed ~~income~~maturity investment portfolio based on fair value at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:

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

(2)Below investment grade and not rated bonds insured by Ambac represent ~~39%~~42% and ~~33%~~41% of the ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 combined fixed ~~income~~maturity portfolio, respectively.

Premium Receivables. Ambac's premium receivables decreased to ~~$372 million~~$356 at ~~September 30, 2020,~~March 31, 2021, from ~~$416 million~~$370 at December 31, ~~2019.~~2020. As further discussed in Note 6. Financial Guarantee Insurance Contracts, the decrease is due to premium receipts and ~~increases~~adjustments for changes in expected and contractual cash flows, partially offset by decreases to the allowance for credit losses ~~partially offset by~~and accretion of the premium receivable discount.

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 $ 239 $ 239
British Pounds £ 87 112
Euros € 18 21
Total $ 372


Currency	Premium Receivable in Payment Currency		Premium Receivable in U.S. Dollars
U.S. Dollars	$	213	$	213
British Pounds	£	89	122
Euros	€	18	21


Total			$	356

Reinsurance Recoverable on Paid and Unpaid Losses. ~~Ambac Assurance~~AAC has reinsurance in place pursuant to surplus share treaty and facultative agreements. To minimize its exposure to losses from reinsurers, ~~Ambac Assurance~~AAC (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 by ~~Ambac Assurance~~AAC in the event of rating agency downgrades of a reinsurer (among other events and circumstances). ~~Ambac Assurance~~AAC benefited from letters of credit and collateral amounting to approximately ~~$132 million~~$108 from its reinsurers at ~~September 30, 2020.~~March 31, 2021. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, reinsurance recoverable on paid and unpaid losses were ~~$37 million~~$33 and ~~$26 million,~~$33, respectively. The increase was primarily a result of adverse development in public finance ~~and student loan insured~~ exposures.

~~Insurance~~ Intangible Asset. AtIntangible assets include (i) an insurance intangible asset that was established at the Fresh Start Reporting Date, ~~an insurance intangible asset was recorded which represented~~representing the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and ~~liabilities.~~ liabilities and (ii) intangible assets established as part of the acquisition of Xchange on December 31, 2020.

As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the ~~net insurance~~ intangible ~~asset was $383 million~~assets were $391 and ~~$427 million,~~$409, respectively. Other than through amortization, variance in the insurance intangible asset is solely from translation gains (losses) from the consolidation of Ambac's foreign subsidiary (Ambac UK).

Derivative Assets and Liabilities. The interest rate derivative portfolio is positioned to benefit from rising rates as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios. Derivative assets ~~increased~~decreased from ~~$75 million~~$93 at December 31, ~~2019,~~2020, to ~~$95 million~~$74 as of ~~September 30, 2020.~~March 31, 2021. Derivative liabilities ~~increased~~decreased from ~~$90 million~~$114 at December 31, ~~2019,~~2020, to ~~$126 million~~$86 as of ~~September 30, 2020.~~March 31, 2021. The net ~~increases~~decreases resulted primarily from ~~lower~~higher interest rates during the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, with the effect on assets partially offset by ~~higher~~lower counterparty credit adjustments.

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 for insurance policies issued to beneficiaries, including 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" and “Results of Operations” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in addition to Basis of

~~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 6. Financial Guarantee Insurance Contracts, respectively, of the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, for further information on loss and loss expenses.

The loss and loss expense reserves, net of subrogation recoverables and before reinsurance as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, were ~~$(393) million~~$(414) and ~~$(482) million,~~$(397), respectively.

differ from the amount of liabilities recorded, (viii) reinsurance contract terminations at amounts that differ from net assets recorded, (ix) changes to the fair value of pooled fund and other investments carried at fair value, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, and (xi) future changes to prescribed ~~practices~~practices.

Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $107 at March 31, 2021, as compared to $26 at December 31, 2020.

The significant drivers to the increase in policyholder surplus were capital contributions of $82 partially offset by operating expenses during the ~~OCI.~~three months ended March 31, 2021.

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 ~~£391 million~~£420 at ~~September 30, 2020,~~March 31, 2021, as compared to ~~£387 million~~£412 at December 31, ~~2019.~~2020. At ~~September 30, 2020,~~March 31, 2021, the carrying value of cash and investments was ~~£473 million,~~£485, an increase from ~~£470 million~~£481 at December 31, ~~2019.~~2020. The increase in shareholders’ funds and cash and investments was primarily due to the continued receipt of premiums and ~~foreign exchange gains,~~investment income, partially offset by ~~insurance~~loss expenses, foreign exchange losses, ~~losses within Ambac UK's investment portfolio (excluding foreign exchange)~~operating expenses and ~~operating expense~~tax payments.

Ambac UK is also required to prepare financial information in accordance with the Solvency II Directive. The basis of preparation of this information is significantly different from both US GAAP and UK GAAP.

Available capital resources under Solvency II were a surplus of ~~£183 million~~£222 at ~~September 30, 2020,~~March 31, 2021, of which ~~£170 million~~£212 were eligible to meet solvency capital requirements. This is ~~a reduction~~an increase from December 31, ~~2019,~~2020, when available capital resources were a surplus of ~~£188 million~~£196 of which ~~£178 million~~£184 were eligible to meet solvency capital requirements. Eligible capital resources at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, were in comparison to regulatory capital requirements of ~~£234 million~~£246 and ~~£208 million,~~£256, respectively. Therefore, Ambac UK ~~was~~remains deficient in terms of compliance with applicable regulatory capital requirements by ~~£64 million~~£35 and ~~£30 million~~£72 at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively. The deficit ~~increased~~reduced as at ~~September 30, 2020,~~March 31, 2021, due to an increase ~~in regulatory capital requirements for non-life insurers in the credit and surety line of business and due to a reduction~~ in eligible capital resources mainly caused by the ~~fall~~increase over the period in long term discount ~~rates.~~rates which reduced the value of technical provision liabilities over the quarter. The regulators are aware of the deficiency in capital resources as compared to capital requirements and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for addressing the shortcoming, although such options remain few.

NON-GAAP FINANCIAL MEASURES

In addition to reporting the Company’s quarterly financial results in accordance with 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

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.

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 fair value 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 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.

•Insurance intangible asset: Elimination of the financial guarantee insurance intangible asset that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. This adjustment ensures that all financial guarantee contracts are accounted for within Adjusted Book Value consistent with the provisions of the Financial Services—Insurance Topic of the ASC.

The decrease in Adjusted Book Value was primarily attributable to the $13 reduction to retained earnings from the increase to the carrying value of redeemable NCI and the impact on expected future premiums from reinsurance and de-risking transactions, partially offset by the Adjusted ~~Loss~~Earnings for the ~~nine~~three months ended ~~September 30, 2020, excluding~~March 31, 2021 (excluding earned premium previously included in Adjusted Book ~~Value.~~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), (ii) changes to expected losses for policies which do not exceed their related unearned premiums and (iii) new reinsurance transactions.

Item 3. Quantitative and Qualitative ~~Disclosures about~~Disclosure About Market ~~Risk~~Risk'

~~Market risk represents the potential for losses that may result from~~As of March 31, 2021, there were no material changes in the ~~value of a financial instrument as a result of changes in market conditions. The primary~~ market risks that ~~would impact~~ the value of Ambac’s financial instruments are interest rate risk, credit spread risk and foreign currency risk. As a result of declines in interest rates and increases in credit spreads during the nine months ended September 30, 2020, relatedCompany is exposed to ~~the impact of the COVID-19 pandemic, along with portfolio adjustments during the period, the sensitivities of~~

~~Ambac's financial instruments have changed from those disclosed in our Annual Report on Form 10-K for the year ended~~since December 31, ~~2019.~~

~~Interest Rate Risk:~~

Financial instruments for which fair value may be affected by changes in interest rates consist primarily of fixed income investment securities, long-term debt and interest rate derivatives. Fixed income investment securities that are guaranteed by Ambac have interest rate risk characteristics that behave inversely to those associated with future financial guarantee claim payments. Accordingly, such securities are excluded from the interest rate sensitivity table that follows. Financial instruments of VIEs that are consolidated as a result of Ambac financial guarantees are also excluded from Ambac's measures of interest rate risk. Changes in fair value resulting from changes in interest rates are driven primarily by the impact of interest rate shifts on the fixed income investment portfolio (which produce net fair value losses as rates increase), long-term debt and the interest rate derivatives portfolio (which produce net fair value gains as rates increase). 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. 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.

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 contractually obligated to repurchase, cure or substitute collateral for any loan that breaches the representations and warranties. However, generally the sponsors have not honored those obligations and have vigorously defended claims brought against them.

As of March 31, 2021, we have estimated RMBS R&W subrogation recoveries of $1,722 (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 currently pending at the New York Court of Appeals involving issues relevant to AAC’s breach of contract claims) 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. 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 Secured Notes or the Tier 2 Notes, which could have a material adverse effect on our financial condition or results of operations and make it more difficult for AAC to repay the Ambac Note (and therefore make it more difficult for the issuer of the Secured Notes to repay the Secured Notes) and/or the Tier 2 Notes and/or AAC’s 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 Ambac Note (and therefore make it more difficult for the issuer of the Secured Notes to satisfy its obligations in respect of the 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 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. 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 adversely impact the value of our securities, including the 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 claims or becomes subject to rehabilitation, liquidation, conservation or dissolution, or otherwise impaired by actions of OCI.

Our ability to realize the estimated RMBS R&W subrogation recoveries included in our financial statements and the time 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 March 31, 2021 would decrease from $1,123 to $(599).

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 ~~number~~material adverse effect on our financial condition, including our capital and liquidity, and may result in adverse consequences such as impairing the ability of ~~issuers~~AAC to honor its financial obligations; the initiation of rehabilitation proceedings against AAC; decreased likelihood of AAC delivering value to AFG, through 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 Secured Notes and the Tier 2 Notes.

AAC insures obligations of the Commonwealth of Puerto Rico, including certain of its authorities and public corporations that are either subject to a Title III bankruptcy protection proceeding under the Puerto Rico Oversight, Management and Stability Act ("PROMESA") or have ~~been, or~~otherwise suspended debt service payments. AAC has made and may continue to be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to material permanent losses. 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, ~~be, substantially affected by~~particularly given the uncertainty related to the ongoing Title III proceedings and the developing economic, ~~effects~~political and legal circumstances in Puerto Rico. Such losses may have a material adverse effect on AAC’s results of ~~COVID-19, such~~operation and financial condition.

AAC has exposure to the Commonwealth of Puerto Rico (the "Commonwealth"), including its authorities and public corporations. Each has its own credit risk profile attributable to, as ~~municipalities~~applicable, discrete revenue sources, direct general obligation pledges and/or general obligation guarantees. AAC had approximately $1,067 of net par exposure to the Commonwealth and ~~securitizations,~~these instrumentalities at March 31, 2021. 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 ~~those backed by consumer loans such as mortgages or student loans.~~ accretion on capital appreciation bonds is approximately $1,282 at March 31, 2021. Total net insured debt service outstanding (net par and interest) to the Commonwealth and its instrumentalities was approximately $2,486 at March 31, 2021.

As a result of the developments described ~~more fully~~ in ~~Management's~~this Risk Factor and elsewhere in this Quarterly Report on Form 10-Q (see Part I, Item 2, 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, have suffered, and are expected to continue to suffer, from severely depressed revenues due to shelter-in-place orders, social distancing guidelines, travel bans and restrictions, and business shutdowns as well as an economic recession brought about by the COVID-19 pandemic.

Furthermore, securitizations dependent on cash flows from payments on mortgage loans, student loans or other assets have experienced, and are expected to continue to experience, shortfalls in receipts due to borrower nonpayments. ~~See Part I, Item 2 of this Form 10-Q, Management's Discussion and Analysis of Financial Condition and Results of Operations,Executive Summary,~~ - Financial Guarantees in Force, and ~~Balance Sheet Commentary for further detail.~~

~~The U.S. Federal government~~Note 6. Financial Guarantee Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q), the Commonwealth and ~~other governments globally have taken~~ certain ~~measures~~of its instrumentalities are continuing to aid consumers, businesses, state and local governments, and the financial markets, but the impact of such aid remains unclear. U.S. Federal and State governments and their agencies have also adopted policies or guidelines to provide emergency relief to consumers, such as limiting debt collection efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. Such policies or guidelines may be expanded over time as the economic effects of the pandemic become more well known. To the extent such measures cause greater incidences of missed mortgage loan, student loan or otherdefault on debt service payments, ~~than would have occurred without governmental intervention, Ambac~~including payments owed on bonds insured by AAC. AAC has made, and may ~~experience higher losses~~continue to be required to make, significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to material permanent losses. Our exposure to Puerto Rico is impacted by the amount of monies available for debt service, which is in ~~its insured portfolio of asset-backed securities.~~

~~The ultimate impact of a catastrophic public health event like COVID-19 on issuers and their obligations, and the economy in general, is by its very nature uncertain, and will be determined~~turn affected by a number of factors including ~~but not limited~~variability in economic growth and demographic trends, tax revenues, changes in law or the effects thereof, essential services expense, federal funding of Commonwealth needs as well as interpretation of legislation, legal documents, and updated financial information (when available).

Substantial uncertainty also exists with respect to the depth and duration of the crisis; the extent to which affected consumers, businesses, municipal entities and other debtors or sources of revenues recover from depressed economic circumstances, and the timelinesultimate outcome for such recoveries; the level and efficacy of government support for municipal entities, consumers, businesses and the financial markets via emergency relief measures; the level and efficacy of state and local government support for consumers and businesses; the impact of governmental intervention; management of public health crisis remediation efforts; and certain socio-economic variables, such as unemployment levels. Consequently, if issuers 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.

At this time, there are significant uncertainties surrounding the ultimate number of claims and the extent of losses Ambac will face as a result of the economic effects of the COVID-19 pandemic. Actual losses may vary materially from Ambac's loss and loss expense reservescreditors in Puerto Rico due to the ~~factors described above~~March 8, 2021, Second Amended Title III Joint Plan of Adjustment of the Commonwealth ("Second Amended POA") or changes thereto as well as legislation enacted by the Commonwealth and the ~~inherent~~United States, including PROMESA, as well as actions taken in reliance on such laws, including Title III filings. AAC is involved in multiple litigations relating to such actions and other issues and may not be successful in pursuing claims or protecting its interests.

Given the numerous uncertainties and risks existing with respect to the restructuring process, outcomes associated with the February 23, 2021, Second Amended Plan Support Agreement between 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, and a group of creditors reported to represent 70% of

all GO and PBA bonds claims ("Second Amended PSA"), the March 8, 2021, Second Amended POA, the May 5, 2021, agreement with the Oversight Board and two monoline financial guaranty companies (the "PRHTA/CCDA PSA"), or any changes thereto under the aforementioned plans and agreements and relevant litigation, no assurance can be given that ultimate debt service discounts will not be very severe and cause AAC to experience losses materially exceeding current reserves. It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could significantly further impair our exposures. In addition, there are possible final legal determinations, including failing to recognize or properly differentiate legal structures and protections applicable to such exposures, that could result in ~~estimating~~ losses exceeding our current reserves by a material amount and further increases to our loss reserves. In particular, in a Title III process, should court-approved plans of adjustment for the Commonwealth, the Puerto Rico Highways and Transportation Authority ("PRHTA"), the Puerto Rico Public Buildings Authority ("PBA") or any other issuers of AAC’s insured debt that may or may not file for Title III protection contemplate discounts to debt service implied by, or even worse than, the newly certified Commonwealth fiscal plan (April 23, 2021) (the “Commonwealth Fiscal Plan”) or AAC receive unfavorable judgments in the litigations to which it is a party, AAC’s financial condition would be materially adversely affected.

For example, the Second Amended PSA provides for lower Commonwealth debt service payments per annum relative to the Plan Support Agreement signed in February 2020 (Amended PSA), extends the tenor of new recovery bonds, increases the amount of cash distributed to creditors, and provides additional consideration in the form of a contingent value instrument ("CVI"). This CVI is intended to provide creditors with additional returns tied to outperformance of the Puerto Rico Sales and Use Tax ("SUT") against certified 2020 Commonwealth Fiscal Plan projections. More specifically, fixed consideration as part of the Second Amended POA includes a combination of cash, new GO current interest bonds as well as new GO capital appreciation bonds. Recovery derived from fixed consideration is estimated to vary between approximately 67% and 77% (as of petition date) for GO creditors, and between approximately 75% and 80% (as of petition date) for PBA creditors.

Under the May 5, 2021, PRHTA/CCDA PSA, consideration for revenue bond creditors such as PRHTA, CCDA, or Puerto Rico Infrastructure Financing Authority ("PRIFA") Special Tax Revenue ("Rum Tax") bonds, on account of their deficiency claims ("Clawback claims") against the Commonwealth, consists of CVI tied to the outperformance of the SUT against the certified 2020 Commonwealth Fiscal Plan projections. Overall, CVI recoveries are subject to a lifetime cap of 75% of deficiency amounts. The value of the Clawback CVI is uncertain given the ~~evolving nature~~contingent, outperformance-driven structure of the ~~pandemic and its impact on issuers of Ambac insured debt and~~instrument coupled with the ~~economy in general. Potential ultimate losses from~~likely back-ended aspects for the ~~economic consequences~~majority of the ~~COVID-19 pandemic could be material~~potential cash flows. In addition, under the PRHTA/CCDA PSA, the PRHTA creditors would receive 'hard currency' in the form of new PRHTA bonds totaling $1,245 and ~~therefore may have an adverse effect on our results~~$389 of ~~operations~~cash proceeds, including a $264 interim distribution, payable at the effective date of the Commonwealth plan of adjustment, and ~~financial condition.~~$125 of restriction

fees and consummation costs. Of the $264 interim cash distribution, $184.8 will be allocated to holders of PRHTA '68 bonds and $79.2 will be allocated to holders of PRHTA '98 bonds. Of the $1,245 in new PRHTA 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. Claim recovery expectations for PRHTA creditors under the PRHTA/CCDA PSA agreement are uncertain and subject to interpretation due to the aforementioned uncertainty related to the value of the Clawback CVI.

Under the PRHTA/CCDA PSA, CCDA creditors would also receive $112 of cash, inclusive of up to $15 related to restriction fees and consummation costs, payable at the effective date of the Commonwealth plan of adjustment. PRIFA was not part of the PRHTA/CCDA PSA and, consequently, there are no additional recoveries provided for in the agreement for PRIFA beyond the proposed treatment of deficiency claims.

It is unclear how details under the agreements and plans described above may change. If the Second Amended POA was confirmed in its current form, AAC’s financial condition would be materially adversely affected. It is also possible that economic or demographic outcomes may be as, or worse than, forecasted in the Commonwealth Fiscal Plan or under proposals or plans promulgated by the Commonwealth or its instrumentalities in or in connection with a Title III process or otherwise. Even a negotiated restructuring to which AAC agrees as part of mediation or other process may involve material losses in excess of current reserves. 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Equity Securities — No matters require disclosure.

(b) Purchases of Equity Securities By the Issuer and Affiliated Purchasers

The following table summarizes Ambac's share purchases during the ~~third~~first quarter of ~~2020.~~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 ~~third~~first quarter of ~~2020,~~2021, Ambac purchased shares from employees that settled restricted stock units to meet employee tax withholdings.

July 2020 August 2020 September 2020 Third Quarter 2020
Total Shares Purchased (1)
453 — — 453
Average Price Paid Per Share $ 13.83 $ — $ — $ 13.83
Total Number of Shares Purchased as Part of Publicly Announced Plan (1)
— — — —
Maximum Number of Shares That may Yet be Purchased Under the Plan — — — —


	Jan-2021		Feb-2021		Mar-2021		First Quarter 2021
Total Shares Purchased (1)	32,010		318		312,381		344,709
Average Price Paid Per Share	$	15.38	$	14.42	$	17.03	$	16.87
Total Number of Shares Purchased as Part of Publicly Announced Plan (1)	—		—		—		—
Maximum Number of Shares That may Yet be Purchased Under the Plan	—		—		—		—

(1) There were no other repurchases of equity securities made during the three months ended ~~September 30, 2020.~~March 31, 2021. Ambac does not have a stock repurchase program.

Item 3. Defaults Upon Senior Securities — No matters require disclosure.

Item 5. Other Information — No matters require disclosure.


		September 30,		December 31,			March 31,		December 31,
(Dollars in millions, except share data) (September 30, 2020 (Unaudited))		2020		2019
(Dollars in millions, except share data) (March 31, 2021 (Unaudited))						(Dollars in millions, except share data) (March 31, 2021 (Unaudited))	2021		2020
Assets:	Assets:					Assets:
Investments:	Investments:					Investments:
Fixed income securities, at fair value (amortized cost of $2,176 and $2,450)		$	2,311	$	2,577
Short-term investments pledged as collateral, at fair value (amortized cost of $152 and $85)		152		85
Short-term investments, at fair value (amortized cost of $586 and $653)		586		653
Other investments (includes $453 and $432 at fair value)		502		478
Total investments (net of allowance for credit losses of $0 at September 30, 2020)		3,551		3,792
Fixed maturity securities, at fair value (amortized cost of $2,221 and $2,175)						Fixed maturity securities, at fair value (amortized cost of $2,221 and $2,175)	$	2,341	$	2,317
Fixed maturity securities pledged as collateral, at fair value (amortized cost of $15 and $15)						Fixed maturity securities pledged as collateral, at fair value (amortized cost of $15 and $15)	15		15
Short-term investments, at fair value (amortized cost of $398 and $492)						Short-term investments, at fair value (amortized cost of $398 and $492)	397		492
Short-term investments pledged as collateral, at fair value (amortized cost of $105 and $125)						Short-term investments pledged as collateral, at fair value (amortized cost of $105 and $125)	105		125
Other investments (includes $600 and $544 at fair value)						Other investments (includes $600 and $544 at fair value)	600		595
Total investments (net of allowance for credit losses of $0 and $0)						Total investments (net of allowance for credit losses of $0 and $0)	3,458		3,544
Cash and cash equivalents	Cash and cash equivalents	37		24		Cash and cash equivalents	23		20
Restricted cash	Restricted cash	10		55		Restricted cash	16		13

Premium receivables (net of allowance for credit losses of $18 at September 30, 2020)		372		416
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 at September 30, 2020)		37		26
Premium receivables (net of allowance for credit losses of $13 and $17)						Premium receivables (net of allowance for credit losses of $13 and $17)	356		370
Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 and $0)						Reinsurance recoverable on paid and unpaid losses (net of allowance for credit losses of $0 and $0)	33		33
Deferred ceded premium	Deferred ceded premium	73		82		Deferred ceded premium	74		70
Subrogation recoverable	Subrogation recoverable	2,194		2,029		Subrogation recoverable	2,076		2,156

Derivative assets	Derivative assets	95		75		Derivative assets	74		93
Current taxes		2		11
Insurance intangible asset		383		427

Intangible assets						Intangible assets	391		409

Other assets	Other assets	60		95		Other assets	115		114
Variable interest entity assets:	Variable interest entity assets:					Variable interest entity assets:
Fixed income securities, at fair value		3,160		3,121
Fixed maturity securities, at fair value						Fixed maturity securities, at fair value	3,236		3,354
Restricted cash	Restricted cash	2		2		Restricted cash	2		2

Loans, at fair value	Loans, at fair value	2,783		3,108		Loans, at fair value	2,948		2,998

Derivative assets	Derivative assets	53		52		Derivative assets	38		41
Other assets	Other assets	1		3		Other assets	1		2
Total assets	Total assets	$	12,812	$	13,320	Total assets	$	12,840	$	13,220
Liabilities and Stockholders’ Equity:	Liabilities and Stockholders’ Equity:					Liabilities and Stockholders’ Equity:
Liabilities:	Liabilities:					Liabilities:

Unearned premiums	Unearned premiums	$	468	$	518	Unearned premiums	$	438	$	456
Loss and loss expense reserves	Loss and loss expense reserves	1,801		1,548		Loss and loss expense reserves	1,662		1,759
Ceded premiums payable	Ceded premiums payable	27		29		Ceded premiums payable	24		27

Deferred taxes	Deferred taxes	28		32		Deferred taxes	20		24

Current taxes						Current taxes	2		6
Long-term debt	Long-term debt	2,737		2,822		Long-term debt	2,661		2,739
Accrued interest payable	Accrued interest payable	499		441		Accrued interest payable	516		517
Derivative liabilities	Derivative liabilities	126		90		Derivative liabilities	86		114
Other liabilities	Other liabilities	91		93		Other liabilities	123		106

Variable interest entity liabilities:	Variable interest entity liabilities:					Variable interest entity liabilities:
Accrued interest payable		0		1
Long-term debt (includes $4,002 and $4,351 at fair value)		4,169		4,554

Long-term debt (includes $4,264 and $4,324 at fair value)						Long-term debt (includes $4,264 and $4,324 at fair value)	4,427		4,493
Derivative liabilities	Derivative liabilities	1,771		1,657		Derivative liabilities	1,739		1,835

Total liabilities	Total liabilities	11,718		11,783		Total liabilities	11,697		12,074
Commitments and contingencies (See Note 11)
Commitments and contingencies (See Note 12)						Commitments and contingencies (See Note 12)
Redeemable noncontrolling interest						Redeemable noncontrolling interest	20		7
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Preferred stock, par value $0.01 per share;20,000,000 shares authorized shares; issued and outstanding shares—NaN	Preferred stock, par value $0.01 per share;20,000,000 shares authorized shares; issued and outstanding shares—NaN	0		0		Preferred stock, par value $0.01 per share;20,000,000 shares authorized shares; issued and outstanding shares—NaN	0		0
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 45,865,081 and 45,571,743		0		0
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 46,477,067 and 45,865,081						Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued shares: 46,477,067 and 45,865,081	0		0
Additional paid-in capital	Additional paid-in capital	240		232		Additional paid-in capital	246		242
Accumulated other comprehensive income (loss)	Accumulated other comprehensive income (loss)	22		42		Accumulated other comprehensive income (loss)	61		79
Retained earnings	Retained earnings	773		1,203		Retained earnings	761		759
Treasury stock, shares at cost: 55,942 and 16,343		(1)		0
Treasury stock, shares at cost: 279,965 and 55,942						Treasury stock, shares at cost: 279,965 and 55,942	(5)		(1)
Total Ambac Financial Group, Inc. stockholders’ equity	Total Ambac Financial Group, Inc. stockholders’ equity	1,035		1,477		Total Ambac Financial Group, Inc. stockholders’ equity	1,063		1,080
Noncontrolling interest		60		60
Nonredeemable noncontrolling interest						Nonredeemable noncontrolling interest	60		60
Total stockholders’ equity	Total stockholders’ equity	1,095		1,536		Total stockholders’ equity	1,123		1,140
Total liabilities and stockholders’ equity		$	12,812	$	13,320
Total liabilities, redeemable noncontrolling interest and stockholders’ equity						Total liabilities, redeemable noncontrolling interest and stockholders’ equity	$	12,840	$	13,220


			Ambac Financial Group, Inc.
(Dollars in millions)	Total		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Preferred Stock		Common Stock		Additional Paid-in Capital		Common Stock Held in Treasury, at Cost		Noncontrolling Interest
Balance at June 30, 2020	$	1,129	$	881	$	(48)	$	0	$	0	$	237	$	(1)	$	60
Total comprehensive income (loss)	(37)		(108)		71		0		0		0		0		0





Stock-based compensation	3		0		0		0		0		3		0		0
Cost of shares (acquired) issued under equity plan	0		0		0		0		0		0		0		0





Balance at September 30, 2020	$	1,095	$	773	$	22	$	0	$	0	$	240	$	(1)	$	60

Balance at June 30, 2019	$	1,553	$	1,247	$	19	$	0	$	0	$	227	$	0	$	60
Total comprehensive income (loss)	73		66		7		0		0		0		0		0





Stock-based compensation	2		0		0		0		0		2		0		0







Balance at September 30, 2019	$	1,629	$	1,313	$	26	$	0	$	0	$	229	$	0	$	60


		Nine Months Ended September 30,					Three Months Ended March 31,
(Dollars in millions)	(Dollars in millions)	2020		2019		(Dollars in millions)	2021		2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income (loss) attributable to common stockholders						Net income (loss) attributable to common stockholders	$	17	$	(280)

Noncontrolling interest in subsidiaries’ earnings						Noncontrolling interest in subsidiaries’ earnings	0		0
Net income (loss)	Net income (loss)	$	(423)	$	(106)	Net income (loss)	$	17	$	(280)
Adjustments to reconcile net income to net cash used in operating activities:	Adjustments to reconcile net income to net cash used in operating activities:					Adjustments to reconcile net income to net cash used in operating activities:

Amortization of bond premium and discount	Amortization of bond premium and discount	(12)		(59)		Amortization of bond premium and discount	(3)		(4)

Share-based compensation	Share-based compensation	8		10		Share-based compensation	4		3
Deferred income taxes	Deferred income taxes	(5)		(3)		Deferred income taxes	(3)		(6)
Current income taxes	Current income taxes	9		28		Current income taxes	(3)		(5)

Unearned premiums, net	Unearned premiums, net	(40)		(118)		Unearned premiums, net	(22)		(7)
Losses and loss expenses, net	Losses and loss expenses, net	78		(461)		Losses and loss expenses, net	(17)		77
Ceded premiums payable	Ceded premiums payable	(2)		(3)		Ceded premiums payable	(2)		(1)

Premium receivables	Premium receivables	44		81		Premium receivables	14		13
Accrued interest payable	Accrued interest payable	69		65		Accrued interest payable	23		23
Amortization of insurance intangible assets		41		280
Net mark-to-market (gains) losses		1		(1)
Amortization of intangible assets						Amortization of intangible assets	19		13

Net realized investment gains	Net realized investment gains	(20)		(71)		Net realized investment gains	(2)		(8)

(Gain) loss on extinguishment of debt						(Gain) loss on extinguishment of debt	(33)		—
Variable interest entity activities	Variable interest entity activities	(3)		(30)		Variable interest entity activities	0		(3)
Derivative assets and liabilities	Derivative assets and liabilities	15		5		Derivative assets and liabilities	(22)		32
Other, net	Other, net	72		87		Other, net	(10)		64
Net cash used in operating activities	Net cash used in operating activities	(167)		(296)		Net cash used in operating activities	(40)		(87)
Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from sales of bonds	Proceeds from sales of bonds	974		1,052		Proceeds from sales of bonds	44		221
Proceeds from matured bonds	Proceeds from matured bonds	105		317		Proceeds from matured bonds	39		49
Purchases of bonds	Purchases of bonds	(844)		(866)		Purchases of bonds	(128)		(150)
Proceeds from sales of other invested assets	Proceeds from sales of other invested assets	377		73		Proceeds from sales of other invested assets	48		243
Purchases of other invested assets	Purchases of other invested assets	(425)		(135)		Purchases of other invested assets	(41)		(195)
Change in short-term investments	Change in short-term investments	67		(235)		Change in short-term investments	94		67

Change in cash collateral receivable	Change in cash collateral receivable	(2)		75		Change in cash collateral receivable	11		(56)
Proceeds from paydowns of consolidated VIE assets	Proceeds from paydowns of consolidated VIE assets	142		512		Proceeds from paydowns of consolidated VIE assets	50		66
Other, net	Other, net	2		0		Other, net	(1)		(1)
Net cash provided by (used in) investing activities		396		791
Net cash provided by investing activities						Net cash provided by investing activities	116		244
Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:

Proceeds from issuance of Ambac UK debt		0		12

Paydowns of Ambac note	Paydowns of Ambac note	(115)		(29)		Paydowns of Ambac note	(16)		(77)

Issuance of auction market preferred shares of Ambac Assurance		0		19

Tax payments related to shares withheld for share-based compensation plans	Tax payments related to shares withheld for share-based compensation plans	(3)		(3)		Tax payments related to shares withheld for share-based compensation plans	(6)		(3)

Payments of consolidated VIE liabilities	Payments of consolidated VIE liabilities	(143)		(510)		Payments of consolidated VIE liabilities	(48)		(66)
Net cash used in financing activities	Net cash used in financing activities	(260)		(511)		Net cash used in financing activities	(69)		(146)
Effect of foreign exchange on cash, cash equivalents and restricted cash	Effect of foreign exchange on cash, cash equivalents and restricted cash	0		0		Effect of foreign exchange on cash, cash equivalents and restricted cash	0		0
Net cash flow	Net cash flow	(31)		(16)		Net cash flow	6		10
Cash, cash equivalents, and restricted cash at beginning of period	Cash, cash equivalents, and restricted cash at beginning of period	81		83		Cash, cash equivalents, and restricted cash at beginning of period	35		81
Cash, cash equivalents, and restricted cash at end of period	Cash, cash equivalents, and restricted cash at end of period	$	50	$	68	Cash, cash equivalents, and restricted cash at end of period	$	42	$	91


		September 30, 2020						December 31, 2019							March 31, 2021						December 31, 2020
		Ambac UK		Ambac Assurance		Total VIEs		Ambac UK		Ambac Assurance		Total VIEs			Ambac UK		Ambac Assurance		Total VIEs		Ambac UK		Ambac Assurance		Total VIEs
Fixed income securities, at fair value:
ASSETS:														ASSETS:
Fixed maturity securities, at fair value:														Fixed maturity securities, at fair value:
Corporate obligations, fair value option	Corporate obligations, fair value option	$	3,029	$	0	$	3,029	$	2,957	$	0	$	2,957	Corporate obligations, fair value option	$	3,103	$	0	$	3,103	$	3,215	$	0	$	3,215
Municipal obligations, available-for-sale (1)	Municipal obligations, available-for-sale (1)	0		131		131		0		164		164		Municipal obligations, available-for-sale (1)	0		133		133		0		139		139
Total FG VIE fixed income securities, at fair value		3,029		131		3,160		2,957		164		3,121
Total FG VIE fixed maturity securities, at fair value														Total FG VIE fixed maturity securities, at fair value	3,103		133		3,236		3,215		139		3,354
Restricted cash	Restricted cash	1		1		2		1		1		2		Restricted cash	1		1		2		1		1		2
Loans, at fair value (2)	Loans, at fair value (2)	2,783		0		2,783		3,108		0		3,108		Loans, at fair value (2)	2,948		0		2,948		2,998		0		2,998
Derivative assets	Derivative assets	53		0		53		52		0		52		Derivative assets	38		0		38		41		0		41
Other assets	Other assets	0		1		1		1		2		3		Other assets	0		1		1		0		2		2
Total FG VIE assets	Total FG VIE assets	$	5,865	$	133	$	5,998	$	6,119	$	167	$	6,286	Total FG VIE assets	$	6,090	$	135	$	6,225	$	6,255	$	143	$	6,398
LIABILITIES:														LIABILITIES:

Accrued interest payable		$	0	$	0	$	0	$	1	$	0	$	1
Long-term debt:	Long-term debt:													Long-term debt:
Long-term debt, at fair value (3)	Long-term debt, at fair value (3)	4,002		0		4,002		4,351		0		4,351		Long-term debt, at fair value (3)	$	4,264	$	0	$	4,264	$	4,324	$	0	$	4,324
Long-term debt, at par less unamortized discount	Long-term debt, at par less unamortized discount	0		167		167		0		203		203		Long-term debt, at par less unamortized discount	0		163		163		0		169		169
Total long-term debt	Total long-term debt	4,002		167		4,169		4,351		203		4,554		Total long-term debt	4,264		163		4,427		4,324		169		4,493
Derivative liabilities	Derivative liabilities	1,771		0		1,771		1,657		0		1,657		Derivative liabilities	1,739		0		1,739		1,835		0		1,835

Total FG VIE liabilities	Total FG VIE liabilities	$	5,773	$	167	$	5,940	$	6,009	$	203	$	6,212	Total FG VIE liabilities	$	6,003	$	163	$	6,166	$	6,159	$	169	$	6,328
Number of FG VIEs consolidated	Number of FG VIEs consolidated	5		1		6		6		1		7		Number of FG VIEs consolidated	5		1		6		5		1		6


		Carrying Value of Assets and Liabilities									Carrying Value of Assets and Liabilities
		Maximum Exposure To Loss (1)		Insurance Assets (2)		Insurance Liabilities (3)		Net Derivative Assets (Liabilities) (4)			Maximum Exposure To Loss (1)		Insurance Assets (2)		Insurance Liabilities (3)		Net Derivative Assets (Liabilities) (4)
September 30, 2020:
March 31, 2021:										March 31, 2021:
Global structured finance:	Global structured finance:									Global structured finance:

Mortgage-backed—residential	Mortgage-backed—residential	$	4,535	$	2,063	$	604	$	0	Mortgage-backed—residential	$	4,065	$	1,951	$	513	$	0
Other consumer asset-backed	Other consumer asset-backed	1,120		26		240		0		Other consumer asset-backed	981		23		239		0
Other commercial asset-backed	Other commercial asset-backed	52		3		1		0		Other commercial asset-backed	23		3		1		0
Other	Other	991		0		15		8		Other	958		0		13		7
Total global structured finance	Total global structured finance	6,698		2,093		860		8		Total global structured finance	6,027		1,977		766		7
Global public finance	Global public finance	22,183		268		316		(1)		Global public finance	21,330		266		291		0
Total	Total	$	28,881	$	2,361	$	1,177	$	7	Total	$	27,357	$	2,243	$	1,057	$	6

December 31, 2019:
December 31, 2020:										December 31, 2020:
Global structured finance:	Global structured finance:									Global structured finance:

Mortgage-backed—residential	Mortgage-backed—residential	$	5,373	$	1,913	$	523	$	0	Mortgage-backed—residential	$	4,308	$	2,024	$	580	$	0
Other consumer asset-backed	Other consumer asset-backed	1,373		31		216		0		Other consumer asset-backed	1,050		24		239		0
Other commercial asset-backed	Other commercial asset-backed	314		9		6		0		Other commercial asset-backed	24		3		1		0
Other	Other	1,107		7		18		8		Other	970		0		13		8
Total global structured finance	Total global structured finance	8,165		1,961		762		8		Total global structured finance	6,352		2,051		834		8
Global public finance	Global public finance	23,341		287		321		0		Global public finance	21,646		263		287		0
Total	Total	$	31,506	$	2,247	$	1,083	$	7	Total	$	27,998	$	2,314	$	1,122	$	8


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


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


	(212)	658-7470
(Registrant's telephone number, including area code)


Item Number	Item Number		Page	Item Number		Page	Item Number		Page	Item Number		Page
PART I. FINANCIAL INFORMATION	PART I. FINANCIAL INFORMATION			PART I (CONTINUED)			PART I. FINANCIAL INFORMATION			PART I (CONTINUED)
1	1	Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries		3	Quantitative and Qualitative Disclosures About Market Risk	76	1	Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries			U.S. Insurance Statutory Basis Financial Results	62
		Consolidated Balance Sheets (Unaudited)	1	4	Controls and Procedures	77		Consolidated Balance Sheets (Unaudited)	1		Ambac Assurance UK Limited Financial Results Under UK Accounting Principles	63
		Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)	2					Consolidated Statements of Total Comprehensive Income (Loss) (Unaudited)	2		Non-GAAP Financial Measures	63
		Consolidated Statements of Stockholders' Equity (Unaudited)	3	PART II. OTHER INFORMATION				Consolidated Statements of Stockholders' Equity (Unaudited)	3
		Consolidated Statements of Cash Flows (Unaudited)	4	1	Legal Proceedings	78		Consolidated Statements of Cash Flows (Unaudited)	4	3	Quantitative and Qualitative Disclosures About Market Risk	65
		Notes to Unaudited Consolidated Financial Statements	5	1A	Risk Factors	78		Notes to Unaudited Consolidated Financial Statements	5	4	Controls and Procedures	65
2	2	Management's Discussion and Analysis of Financial Condition and Results of Operations	47	2	Unregistered Sales of Equity Securities and Use of Proceeds	79	2	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
		Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995	47	3	Defaults Upon Senior Securities	79		Cautionary Statement Pursuant To The Private Securities Litigation Reform Act Of 1995	40	PART II. OTHER INFORMATION
		Executive Summary	48	5	Other Information	79		Executive Summary	41	1	Legal Proceedings	65
		Critical Accounting Policies and Estimates	51	6	Exhibits	79		Critical Accounting Policies and Estimates	43	1A	Risk Factors	65
		Financial Guarantees in Force	51	SIGNATURES		80		Financial Guarantees in Force	44	2	Unregistered Sales of Equity Securities and Use of Proceeds	68
		Results of Operations	58					Results of Operations	50	3	Defaults Upon Senior Securities	68
		Liquidity and Capital Resources	64					Liquidity and Capital Resources	54	5	Other Information	69
		Balance Sheet	66					Balance Sheet	56	6	Exhibits	68
		Variable Interest Entities	73					Variable Interest Entities	62	SIGNATURES		69
		Accounting Standards	73					Accounting Standards	62
		Ambac Assurance Statutory Basis Financial Results	73
		Ambac Assurance UK Limited Financial Results Under UK Accounting Principles	74
		Non-GAAP Financial Measures	74


Supplemental Disclosure of Cash Flow Information	Nine Months Ended September 30,
	2020		2019
Cash paid during the period for:
Income taxes	$	11	$	11
Interest on long-term debt	83		110
Non-cash financing activities:

Exchange of investments in Puerto Rico COFINA bonds for new bonds issued in the Plan of Adjustment	$	��	$	510



	September 30,
	2020		2019
Reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows:
Cash and cash equivalents	$	37	$	52
Restricted cash	10		13
Variable Interest Entity Restricted cash	2		3
Total cash, cash equivalents, and restricted cash shown on the Consolidated Statements of Cash Flows	$	50	$	68


	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
Three Months Ended September 30, 2020:
Beginning Balance	$	109	$	6	$	(164)	$	0	$	(48)


Other comprehensive income (loss) before reclassifications	45		0		29		0		74
Amounts reclassified from accumulated other comprehensive income (loss)	(2)		0		0		0		(3)


Net current period other comprehensive income (loss)	42		0		29		0		71
Balance at September 30, 2020	$	152	$	6	$	(135)	$	0	$	22

Three Months Ended September 30, 2019:
Beginning Balance	$	157	$	9	$	(145)	$	(2)	$	19


Other comprehensive income (loss) before reclassifications	50		0		(24)		0		26
Amounts reclassified from accumulated other comprehensive income (loss)	(18)		0		0		0		(19)


Net current period other comprehensive income (loss)	31		0		(24)		0		7
Balance at September 30, 2019	$	189	$	9	$	(169)	$	(2)	$	26


Details about Accumulated Other Comprehensive Income Components	Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income								Affected Line Item in the Consolidated Statement of Total Comprehensive Income (Loss)	Details about Accumulated Other Comprehensive Income Components	Amount Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Consolidated Statement of Total Comprehensive Income (Loss)
		Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
		2020		2019		2020		2019				2021		2020
Unrealized Gains (Losses) on Available-for-Sale Securities	Unrealized Gains (Losses) on Available-for-Sale Securities										Unrealized Gains (Losses) on Available-for-Sale Securities
		$	(2)	$	(20)	$	(20)	$	(77)	Net realized investment gains (losses) and other-than-temporary impairment losses		$	(2)	$	(8)		Net realized investment gains (losses)
		0		1		1		6		Provision for income taxes		(1)		1			Provision for income taxes
		$	(2)	$	(18)	$	(19)	$	(71)	Net of tax and noncontrolling interest		$	(3)	$	(7)		Net of tax and noncontrolling interest
Amortization of Postretirement Benefit	Amortization of Postretirement Benefit										Amortization of Postretirement Benefit
Prior service cost	Prior service cost	$	0	$	0	$	(1)	$	(1)	Other income	Prior service cost	$	0	$	0		Other income
Actuarial (losses)	Actuarial (losses)	0		0		0		0		Other income	Actuarial (losses)	0		0			Other income
		0		0		(1)		(1)		Total before tax		0		0			Total before tax
		0		0		0		0		Provision for income taxes		0		0			Provision for income taxes
		$	0	$	0	$	(1)	$	(1)	Net of tax and noncontrolling interest		$	0	$	0		Net of tax and noncontrolling interest
Credit risk changes of fair value option liabilities	Credit risk changes of fair value option liabilities										Credit risk changes of fair value option liabilities
		$	0	$	0	$	2	$	0	Credit Risk Changes of Fair Value Option Liabilities		$	(1)	$	4		Credit risk changes of fair value option liabilities
		0		0		0		0		Provision for income taxes		0		(1)			Provision for income taxes
		$	0	$	0	$	2	$	0	Net of tax and noncontrolling interest		$	(1)	$	3		Net of tax and noncontrolling interest
Total reclassifications for the period	Total reclassifications for the period	$	(3)	$	(19)	$	(18)	$	(72)	Net of tax and noncontrolling interest	Total reclassifications for the period	$	(3)	$	(4)		Net of tax and noncontrolling interest


Surveillance Categories as of September 30, 2020
Type of Guaranteed Bond	I		IA		II		III		IV		Total
Public Finance:
Housing revenue	$	158	$	13	$	0	$	0	$	0	$	171
Other	2		13		0		0		0		16
Total Public Finance	160		26		0		0		0		186

Structured Finance:
Mortgage-backed and home equity	3				1		3		16		23
Structured insurance	16		0		0		0		0		16
Student loan	3		0		2		12		0		17
Other	7		0		0		0		0		7
Total Structured Finance	29		0		3		15		16		63

International:
Sovereign/sub-sovereign	78		13		0		15		0		105
Investor-owned and public utilities	29		0		0		0		0		29
Other	6		0		0		0		0		6
Total International	113		13		0		15		0		141
Total (1)	$	302	$	39	$	3	$	29	$	16	$	390


Surveillance Categories as of March 31, 2021
Type of Guaranteed Bond	I		IA		II		III		IV		Total
Public Finance:
Housing revenue	$	152	$	13	$	0	$	0	$	0	$	165
Other	2		0		0		0		0		2
Total Public Finance	154		13		0		0		0		167

Structured Finance:
Mortgage-backed and home equity	2		0		1		3		14		20
Structured insurance	14		0		0		0		0		14
Student loan	2		0		2		10		0		14
Other	7		0		0		0		0		7
Total Structured Finance	25		0		3		13		14		55

International:
Sovereign/sub-sovereign	86		12		0		12		0		111
Investor-owned and public utilities	30		0		0		0		0		30
Other	6		0		0		0		0		6
Total International	123		12		0		12		0		148
Total (1)	$	302	$	25	$	3	$	25	$	14	$	369

Surveillance Categories as of December 31, 2020
Type of Guaranteed Bond	I		IA		II		III		IV		Total
Public Finance:
Housing revenue	$	155	$	13	$	0	$	0	$	0	$	168
Other	2		15		0		0		0		17
Total Public Finance	157		27		0		0		0		185

Structured Finance:
Mortgage-backed and home equity	3		0		1		3		15		22
Structured insurance	14		0		0		0		0		14
Student loan	3		0		2		11		0		16
Other	7		0		0		0		0		7
Total Structured Finance	27		0		3		14		15		59

International:
Sovereign/sub-sovereign	82		13		0		13		0		108
Investor-owned and public utilities	31		0		0		0		0		31
Other	5		0		0		0		0		5
Total International	118		13		0		13		0		144
Total (1)	$	302	$	40	$	3	$	27	$	15	$	387


Surveillance Categories as of December 31, 2020
	I		IA		II		III		IV		V		Total
Number of policies	40		25		15		15		132		5		232
Remaining weighted-average contract period (in years) (1)	10		18		8		16		14		7		14
Gross insured contractual payments outstanding:
Principal	$	842	$	1,375	$	595	$	1,469	$	3,246	$	47	$	7,573
Interest	279		1,011		484		215		1,427		26		3,443
Total	$	1,121	$	2,386	$	1,079	$	1,685	$	4,673	$	72	$	11,016
Gross undiscounted claim liability	$	3	$	49	$	40	$	541	$	1,690	$	72	$	2,395
Discount, gross claim liability	0		(2)		(1)		(85)		(213)		(3)		(303)
Gross claim liability before all subrogation and before reinsurance	3		47		40		456		1,477		69		2,092
Less:
Gross RMBS subrogation (2)	0		0		0		0		(1,753)		0		(1,753)
Discount, RMBS subrogation	0		0		0		0		3		0		3
Discounted RMBS subrogation, before reinsurance	0		0		0		0		(1,751)		0		(1,751)
Less:
Gross other subrogation (3)	0		0		0		(36)		(706)		(12)		(755)
Discount, other subrogation	0		0		0		1		18		1		20
Discounted other subrogation, before reinsurance	0		0		0		(35)		(689)		(11)		(735)
Gross claim liability, net of all subrogation and discounts, before reinsurance	3		47		39		421		(963)		58		(394)
Less: Unearned premium revenue	(2)		(16)		(5)		(17)		(30)		(1)		(72)
Plus: Loss expense reserves	1		2		1		5		59		0		68
Gross loss and loss expense reserves	$	2	$	32	$	35	$	409	$	(933)	$	57	$	(397)
Reinsurance recoverable reported on Balance Sheet (4)	$	0	$	6	$	9	$	24	$	(6)	$	0	$	33


Commission File Number:						1-10777


Amortization expense (1) (2)
2020 (three months)		$	11
2021		39
Amortization expense				Amortization expense	Insurance Intangible Asset (1) (2)		Other Intangible Assets		Total
2021 (Nine months)				2021 (Nine months)	$	28	$	2	$	30
2022	2022	35		2022	35		3		37
2023	2023	32		2023	31		3		34
2024	2024	29		2024	29		3		31
2025				2025	26		3		29
Thereafter	Thereafter	239		Thereafter	207		22		229


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	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 ~~income~~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.

l	Level 3	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, equity interests in Ambac sponsored special purpose entities and certain investments in fixed ~~income~~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.


	Carrying Amount		Total Fair Value		Fair Value Measurements Categorized as:
March 31, 2021:					Level 1		Level 2		Level 3
Financial assets:
Fixed maturity securities:
Municipal obligations	$	366	$	366	$	0	$	366	$	0
Corporate obligations	1,108		1,108		2		1,106		0
Foreign obligations	97		97		97		0		0
U.S. government obligations	108		108		108		0		0

Residential mortgage-backed securities	269		269		0		269		0

Collateralized debt obligations	97		97		0		97		0
Other asset-backed securities	295		295		0		219		76
Fixed maturity securities, pledged as collateral:
U.S. government obligations	15		15		15		0		0
Short-term	105		105		105		0		0
Short term investments	397		397		311		86		0
Other investments (1)	600		600		99		0		0
Cash, cash equivalents and restricted cash	39		39		38		2		0
Derivative assets:

Interest rate swaps—asset position	73		73		0		7		66

Futures contracts	1		1		1		—		—
Other assets - equity in sponsored VIE	1		1		0		0		1
Other assets-Loans	3		3		0		0		3
Variable interest entity assets:

Fixed maturity securities: Corporate obligations	3,103		3,103		0		0		3,103
Fixed maturity securities: Municipal obligations	133		133		0		133		0
Restricted cash	2		2		2		0		0
Loans	2,948		2,948		0		0		2,948

Derivative assets: Currency swaps-asset position	38		38		0		38		0
Total financial assets	$	9,799	$	9,799	$	778	$	2,323	$	6,197
Financial liabilities:

Long term debt, including accrued interest	$	3,177	$	3,032	$	0	$	3,011	$	20
Derivative liabilities:

Interest rate swaps—asset position	85		85		—		85		—



Liabilities for net financial guarantees written (2)	(751)		279		0		0		279
Variable interest entity liabilities:
Long-term debt (includes $4,264 at fair value)	4,427		4,451		0		4,290		160

Derivative liabilities: Interest rate swaps—liability position	1,739		1,739		0		1,739		0

Total financial liabilities	$	8,677	$	9,586	$	0	$	9,126	$	460


Level 3 - Financial Assets and Liabilities Accounted for at Fair Value	Level 3 - Financial Assets and Liabilities Accounted for at Fair Value															Level 3 - Financial Assets and Liabilities Accounted for at Fair Value
								VIE Assets and Liabilities															VIE Assets and Liabilities
		Investments		Other Assets(1)		Derivatives		Investments		Loans		Long-term Debt		Total			Investments(1)		Other Assets(2)		Derivatives		Investments		Loans		Total
Three Months Ended September 30, 2020:
Three Months Ended March 31, 2021:																Three Months Ended March 31, 2021:
Balance, beginning of period	Balance, beginning of period	$	66	$	2	$	86	$	2,907	$	2,787	$	0	$	5,848	Balance, beginning of period	$	78	$	1	$	84	$	3,215	$	2,998	$	6,376

Total gains/(losses) realized and unrealized:	Total gains/(losses) realized and unrealized:															Total gains/(losses) realized and unrealized:
Included in earnings	Included in earnings	0		0		1		1		(43)		0		(40)		Included in earnings	0		0		(17)		(138)		9		(145)
Included in other comprehensive income	Included in other comprehensive income	9		—		—		121		116		0		246		Included in other comprehensive income	(2)		—		—		26		24		49
Purchases	Purchases	—		—		—		—		—		—		—		Purchases	—		—		—		—		—		—
Issuances	Issuances	—		—		—		—		—		—		—		Issuances	—		—		—		—		—		—
Sales	Sales	—		—		—		—		—		—		—		Sales	—		—		—		—		—		—
Settlements	Settlements	0		—		(2)		—		(78)		0		(80)		Settlements	0		—		(2)		—		(84)		(86)

Balance, end of period	Balance, end of period	$	75	$	2	$	85	$	3,029	$	2,783	$	0	$	5,974	Balance, end of period	$	76	$	1	$	65	$	3,103	$	2,948	$	6,194
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 earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—	$	0	$	1	$	1	$	(43)	$	0	$	(41)	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	$	—	$	0	$	(17)	$	(138)	$	9	$	(145)
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	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	$	9	$	0	$	0	$	121	$	116	$	0	$	246	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	$	(2)	$	0	$	0	$	26	$	24	$	49

Three Months Ended September 30, 2019:
Three Months Ended March 31, 2020:																Three Months Ended March 31, 2020:
Balance, beginning of period	Balance, beginning of period	$	74	$	4	$	62	$	2,882	$	4,289	$	(231)	$	7,080	Balance, beginning of period	$	72	$	3	$	66	$	2,957	$	3,108	$	6,207

Total gains/(losses) realized and unrealized:	Total gains/(losses) realized and unrealized:															Total gains/(losses) realized and unrealized:
Included in earnings	Included in earnings	1		0		12		206		127		0		345		Included in earnings	0		0		12		30		88		130
Included in other comprehensive income	Included in other comprehensive income	5		—		—		(92)		(133)		7		(213)		Included in other comprehensive income	(6)		—		—		(181)		(190)		(377)
Purchases	Purchases	—		—		—		—		—		—		—		Purchases	—		—		—		—		—		—
Issuances	Issuances	—		—		—		—		—		—		—		Issuances	—		—		—		—		—		—
Sales	Sales	—		—		—		—		—		—		—		Sales	—		—		—		—		—		—
Settlements	Settlements	0		—		(1)		—		(466)		0		(467)		Settlements	0		—		(1)		—		(74)		(76)

Deconsolidation of VIEs		0		0		0		—		(851)		223		(627)

Balance, end of period	Balance, end of period	$	79	$	3	$	73	$	2,996	$	2,966	$	0	$	6,117	Balance, end of period	$	66	$	3	$	77	$	2,806	$	2,932	$	5,884
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 earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	—	$	0	$	12	$	206	$	115	$	0	$	332	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	$	—	$	0	$	12	$	30	$	88	$	130
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																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	$	(6)	$	0	$	0	$	(181)	$	(190)	$	(377)


Level 3 - Derivatives by Class	Level 3 - Derivatives by Class													Level 3 - Derivatives by Class
		Three Months Ended September 30, 2020						Three Months Ended September 30, 2019							Three Months Ended March 31, 2021						Three Months Ended March 31, 2020
		Interest Rate Swaps		Credit Derivatives		Total Derivatives		Interest Rate Swaps		Credit Derivatives		Total Derivatives			Interest Rate Swaps		Credit Derivatives		Total Derivatives		Interest Rate Swaps		Credit Derivatives		Total Derivatives
Balance, beginning of period	Balance, beginning of period	$	87	$	(1)	$	86	$	63	$	(1)	$	62	Balance, beginning of period	$	85	$	0	$	84	$	67	$	0	$	66

Total gains/(losses) realized and unrealized:	Total gains/(losses) realized and unrealized:													Total gains/(losses) realized and unrealized:
Included in earnings	Included in earnings	1		0		1		11		1		12		Included in earnings	(17)		0		(17)		13		(1)		12
Included in other comprehensive income	Included in other comprehensive income	0		0		0		0		0		0		Included in other comprehensive income	0		0		0		0		0		0
Purchases	Purchases	0		0		0		0		0		0		Purchases	0		0		0		0		0		0
Issuances	Issuances	0		0		0		0		0		0		Issuances	0		0		0		0		0		0
Sales	Sales	0		0		0		0		0		0		Sales	0		0		0		0		0		0
Settlements	Settlements	(2)		0		(2)		(1)		0		(1)		Settlements	(2)		0		(2)		(1)		0		(1)

Balance, end of period	Balance, end of period	$	86	$	(1)	$	85	$	73	$	0	$	73	Balance, end of period	$	66	$	0	$	65	$	79	$	(2)	$	77
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 earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date	$	1	$	0	$	1	$	11	$	0	$	12	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	$	(17)	$	0	$	(17)	$	13	$	(2)	$	12
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														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	$	(17)	$	0	$	(17)	$	0	$	0	$	0



Level 3 - Derivatives by Class
	Nine Months Ended September 30, 2020						Nine Months Ended September 30, 2019
	Interest Rate Swaps		Credit Derivatives		Total Derivatives		Interest Rate Swaps		Credit Derivatives		Total Derivatives
Balance, beginning of period	$	67	$	0	$	66	$	47	$	(1)	$	46

Total gains/(losses) realized and unrealized:
Included in earnings	24		(1)		24		29		1		30
Included in other comprehensive income	0		0		0		0		0		0
Purchases	0		0		0		0		0		0
Issuances	0		0		0		0		0		0
Sales	0		0		0		0		0		0
Settlements	(5)		0		(5)		(3)		0		(3)



Balance, end of period	$	86	$	(1)	$	85	$	73	$	0	$	73
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	$	24	$	(1)	$	23	$	29	$	1	$	30


	Net Investment Income		Net Gains (Losses) on Derivative Contracts		Income (Loss) on Variable Interest Entities		Other Income or (Loss)
Three Months Ended September 30, 2020:
Total gains or losses included in earnings for the period	$	0	$	1	$	(41)	$	0
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		1		(41)		0

Three Months Ended September 30, 2019:
Total gains or losses included in earnings for the period	$	1	$	12	$	333	$	0
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		12		321		0

Nine Months Ended September 30, 2020:
Total gains or losses included in earnings for the period	$	1	$	24	$	137	$	(1)
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		23		137		(1)

Nine Months Ended September 30, 2019:
Total gains or losses included in earnings for the period	1		30		668		(1)
Changes in unrealized gains or losses included in earnings relating to the assets and liabilities still held at the reporting date	0		30		611		(1)


	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains in AOCI		Gross Unrealized Losses in AOCI		Estimated Fair Value
September 30, 2020:
Fixed income securities:
Municipal obligations	$	322	$	0	$	29	$	1	$	351
Corporate obligations (1)	1,066		0		28		3		1,091
Foreign obligations	76		0		1		0		77
U.S. government obligations	118		0		4		1		122

Residential mortgage-backed securities	251		0		45		0		296

Collateralized debt obligations	74		0		0		1		73
Other asset-backed securities	268		0		33		1		300
	2,176		0		140		6		2,311
Short-term	586		0		0		0		586
	2,761		0		141		6		2,896
Fixed income securities pledged as collateral:

Short-term	152		0		0		0		152
Total collateralized investments	152		0		0		0		152
Total available-for-sale investments	$	2,914	$	0	$	141	$	6	$	3,048


~~Balance, beginning of period~~	$	12



~~Reductions for credit impairments previously recognized on:~~
~~Securities that matured or were sold during the period~~	~~(1)~~

~~Balance, end of period~~	$	12


	Municipal Obligations		Corporate Obligations (2)		Mortgage and Asset- backed Securities		Total		Weighted Average Underlying Rating (1)
September 30, 2020:
Ambac Assurance Corporation	$	310	$	470	$	473	$	1,253	CCC+
National Public Finance Guarantee Corporation	6		0		—		6		BBB-
Assured Guaranty Municipal Corporation	1		0		—		1		C



Total	$	318	$	470	$	473	$	1,260	CCC+

December 31, 2019:
Ambac Assurance Corporation	$	176	$	535	$	442	$	1,153	B-
National Public Finance Guarantee Corporation	11		0		—		11		BBB-




Total	$	186	$	535	$	442	$	1,164	B-


		Nine Months Ended September 30,
($ in million)		2020		2019
Three Months Ended March 31,						Three Months Ended March 31,	2021		2020
Cash provided by (used in):	Cash provided by (used in):					Cash provided by (used in):
Operating activities	Operating activities	$	(167)	$	(296)	Operating activities	$	(40)	$	(87)
Investing activities	Investing activities	396		791		Investing activities	116		244
Financing activities	Financing activities	(260)		(511)		Financing activities	(69)		(146)
Foreign exchange impact on cash and cash equivalents	Foreign exchange impact on cash and cash equivalents	—		—		Foreign exchange impact on cash and cash equivalents	—		—
Net cash flow	Net cash flow	$	(31)	$	(16)	Net cash flow	$	6	$	10


		Present Value of Expected Net Cash Flows			Unearned Premium Revenue			Gross Loss and Loss Expense Reserves					Present Value of Expected Net Cash Flows	Unearned Premium Revenue			Gross Loss and Loss Expense Reserves
($ in millions) Balance Sheet Line Item			Claims and Loss Expenses				Recoveries (1)
September 30, 2020:
Balance Sheet Line Item												Balance Sheet Line Item				Claims and Loss Expenses			Unearned Premium Revenue		Recoveries (1)		Gross Loss and Loss Expense Reserves
March 31, 2021:												March 31, 2021:
Loss and loss expense reserves	Loss and loss expense reserves		$	2,116	$	(235)		$	(80)	$	1,801	Loss and loss expense reserves		$	1,831		$	(102)			$	(67)			$	1,662
Subrogation recoverable	Subrogation recoverable		109		(2,303)			—		(2,194)		Subrogation recoverable		99			(2,175)		—				(2,076)
Totals	Totals		$	2,225	$	(2,538)		$	(80)	$	(393)	Totals		$	1,930		$	(2,277)	$	(67)			$	(414)

December 31, 2019:
December 31, 2020:												December 31, 2020:
Loss and loss expense reserves	Loss and loss expense reserves		$	1,835	$	(233)		$	(54)	$	1,548	Loss and loss expense reserves		$	2,060		$	(229)	$	(72)			$	1,759
Subrogation recoverable	Subrogation recoverable		131		(2,160)			—		(2,029)		Subrogation recoverable		100			(2,256)		—				(2,156)
Totals	Totals		$	1,966	$	(2,394)		$	(54)	$	(482)	Totals		$	2,160		$	(2,485)	$	(72)			$	(397)


		Gross Par Outstanding (1)(2)				Present Value of Expected Net Cash Flows						Unearned Premium Revenue				Gross Loss and Loss Expense Reserves (1)(3)					Gross Par Outstanding (1)(2)							Present Value of Expected Net Cash Flows			Unearned Premium Revenue			Gross Loss and Loss Expense Reserves (1)(3)
($ in millions)							Claims and Loss Expenses			Recoveries
September 30, 2020:
																									Gross Par Outstanding (1)(2)								Claims and Loss Expenses				Unearned Premium Revenue		Recoveries	Gross Loss and Loss Expense Reserves (1)(3)
March 31, 2021:																						March 31, 2021:
RMBS	RMBS			$	2,672					$	702			$	(2,151)			$	(13)				$	(1,462)			RMBS		$	2,405						$		599			$	(2,029)		$	(11)	$	(1,441)
Domestic Public Finance	Domestic Public Finance	3,783						1,140				(352)				(52)			736			Domestic Public Finance			3,097						963			(215)				(40)				708
Student Loans	Student Loans	431						272				(35)				(4)			233			Student Loans			399						270			(33)				(2)				235
Ambac UK and Other Credits	Ambac UK and Other Credits	866						31				—				(11)			20			Ambac UK and Other Credits			1,186						41			—				(14)				27

Loss expenses	Loss expenses	—						80				—				—			80			Loss expenses			—						57			—				—				57
Totals	Totals	$	7,752					$	2,225			$	(2,538)			$	(80)		$	(393)		Totals			$	7,087					$	1,930		$	(2,277)			$	(67)			$	(414)


($ in millions)	Estimated Change in Net Fair Value		Estimated Net Fair Value
300 basis point rise	$	20	$	(620)
200 basis point rise	16		(624)
100 basis point rise	13		(627)
Base scenario	—		(640)
100 basis point decline(1)	8		(632)
200 basis point decline(1)	10		(630)


	July 2020		August 2020		September 2020		Third Quarter 2020
Total Shares Purchased (1)	453		—		—		453
Average Price Paid Per Share	$	13.83	$	—	$	—	$	13.83
Total Number of Shares Purchased as Part of Publicly Announced Plan (1)	—		—		—		—
Maximum Number of Shares That may Yet be Purchased Under the Plan	—		—		—		—


Exhibit Number						Description
Other exhibits, filed or furnished, as indicated:
10.1+						~~Revised form~~Form of ~~2020~~2021 Restricted Stock Unit Award Agreement between Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and Ksenak.
10.2+						~~Revised form~~F orm of ~~2020~~202 1 Restricted Stock Unit Award Agreement between Ambac Financial Group, Inc. and Messrs . Barranco, Eisman, Reilly and Ms. Smith.
10.3+						Form of 2021 Performance Stock Unit Award Agreement between Ambac Financial Group, Inc. and Messrs. LeBlanc, Trick and Ksenak.
10.4+						Form of 2021 Performance Stock Unit Award Agreement between Ambac Financial Group, Inc. and Messrs. Barranco, Eisman, Reilly and Ms. Smith.
31.1+						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.
31.2+						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.
32.1++						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.
101.INS						XBRL Instance Document - the instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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

						+ Filed herewith. ++ Furnished herewith.


		AMBAC FINANCIAL GROUP, INC.

Dated:	~~November 9, 2020~~May 10, 2021	By:	/S/ DAVID TRICK
		Name:	David Trick
		Title:	Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)