AMBAC FINANCIAL GROUP INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The objectives of our Management’s Discussion and Analysis of FinancialCondition and Results of Operations (“MD&A”)…

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

•A narrative explanation from the perspective of management of our financial
condition, results of operations, cash flows, liquidity and certain other
factors that may affect future results;

•Context to the consolidated financial statements; and

•Information that allows assessment of the likelihood that past performance is
indicative of future performance.

The following discussion should be read in conjunction with our consolidated
financial statements in Item 8 of this Report and the matters described under
Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2021. Refer to Item 1. Business and Note 1. Background and Business
Description for a description of our business and our key strategies to achieve
our primary goal to maximize shareholder value.

Organization of Information

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MD&A includes the following sections:

                                                                  Page
  Executive Summary                                                29
  Critical Accounting Estimates                                    32
  Financial Guarantees in Force                                    34
  Results of Operations                                            42
  Liquidity and Capital Resources                                  46
  Balance     Sheet                                                48
  Accounting Standards                                             54
  Ambac Assurance Statutory Basis Financial Results                54
  Ambac UK Financial Results under UK Accounting Principles        56
  Non-GAAP Financial Measu    res                                  57


                       EXECUTIVE SUMMARY ($ in millions)

AFG

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

•AFG contributed $92 of additional capital to Everspan.

•Everspan received an ‘A-‘ Financial Strength Rating from AM Best in February
2021
.

•Everspan launched its specialty insurance program business in May 2021.

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

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

•See below AAC and Subsidiaries for the various 2021 activities relating to the
financial guarantee business

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

Net Assets

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

($ in millions)
Cash and short-term investments        $ 125
Other investments (1)                    130
Other net assets                          14
Total                                  $ 269

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

AAC and Subsidiaries

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

Asset Management

Investment portfolios are subject to internal investment guidelines, as well as
limits on types and quality of investments

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

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

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

Liability and Insured Exposure Management

AAC's Risk Management Group focuses on the implementation and execution of risk
reduction, defeasance and loss recovery strategies. Analysts evaluate the
estimated timing and severity of projected policy claims as well as the
potential impact of loss mitigation or remediation strategies in order to target
and 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 2021,
Ambac completed risk reduction transactions consisting of quota share
reinsurance, refinancings, and commutations of $2,695, of which, quota share
reinsurance represented $1,695.

The following table provides a comparison of total, adversely classified ("ACC")
and watch list credit net par outstanding in the insured portfolio at
December 31, 2021 and 2020. Net par exposure within the U.S. public finance
market includes capital appreciation bonds which are reported at the par amount
at the time of issuance of the insurance policy as opposed to the current
accreted value of the bonds.

($ in billions)
December 31,            2021          2020    Variance
            Total $ 28,020      $ 33,888      $ (5,868)      (17) %
ACC               $  6,361      $  8,458      $ (2,097)      (25) %
Watch List        $  3,824      $  4,720      $   (896)      (19) %

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

We have been paying claims for several years on most of our exposure to Puerto
Rico, which consists of several different issuing entities (all below investment
grade). These issuing entities, which have been part of the PROMESA
restructuring process that began in 2016, each have their own credit risk
profile attributable to discrete revenue sources, direct general obligation
pledges, and/or general obligation guarantees.

On January 18, 2022, Judge Swain, U.S. District Court for the District of Puerto
Rico
, confirmed the modified Eighth

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

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

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

COVID-19

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

COVID-19 and the public health responses by the US federal and state governments
at the onset of the pandemic resulted in a shut down for several months of
significant portions of the US economy, including areas that Ambac's insured
obligors rely upon to generate the revenues and cash flows necessary to service
debts we insure. In the U.S. and Europe, where most of Ambac's financial
guaranty exposure is located, significant fiscal stimulus measures, monetary
policy actions and other relief measures helped to moderate the negative
economic impacts of COVID-19 and supported the economic recovery which began in
the second half of 2020 and continues into 2022. As of December 31, 2021, there
have been no defaults of Ambac-insured obligations as a result of the COVID-19
pandemic.

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

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

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 incorporates the
perceived impact of COVID-19 on historical and prospective business results.

Financial Statement Impact of Foreign Currency

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

($ in millions)
Net income (1)                                                                     $          (7)
Gain (losses) on foreign currency translation (net of tax)                                    (8)

Unrealized gains (losses) on non-functional currency available-for-sale
securities (net of tax)

                                                                        3
Impact on total comprehensive income (loss)                                 

$ (12)

(1)  A portion of Ambac UK's, and to a lesser extent AAC's, assets and
liabilities are denominated in currencies other than its functional currency and
accordingly, we recognized net foreign currency transaction gains/(losses) as a
result of changes to foreign currency rates through our Consolidated Statement
of Total Comprehensive Income (Loss). Refer to Note 2. Basis of Presentation and
Significant Accounting Policies to the Consolidated Financial Statements
included in Part II, Item 8 in this Annual Report in Form 10-K for further
details on transaction gains and losses.

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

LIBOR Sunset

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

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

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

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

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

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

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

                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

Valuation of Financial Guarantee Losses and Loss Expense Reserves (including
Subrogation Recoverables)

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

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

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

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

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

                                Gross Par        Gross Loss and Loss Expense
                               Outstanding                Reserves
                                 (1) (2)                 (1) (3) (4)
December 31, 2021
Structured Finance               2,371                      (1,178)
Domestic Public Finance          2,742                         562
Other                            1,189                          17
Loss expenses                        -                          45
Totals                           6,302                        (554)
December 31, 2020
Structured Finance               2,945                      (1,212)
Domestic Public Finance          3,016                         724
Other                            1,612                          23
Loss expenses                        -                          68
Totals                           7,573                        (397)


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

(2) Gross Par Outstanding includes capital appreciation bonds, which are
reported at the par amount at the time of issuance of the insurance policy as
opposed to the current accreted value of the bond.

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

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

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

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

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

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

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

Valuation of Certain Financial Instruments

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

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

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

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

Valuation of Deferred Tax Assets

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

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

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

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

                         FINANCIAL GUARANTEES IN FORCE
                                ($ in millions)

Financial guarantee products were sold in three principal markets: U.S. public
finance, U.S. structured finance and international finance. The following table
provides a breakdown of guaranteed net par outstanding by market at December 31,
2021 and 2020. Net par exposures within the U.S. public finance market include
capital appreciation bonds which are reported at the par amount at the time of
issuance of the insurance policy as opposed to the current accreted value of the
bonds. Guaranteed net par outstanding includes the exposures of policies
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 policies insuring the Sitka Senior Secured Notes
and LSNI Secured Notes as defined in Note 1. Background and Business Description
to the Consolidated Financial Statements included in Part II, Item 8 in this
Form 10-K.

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December 31,                      2021          2020
Public Finance (1) (2)      $ 12,360      $ 15,497
Structured Finance             4,904         6,337
International Finance         10,756        12,054
Total net par outstanding   $ 28,020      $ 33,888

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

(2) Includes $1,054 and $1,070 of Puerto Rico net par outstanding at
December 31, 2021 and 2020, respectively.

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

U.S. Public Finance Insured Portfolio

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

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

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

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

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

U.S. Structured Finance Portfolio

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

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

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

International Finance Insured Portfolio

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

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public utilities represented approximately 18% and 12% of net par outstanding,
respectively. Ambac has no insured exposure related to emerging markets.

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

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

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

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


Largest Insured Exposures:

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

                                                                                                                                                                                  % of Total
                                                                                                     Ambac                                                 Net Par                 Net Par
              Risk Name                                         Country-Bond Type                 Ratings (1)           Ultimate Maturity Year           Outstanding             Outstanding
IF     AUK    Capital Hospitals plc (2)                         UK-Infrastructure                      A-                         2046                          925                        3.3  %
IF     AUK    Anglian Water                                        UK-Utility                          A-                         2035                          905                        3.2  %
IF     AUK    Mitchells & Butlers Finance plc-UK            UK-Asset Securitizations                  BBB                         2033                 $        892                        3.2  %
              Pub Securitisation
IF     AUK    Aspire Defence Finance plc                        UK-Infrastructure                      A-                         2040                          836                        3.0  %
IF     AUK    National Grid Gas                                    UK-Utility                         BBB+                        2037                          835                        3.0  %
IF     AUK    Posillipo Finance II S.r.l                       Italy-Sub-Sovereign                    BIG                         2035                          661                        2.4  %
              New Jersey Transportation Trust
PF     AAC    Fund Authority - Transportation            US-Lease and Tax-backed Revenue              BBB-                        2036                          623                        2.2  %
              System
IF     AUK    National Grid Electricity                            UK-Utility                         BBB+                        2036                          557                        2.0  %
              Transmission
IF     AUK    RMPA Services plc                                 UK-Infrastructure                     BBB+                        2038                          550                        2.0  %
IF     AUK    Catalyst Healthcare (Manchester)                  UK-Infrastructure                     BBB-                        2040                          541                        1.9  %
              Financing plc (2)
Total                                                                                                                                                  $      7,325                       26.2  %

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

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

(2)A portion of this transaction is insured by an insurance policy issued by
AAC. AAC has issued a policy for this transaction that will only pay in the
event that Ambac UK does not pay under its insurance policies ("second to pay
policy")


Net par related to the top ten exposures reduced $394 from December 31, 2020.
Exposures are impacted by changes in foreign exchange rates, certain indexation
rates, scheduled and unscheduled paydowns and the purchase of quota share
reinsurance. As a result of recent increases in inflation, such indexation
exposures have increased at a faster pace than they have historically.

The concentration of net par amongst the top ten (as a percentage of net par
outstanding) increased slightly to 26.2% at December 31, 2021 from 22.9% at
December 31, 2020. National Grid Gas had an Ambac rating downgrade since
December 31, 2020, Excluding the top ten exposures, the remaining insured
portfolio of financial guarantees has an average net par outstanding of $32 per
single risk, with insured

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

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

Puerto Rico

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

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

Commonwealth Plan of Adjustment (Title III Case)

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

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

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

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

PRIFA/CCDA Qualifying Modifications (Title VI Cases)

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

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

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

PRHTA Plan of Adjustment (Title III Case)

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

Bondholder Elections: GO, PBA, PRIFA, and CCDA

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

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

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

Plan Support Agreements

PRIFA PSA

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

PRHTA/CCDA PSA

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

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

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

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

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

Amended and Restated GO / PBA PSA

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

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

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

Plan of Adjustment and Qualifying Modification Considerations

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

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

Ambac Title III Litigation Update

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

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

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

Summary

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

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

                                                                                                                Net Par
                                                                                                              and Interest           Ever-to-Date
                                              Range of               Ambac                Net Par             Outstanding             Net Claims
($ in millions)                               Maturity            Ratings (1)           Outstanding              (2)(4)                Paid (3)

PR Infrastructure Financing Authority
(Special Tax Revenue)                         2023-2044               BIG             $        403          $         872          $         202
PR Highways and Transportation
Authority (1998 Resolution - Senior
Lien Transportation Revenue)                  2022-2042               BIG                      394                    620                    164
PR Convention Center District
Authority (Hotel Occupancy Tax)               2028-2031               BIG                       86                    123                     72
PR Public Buildings Authority -
Guaranteed by the Commonwealth of
Puerto Rico                                   2022-2035               BIG                       83                    139                     96

PR Sales Tax Financing Corporation -
Senior Sales Tax Revenue (COFINA)             2047-2054               BIG                       73                    648                     37
Commonwealth of Puerto Rico - General
Obligation Bonds                              2022-2023               BIG                       11                     12                     56
PR Highways and Transportation
Authority (1968 Resolution - Highway
Revenue)                                      2022-2027               BIG                        4                      9                     25

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

$ 1,054 $ 2,423 $ 652

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

(2)  Net Par and Interest Outstanding ("P&I") represent the total insured future
debt service remaining over the lifetime of the bonds. P&I for capital
appreciation bonds does not represent the accreted amount but rather the amount
due at respective maturity dates.

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

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


Additional Insured Portfolio Information

Average Life of Insured Portfolio

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

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

Net Par Outstanding Amortization (1)       Estimated Net
($ in millions)                             Amortization
2022                                      $        2,395
2023                                               1,584
2024                                               1,814
2025                                               1,468
2026                                               1,385

2022-2026                                 $        8,646
2027-2031                                          6,131
2032-2036                                          6,817
2037-2041                                          3,544
After 2041                                         2,882
Total                                     $       28,020


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

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  Table of     Contents
Exposure Currency

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

                        Net Par           Net Par
                         Amount            Amount         Percentage
                      Outstanding       Outstanding       of Net Par
Currency                in Base           in U.S.           Amount
($ in millions)         Currency          Dollars         Outstanding
U.S. Dollars         $     17,497      $     17,497              62  %
British Pounds       £      6,690             9,054              32  %
Euros                €      1,113             1,267               5  %
Australian Dollars   A$       279               202               1  %

Total                                  $     28,020             100  %

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

Ratings Distribution

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

                    [[Image Removed: ambc-20211231_g3.jpg]]

                    [[Image Removed: ambc-20211231_g4.jpg]]

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


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

Summary of Below Investment Grade Exposure:

Bond Type ($ in millions)           Net Par Outstanding
December 31,                         2021             2020
Public Finance:
Puerto Rico                   $     1,054           $ 1,070

Military Housing                      370               308

Other                                 317             1,057
Total Public Finance                1,741             2,435
Structured Finance:
RMBS                                2,170             2,800

Student loans                         302               512

Total Structured Finance            2,472             3,312
International Finance:
Sovereign/sub-sovereign               774               742
Transportation                        389               760
Other                                  62                72
Total International Finance         1,225             1,574
Total                         $     5,438           $ 7,321

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

Below investment grade exposures could increase as a relative proportion of the
guarantee portfolio given that stressed borrowers generally have less ability to
prepay or refinance their debt. Accordingly, due to these and other factors, it
is not unreasonable to expect the proportion of below investment grade exposure
in the guarantee portfolio to continue to increase in the future.

Ceded Reinsurance

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

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

Bond Type                            Ceded Par Amount
($ in millions)                        Outstanding
December 31,                        2021          2020
Public Finance:
Lease and tax-backed revenue     $ 1,618       $ 1,156
General obligation                 1,458         1,327
Housing revenue                      922           934
Transportation revenue               749           586

Other                                612           509
Total Public Finance               5,359         4,512
Structured Finance:
Structured insurance                 313           115
Investor-owned utilities             222           224

Other                                185           280
Total Structured Finance             720           619
Total Domestic                     6,079         5,131
International Finance:

Total International Finance           23            51
Total                            $ 6,102       $ 5,182
Percentage of Gross Par Ceded         18  %         13  %

                     RESULTS OF OPERATIONS ($ in millions)

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

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

A summary of our financial results is shown below:

($ in millions)
Year Ended December 31,                                   2021        2020        2019
Revenues:
Net premiums earned                                      $  47      $   54      $   66
Net investment income                                      139         122         227

Net investment gains (losses), including impairments 7 22

81

Net gains (losses) on derivative contracts                  22         (50) 

(50)

Net realized gains (losses) on extinguishment of debt       33           -  

Other income (expense) (1)                                  27           3  

134

Income (loss) on variable interest entities                  7           5  

38

Expenses:

Losses and loss expenses (benefit)                         (88)        225          13
Intangible amortization                                     55          57         295
Operating expenses                                         126          92         103
Interest expense                                           187         222         269

Provision (benefit) for income taxes                        18          (3) 

32

Net income (loss)                                          (16)       (437) 

(216)

Net income (loss) attributable to common stockholders $ (17) $ (437)

$ (216)

(1)2019 includes proceeds received in connection with an SEC action against
Citigroup Global Markets Inc. in the amount of $142.

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

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

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

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

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

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

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

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

Net Investment Income. Net investment income primarily consists of interest and
net discount accretion on fixed maturity securities classified as
available-for-sale, and net gains (losses) on pooled investment funds which
include changes in fair value of the funds' net assets. Fixed maturity
securities include investments in Ambac-insured securities that are made
opportunistically based on their risk/reward and asset-liability management
characteristics. Investments in pooled investment funds and certain other
investments are either classified as trading securities with changes in fair
value recognized in earnings or are reported under the equity method. These
funds and other investments are reported in Other investments on the
Consolidated Balance Sheets. For further information about investment funds
held, refer to Note 4. Investments to the Consolidated Financial Statements,
included in this Annual Report on Form 10-K.

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:

($ in millions)
Year Ended December 31,                                2021                  2020                  2019
Securities available-for-sale: Ambac-insured
(including LSNI and Sitka Senior Secured Notes)   $         45          $         62          $        121
Securities available-for-sale and short-term
other than Ambac-insured                                    29                    41                    75
Other investments (includes trading securities)             66                    19                    32
Net investment income                             $        139          $        122          $        227


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

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

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

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

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

($ in millions)
Year Ended December 31,                              2021      2020      

2019

Net realized gains on securities sold or called $ 11 $ 26 $ 59
Foreign exchange gains (losses)

                       (5)       (4)       

22

Credit impairment                                      -         -         -
Intent / requirement to sell impairments               -         -         -

Total net investment gains, including impairments $ 7 $ 22 $ 81

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

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

Net Gains (Losses) on Derivative Contracts. Net gains (losses) on derivative
contracts includes result from the Company's interest rate derivatives portfolio
and its runoff credit derivative portfolio. The interest rate derivatives
portfolio is positioned to benefit from rising rates as a partial economic hedge
against interest rate exposure in the financial guarantee and investment
portfolios. Net gain (loss) on interest rate derivatives generally reflect
mark-to-market gains (losses) in the portfolio caused by increases (declines) in
forward interest rates during the periods, the carrying cost of the portfolio,
and the impact of counterparty credit adjustments as discussed below. Results
from credit derivatives were not significant to the periods presented.

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

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

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

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

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

Income (Loss) on Variable Interest Entities. Included within Income (loss) on
variable interest entities are income statement amounts relating to VIEs
consolidated under the Consolidation Topic of the ASC as a result of Ambac's
variable interest arising from financial guarantees written by Ambac's
subsidiaries, including gains or losses attributable to consolidating or
deconsolidating VIEs during the periods reported. Generally, the Company's
consolidated VIEs are entities for which Ambac has provided financial guarantees
on all of or a portion of its assets or liabilities. In consolidation, assets
and liabilities of the VIEs are initially reported at fair value and the related
insurance assets and liabilities are eliminated. However, the amount of VIE net
assets (liabilities) that remain in consolidation generally result from the net
positive (negative) projected cash flows from (to) the VIEs which are
attributable to Ambac's insurance subsidiaries in the form of financial
guarantee insurance premiums, fees and losses. In the case of VIEs with net
negative projected cash flows, the net liability is generally to be funded by
Ambac's insurance subsidiaries through insurance claim payments. Differences
between the net carrying value of the insurance accounts under the Financial
Services-Insurance Topic of the ASC and the carrying value of the consolidated
VIE's net assets or liabilities are recorded through income at the time of
consolidation. Additionally, terminations or other changes to Ambac's financial
guarantee insurance policies that impact projected cash flows between a
consolidated VIE and Ambac could result in gains or losses, even if such policy
changes do not result in deconsolidation of the VIE.

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

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

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

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

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

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

($ in millions)
Year Ended December 31,     2021       2020          2019
Structured Finance (1)     $ (20)     $ (52)     $ (111)
Domestic Public Finance      (73)       256         250
Other (2)                      4         21        (127)
Totals (3)                 $ (88)     $ 225      $   13


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

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

(3) Includes loss expenses incurred of $55, $103 and $78 for the year ended
December 31, 2021, 2020 and 2019, respectively.

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

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

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

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

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

($ in millions)
Year Ended December 31,         2021       2020      2019
Compensation                   $  62      $ 51      $  58
Non-compensation                  64        41         44
Gross operating expenses         126        92        103
Reinsurance commissions, net       -         -          -

Total operating expenses       $ 126      $ 92      $ 103

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

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

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

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

Interest Expense. Interest expense includes accrued interest on the LSNI Ambac
Note (as defined in Note 1. Background and Business Description to the
Consolidated Financial Statements included in Part II, Item 8 in this Form
10-K), Sitka AAC Note, Tier 2 Notes, Surplus Notes and other debt obligations.
Additionally, interest expense includes discount accretion when the debt
instrument carrying value is at a discount to par. The following table provides
details by type of obligation for the periods presented:

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($ in millions)
Year Ended December 31,     2021       2020       2019
Surplus Notes (1)          $  77      $  85      $  99
LSNI Ambac Note               50        107        143
Sitka AAC Note                32          -          -
Tier 2 Notes                  27         28         26
Other                          1          1          -

Total interest expense     $ 187      $ 222      $ 269

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

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

Surplus Note principal and interest payments require the approval of OCI. In May
2021, OCI declined the request of AAC to pay the principal amount of the Surplus
Notes, plus all accrued and unpaid interest thereon, on the scheduled payment
date of June 7, 2021. As a result, the scheduled payment date for interest, and
the scheduled maturity date for payment of principal of the Surplus Notes, was
extended and shall continue to be extended until OCI grants approval to make the
payment. Interest will accrue, compounded on each anniversary of the original
scheduled payment date or scheduled maturity date, on any unpaid principal or
interest through the actual date of payment, at 5.1% per annum. Holders of
Surplus Notes will have no rights to enforce the payment of the principal of, or
interest on, Surplus Notes in the absence of OCI approval to pay such amount.
The interest on the outstanding Surplus Notes were accrued for and AAC is
accruing interest on the interest amounts following each scheduled payment date.
Total accrued and unpaid interest for Surplus Notes outstanding to third parties
were $576 at December 31, 2021. Since the issuance of the Surplus Notes in 2010,
OCI has declined to approve regular payments of interest on Surplus Notes,
although the OCI has permitted two exceptional payments. Ambac can provide no
assurance as to when Surplus Note principal and interest payments will be made,
if ever. If OCI does not approve regular payments on Surplus Notes within the
next several years, the total amount due for Surplus Notes may exceed AAC's
financial resources and holders of Surplus Notes may not ever be paid in full.

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

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

                        LIQUIDITY AND CAPITAL RESOURCES
                                ($ in millions)

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

Holding Company Liquidity

AFG is organized as a legal entity separate and distinct from its operating
subsidiaries. AFG is a holding company with no outstanding debt. AFG's liquidity
is primarily dependent on its net assets, excluding its equity investments in
subsidiaries, totaling $269 as of December 31, 2021, of which $142 is considered
highly liquid, and secondarily on distributions and expense sharing payments
from its subsidiaries. AFG's investments include securities directly and
indirectly issued and/or insured by AAC, some of which are eliminated in
consolidation. Securities issued or insured by AAC and certain other of AFG's
investments are generally less liquid than investment grade and highly traded
investments.

•During 2021, AFG received distributions from Xchange of $6.

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

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

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

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

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

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

Operating Companies’ Liquidity

Insurance:

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

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

•See Note 7. Insurance Contracts to the Consolidated Financial Statements
included in Part II, Item 8, in this Annual Report on Form 10-K for a summary of
future gross financial guarantee premiums to be collected by AAC and Ambac UK.
Termination of financial guarantee policies on an accelerated basis may
adversely impact AAC's liquidity.

Cash provided from these sources is used primarily for claim payments and
commutations, loss expenses and acquisition costs, debt service on outstanding
debt (AAC only), operating expenses, reinsurance payments and purchases of
securities and other investments that may not be immediately converted into
cash.

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

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

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

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

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

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

Managing General Agent / Underwriting (MGA/U):

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

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base and profit commissions) from insurance carriers. Base commissions are
generally received monthly, whereas profit commissions are received only if the
business underwritten is profitable. Cash provided from these sources is used
primarily for commissions paid to sub-producers, distributions to its members
(including AFG) and operating expenses.

Consolidated Cash Flow Statement Discussion

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

($ in million)
Year Ended December 31,                                       2021        2020        2019
Cash provided by (used in):
Operating activities                                        $ (131)     $ (175)     $ (311)
Investing activities                                           776         432       1,000
Financing activities                                          (657)       (303)       (691)
Effect of foreign exchange on cash and cash equivalents          -           -           -
Net cash flow                                               $  (12)     $  (46)     $   (2)


Operating activities

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

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

•Debt service on the Sitka AAC Note was $30 for the year ended December 31,
2021
.

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

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

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

•Net loss and loss expenses paid, including commutation payments are detailed
below:

($ in million)
Year Ended December 31,       2021       2020       2019
Net losses paid            $ 103      $ 159      $ 416
Net subrogation received    (121)      (118)      (168)
Net loss expenses paid        77        108         70
Net cash flow              $  59      $ 149      $ 318


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

Investing Activities

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

Financing Activities

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

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

Collateral

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

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

                         BALANCE SHEET ($ in millions)

Total assets decreased by approximately $917 from December 31, 2020 to $12,303
at December 31, 2021, primarily due to the impacts of the Corolla Trust Exchange
and Secured Note Refinancing described in Note 1. Background and Business
Description in this Annual Report on Form 10-K located in Part II. Item 8,
payment of loss and loss expenses, interest and operating expenses, lower
subrogation recoverables, lower consolidated VIE assets from paydowns of
consolidated

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

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

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

Investment Portfolio.

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

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

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

($ in millions)
December 31,                          2021         2020
Fixed maturity securities           $ 1,730      $ 2,317
Short-term                              414          492
Other investments                       690          595

Securities pledged as collateral 120 140
Total investments (1)

               $ 2,955      $ 3,544


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

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

The following charts provide the ratings(1) distribution of the fixed maturity
investment portfolio based on fair value at December 31, 2021 and 2020.

[[Image Removed: ambc-20211231_g5.jpg]]

[[Image Removed: ambc-20211231_g6.jpg]]

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

(2)Below investment grade and not rated bonds insured by Ambac represented 32%
and 41% of the 2021 and 2020 combined fixed maturity investment portfolios,
respectively. The decrease is primarily due to the impact of the Secured Note
Refinancing described in Note 1. Background and Business Description to the
Consolidated Financial Statements in this Annual Report Form 10-K located in
Part II. Item 8.

Premium Receivables.

Ambac's premium receivables decreased to $323 at December 31, 2021, from $370 at
December 31, 2020. As further discussed in Note 7. Insurance Contracts to the
Consolidated Financial Statements, in this Annual Report Form 10-K located in
Part II. Item 8, the decrease is due to premium

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

Premium receivables by payment currency were as follows:

Currency                                                       Premium Receivable          Premium Receivable in
(Amounts in millions)                                         in Payment Currency              U.S. dollars
U.S. Dollars                                                  $             199          $                  199
British Pounds                                                £              80                             108
Euros                                                         €              14                              16

Total                                                                                    $                  323

Reinsurance Recoverable on Paid and Unpaid Losses.

Ambac has reinsurance in place pursuant to surplus share treaty and facultative
agreements. To minimize its exposure to losses from reinsurers, Ambac
(i) monitors the financial condition of its reinsurers; (ii) is entitled to
receive collateral from its reinsurance counterparties under certain reinsurance
contracts; and (iii) has certain cancellation rights that can be exercised in
the event of rating agency downgrades of a reinsurer (among other events and
circumstances). For those reinsurance counterparties that do not currently post
collateral, Ambac's reinsurers are well capitalized, highly rated, authorized
capacity providers. Ambac benefited from letters of credit and collateral
amounting to approximately $111 from its reinsurers at December 31, 2021. As of
December 31, 2021 and 2020, reinsurance recoverable on paid and unpaid losses
were $55 and $33, respectively. The increase was primarily a result of
reinsurance recoverables of $30 added in connection with the PWIC transaction,
offset by favorable development in financial guarantee insured exposures.

Intangible Assets.

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

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

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

Derivative Assets and Liabilities.

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

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
Presentation and Significant Accounting Policies and Loss Reserves sections
included in Note 2. Basis of Presentation and Significant Accounting Policies
and Note 7. Insurance Contracts, respectively, to the Consolidated Financial
Statements included in Part II, Item 8 in this Annual Report on Form 10-K, for
further information on loss and loss expenses.

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

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                                                        Present Value of
                                                            Expected
                                                         Net Cash Flows                                Gross Loss
                                                               Claims and          Unearned             and Loss
($ in millions)                                                   Loss              Premium             Expense
Balance Sheet Line Item                                         Expenses            Revenue           Reserves (2)    Recoveries (1)
December 31, 2021:
Loss and loss expense reserves                               $     1,781          $   (155)         $         (56)                     $ 1,570
Subrogation recoverable                                               88            (2,180)                     -                       (2,092)
Totals                                                       $     1,869          $ (2,335)         $         (56)                     $  (522)

December 31, 2020:
Loss and loss expense reserves                               $     2,060          $   (229)         $         (72)                     $ 1,759
Subrogation recoverable                                              100            (2,256)                     -                       (2,156)
Totals                                                       $     2,160          $ (2,485)         $         (72)                     $  (397)

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

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

Financial Guarantee:

Ambac has exposure to various bond types issued in the debt capital markets. Our
experience has shown that, for the majority of bond types, we have not
experienced significant claims. The bond types that have experienced significant
claims, including through commutations, are residential mortgage-backed
securities ("RMBS"), student loan securities and public finance securities.
These bond types represent 93% of our ever-to-date insurance claims recorded
with RMBS comprising 74%.

The table below indicates gross par outstanding and the components of gross loss
and loss expense reserves related to policies in Ambac's gross loss and loss
expense reserves at December 31, 2021 and 2020:


                                                                           Present Value of Expected                                 Gross Loss
                                                                                 Net Cash Flows                                       and Loss
                                                  Gross Par             Claims and                                 Unearned            Expense
                                                 Outstanding               Loss                                    Premium            Reserves
($ in millions)                                     (1)(2)               Expenses             Recoveries           Revenue             (1)(2)
December 31, 2021:
Structured Finance                             $       2,371          $    

852 $ (2,018) $ (12) $ (1,178)
Domestic Public Finance

                                2,742                   905                 (312)               (31)                562
Other                                                  1,189                    35                   (5)               (13)                 17
Loss expenses                                              -                    45                    -                  -                  45
Totals                                         $       6,302          $      1,837          $    (2,335)         $     (56)         $     (554)

December 31, 2020:
Structured Finance                             $       2,945          $    

940 $ (2,136) $ (16) $ (1,212)
Domestic Public Finance

                                3,016                 1,112                 (349)               (39)                724
Other                                                  1,612                    40                    -                (17)                 23
Loss expenses                                              -                    68                    -                  -                  68
Totals                                         $       7,573          $      2,160          $    (2,485)         $     (72)         $     (397)


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

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

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

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                                             Payments Due by Period
                                Less Than                                           More Than
($ in millions)     Total         1 Year        1 - 3 Years       3 - 5 Years         5 Years
Claim payments    $ 2,095      $      422      $        119      $        109      $    1,445

Variability of Expected Losses and Recoveries

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

While our loss reserves consider our judgment regarding issuers' financial
flexibility to adapt to adverse markets, they may not adequately capture sudden,
unexpected or protracted uncertainty that adversely affects market conditions,
such as COVID-19. Accordingly, it is possible that our estimated loss reserves,
gross of reinsurance, for financial guarantee insurance policies could be
understated. We have attempted to identify possible cash flows related to losses
and recoveries using more stressful assumptions than the probability-weighted
outcome recorded. The possible net cash flows consider the highest stress
scenario that was utilized in the development of our probability-weighted
expected loss at December 31, 2021, and assumes an inability to execute any
commutation transactions with issuers and/or investors. Such stress scenarios
are developed based on management's view about all possible outcomes relating to
losses and recoveries. In arriving at such view, management makes considerable
judgments about the possibility of various future events. Although we do not
believe it is possible to have stressed outcomes in all cases, it is possible
that we could have stress case outcomes in some or even many cases. See "Risk
Factors" in Part I, Item 1A of this Form 10-K as well as the descriptions of
"Structured Finance Variability," "Public Finance Variability," and "Other
Credits, including Ambac UK, Variability," below for further discussion of the
risks relating to future losses and recoveries that could result in more highly
stressed outcomes appearing below.

The occurrence of these stressed outcomes individually or collectively would
have a material adverse effect on our results of operations and financial
condition and may result in materially adverse consequence for Ambac, including
(without limitation) impairing the ability of AAC to honor its financial
obligations, particularly its outstanding debt and preferred stock obligations;
the initiation of rehabilitation proceedings against AAC; decreased likelihood
of AAC delivering value to AFG, through dividends or otherwise; and a
significant drop in the value of securities issued or insured by AFG or AAC.

Structured Finance

RMBS:

Changes to assumptions that could make our reserves under-estimated include an
increase in interest rates, deterioration in housing prices, poor servicing,
government intervention into the functioning of the mortgage market and the
effect of a weakened economy characterized by growing unemployment and wage
pressures. We utilize a model to project losses in our RMBS exposures and
changes to reserves, either upward or downward, are not unlikely if we used a
different model or methodology to project losses. In the case of both first and
second-lien exposures, the possible stress case assumes a lower housing

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

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

Student Loans:

Changes to assumptions that could make our reserves under-estimated include, but
are not limited to, increases in interest rates, default rates and loss
severities on the collateral due to economic or other factors, including the
COVID-19 related economic impact. Such factors may include lower recoveries on
defaulted loans or additional losses on collateral or trust assets, including as
a result of any enforcement actions by the Consumer Finance Protection Bureau.

Structured Finance Variability:

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

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

Public Finance

Ambac's U.S. public finance portfolio predominantly consists of municipal bonds
such as general and revenue obligations and lease and tax-backed obligations of
state and local government entities; however, the portfolio also includes a wide
array of non-municipal types of bonds, including financings for not-for-profit
entities and transactions with public and private elements, which generally
finance infrastructure, housing and other public purpose facilities and
interests.

It is possible our loss reserves for public finance credits may be
under-estimated if issuers are faced with prolonged exposure to adverse
political, judicial, economic, fiscal or socioeconomic events or trends.
Additionally, our loss reserves may be under-estimated because of the continuing
effects of COVID-19 pandemic. The COVID-19 related economic downturn put a
strain on municipal issuers, particularly those dependent upon narrow sources of
revenues or dedicated taxes to support debt service, such as hotel occupancy
taxes, parking revenues, tolls, etc. While the economy has been in recovery
since mid-2020, the lingering impact of the pandemic continues to negatively
impact certain of these municipal issuers that are dependent upon narrow sources
of revenue. A further prolonged recovery from the COVID-19 pandemic could put
additional stresses on these issuers and result in increased defaults and
potential additional losses for Ambac.

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

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

In addition, municipal entities may be more inclined to use bankruptcy to
resolve their financial stresses if they believe preferred outcomes for various
creditor groups can be achieved.

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

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

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

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

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Other Credits, including Ambac UK, Variability

It is possible our loss reserves on other types of credits, including those
insured by Ambac UK, may be under-estimated because of various risks that vary
widely, including the risk that we may not be able to recover or mitigate losses
through our remediation processes. For all other credits, including Ambac UK,
for which we have an estimate of expected loss, the sum of all the highest
stress case loss scenarios is approximately $370 greater than the loss reserves
at December 31, 2021. Additionally, our loss reserves may be under-estimated as
a result of the ultimate scope, duration and magnitude of the effects of
COVID-19. There can be no assurance that losses may not exceed our stress case
estimates.

Long-term Debt.

Long-term debt consists of surplus notes issued by AAC, the Sitka AAC Note
(which refinanced the LSNI Ambac Note), the Tier 2 Notes issued in connection
with the Rehabilitation Exit Transactions (as defined in Note 1. Background and
Business Description to the Consolidated Financial Statements included in Part
II, Item 8 of this Form 10-K), and Ambac UK debt issued in connection with the
2019 commutation of its exposure with respect to Ballantyne Re plc. The carrying
value of each of these as of December 31, 2021 and 2020 is below:
($ in millions)
December 31,                 2021         2020
Surplus Notes (1)          $   729      $   778

LSNI Ambac Note                  -        1,641
Sitka AAC Note               1,154            -
Tier 2 Notes                   333          306
Ambac UK Debt                   15           14

Total Long-term Debt       $ 2,230      $ 2,739

(1) Includes Junior Surplus Notes as of December 31, 2020. All Junior Surplus
Notes were retired in 2021.

The decrease in long-term debt from December 31, 2020 resulted from the impact
of the Secured Note Refinancing and 2021 Surplus Note Exchanges, described
further in Note 1. Background and Business Description to the Consolidated
Financial Statements, included in this Annual Report on Form 10-K, partially
offset by issuances of surplus notes from AFG sales, accretion on the carrying
value of surplus notes and Ambac UK debt and paid-in-kind interest on Tier 2
Notes.

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

Redeemable Noncontrolling Interest. The increase during 2021 was the result of
the remeasurement of the redemption value of the put option provided to the
minority owners (noncontrolling interest holders) of Xchange as if it were
exercisable on December 31, 2021. Refer to Note 3. Business Combination for
further information relating to this acquisition.

                              ACCOUNTING STANDARDS

The following accounting standards have been issued, but have not yet been
adopted. We do not expect these accounting standards to have a consequential
impact on Ambac’s financial statements.

Equity-classified Written Call Options

In May 2021, the FASB issued ASU 2021-04, Issuer's Accounting for Certain
Modifications or Exchanges of Freestanding Equity-Classified Written Call
Options. The ASU clarifies and reduces diversity in practice for an issuer's
accounting for modifications or exchanges of equity-classified written call
options (e.g. warrants) that remain equity-classified after the modification or
exchange. The ASU requires an issuer to account for the modification or exchange
based on the economic substance of the transaction. For example, if the
modification or exchange is related to the issuance of debt or equity, any
change in the fair value of the written call option would be accounted for as
part of the debt issuance cost in accordance with the debt guidance or equity
issuance cost in accordance with the equity guidance, respectively. The ASU is
effective for fiscal years beginning after December 15, 2021, with early
adoption permitted. Ambac will adopt this ASU on January 1, 2022.

Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible
Instruments and Contracts in an Entity's Own Equity. The ASU i) simplifies the
accounting for convertible debt and convertible preferred stock by reducing the
number of accounting models, and amends certain disclosures, ii) amends and
simplifies the derivative scope exception guidance for contracts in an entity's
own equity, including share-based compensation, and iii) amends the diluted
earnings per share calculations for convertible instruments and contracts in an
entity's own equity. The ASU is effective for fiscal years ending after December
15, 2021, with early adoption permitted. Ambac will adopt this ASU on January 1,
2022.

Please refer to Note 2. Basis of Presentation and Significant Accounting
Policies to the Consolidated Financial Statements, included in Part II, Item 8
in this Annual Report Form 10-K for the year ended December 31, 2021, for a
discussion of the impact of other recent accounting pronouncements on Ambac's
financial condition and results of operations.

             U.S. STATUTORY BASIS FINANCIAL RESULTS ($ in millions)

AFG's U.S. insurance subsidiaries prepare financial statements under accounting
practices prescribed or permitted by its domiciliary state regulator ("SAP") for
determining and reporting the financial condition and results of operations of
an insurance company. The National Association of Insurance Commissioners
("NAIC") Accounting Practices and Procedures manual ("NAIC SAP") is adopted as a
component of prescribed practices by each domiciliary state. For further
information, see Note 8. Insurance Regulatory Restrictions to the Consolidated

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Financial Statements included in Part II, Item 8 in this Annual Report Form
10-K.

Ambac Assurance Corporation

AAC's statutory policyholder surplus and qualified statutory capital (defined as
the sum of policyholders surplus and mandatory contingency reserves) were $757
and $1,322 at December 31, 2021, respectively, as compared to $865 and $1,413 at
December 31, 2020, respectively. As of December 31, 2021, statutory policyholder
surplus and qualified statutory capital included $853 principal balance of
surplus notes outstanding and $138 liquidation preference of preferred stock
outstanding. These surplus notes (including related accrued interest of $625
that is not recorded under statutory basis accounting principles); preferred
stock; and all other liabilities, including insurance claims, $1,175 principal
balance of Sitka AAC Notes (refinanced the LSNI Ambac Note as described in Note
1. Background and Business Description to the Consolidated Financial Statements
included in Part II, Item 8 in this Form 10-K) and $333 principal balance of
Tier 2 Notes are obligations that, individually and collectively, have claims on
the resources of AAC that are senior to AFG's equity and therefore impede AFG's
ability to realize residual value and/or receive dividends from AAC.

The significant drivers to the net decrease in policyholder surplus were
statutory net losses of $127 for the year ended December 31, 2021 and
contributions to contingency reserves of $17, partially offset by an increase in
the fair value of pooled investments of $35.

AAC's statutory surplus is sensitive to multiple factors, including: (i) loss
reserve development, (ii) payments on surplus notes, if approved by OCI,
(iii) on-going interest costs associated with the Sitka AAC Note and Tier 2
Notes, including changes to the interest rates as the Sitka AAC Note is a
floating rate obligation, (iv) deterioration in the financial position of AAC
subsidiaries that have their obligations guaranteed by AAC, (v) first time
payment defaults of insured obligations, which increase statutory loss reserves,
(vi) commutations of insurance policies or credit derivative contracts at
amounts that differ from the amount of liabilities recorded, (vii) reinsurance
contract terminations at amounts that differ from net assets recorded,
(viii) changes to the fair value of pooled fund and other investments carried at
fair value, (ix) settlements of representation and warranty breach claims at
amounts that differ from amounts recorded, including failures to collect such
amounts, (x) realized gains and losses, including losses arising from other than
temporary impairments of investment securities, and (xi) future changes to
prescribed SAP practices by the OCI.

The significant differences between GAAP and SAP are that under SAP:

•Loss reserves are only established for losses on guaranteed obligations that
have experienced a payment default in an amount that is sufficient to cover the
present value of the anticipated defaulted debt service payments over the
expected period of default, less estimated recoveries under subrogation rights
(5.1% as prescribed by OCI). Under GAAP, in addition to the establishment of
loss reserves for defaulted obligations, loss reserves are established (net of
GAAP basis unearned premium revenue) for obligations

that have experienced credit deterioration, but have not yet defaulted using a
weighted-average risk-free discount rate, currently at 1.2%.

•Mandatory contingency reserves are required based upon the type of obligation
insured, whereas GAAP does not require such a reserve. Releases of the
contingency reserves are generally subject to OCI approval and relate to a
determination that the held reserves are deemed excessive.

•Investment grade fixed maturity investments are stated at amortized cost and
certain below investment grade fixed maturity investments are reported at the
lower of amortized cost or fair value. Under GAAP, all fixed maturity
investments are reported at fair value.

•Wholly owned subsidiaries are not consolidated; rather, the equity basis of
accounting is utilized and the carrying values of these investments are subject
to admissibility tests.

•Variable interest entities ("VIE") are not required to be assessed for
consolidation. Under GAAP, a reporting entity that has both the following
characteristics is required to consolidate the VIE: a) the power to direct the
activities of the VIE that most significantly impact the VIE's economic
performance and b) the obligation to absorb losses of the VIE or the right to
receive benefits from the VIE that could potentially be significant to the VIE.
AAC generally has the obligation to absorb losses of VIEs that could potentially
be significant to the VIE as the result of its guarantee of insured obligations
issued by VIEs. For certain VIEs AAC has the power to direct the most
significant activities of the VIE and accordingly consolidates the related VIEs
under GAAP.

•All payments of principal and interest on the surplus notes are subject to the
approval of the OCI. Unpaid interest due on the surplus notes is expensed when
the approval for payment of interest has been granted by the OCI. Under GAAP,
interest on surplus notes is accrued regardless of OCI approval.

•Upfront premiums written are earned on a basis proportionate to the remaining
scheduled debt service to the original total principal and interest insured.
Installment premiums are reflected in income pro-rata over the period covered by
the premium payment. Under GAAP, premium revenues for both upfront and
installment premiums are earned over the life of the financial guarantee
contract in proportion to the insured principal amount outstanding at each
reporting date.

•Insurance intangibles that arose as a result of the implementation of Fresh
Start reporting are not a concept within SAP. This insurance intangible asset is
amortized as an expense on a level yield basis over the life of the related
insurance risks.

•Unearned premiums and loss reserves are presented net of ceded amounts, while
under GAAP, they are reflected gross of ceded amounts.

Everspan Indemnity Insurance Company

Everspan Indemnity Insurance Company’s statutory policyholder surplus was $106
at December 31, 2021, as compared to $26 at December 31, 2020.

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The significant drivers to the increase in policyholder surplus for the year
ended December 31, 2021 were capital contributions of $92 partially offset by
operating expenses and changes in investment in subsidiaries, primarily due to a
limitation on the amount of goodwill that may be admitted in accordance with
SAP.

The significant differences between GAAP and SAP are that under SAP:

•Investment grade fixed maturity investments are stated at amortized cost and
certain below investment grade fixed maturity investments are reported at the
lower of amortized cost or fair value. Under GAAP, all fixed maturity
investments are reported at fair value.

•Wholly owned subsidiaries are not consolidated; rather, the equity basis of
accounting is utilized and the carrying values of these investments are subject
to admissibility tests.

•The acquisition of PWIC was recorded as an equity method investment, which
includes a goodwill component representing the acquisition cost in excess of
PWIC's statutory surplus. Goodwill will be amortized over a period not to exceed
ten years. Under GAAP, the acquisition of PWIC was recorded as an asset
acquisition, which requires i) all net assets to initially be recorded at fair
value and ii) the acquisition cost in excess of the fair value of net assets to
be allocated to the bases of certain types of assets based on their relative
fair values, if applicable. No goodwill is recorded for asset acquisitions.

           AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES
                                (£ in millions)

Ambac UK is required to prepare financial statements under FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland."
Ambac UK's shareholder funds under UK GAAP were £444 at December 31, 2021, as
compared to £412 at December 31, 2020. At December 31, 2021, the carrying value
of cash and investments was £500, a increase from £481 at December 31, 2020. The
increase in shareholders' funds and cash and investments was primarily due to
the continued receipt of premiums and investment income, partially offset by
loss expenses, foreign exchange losses within Ambac UK's investment portfolio,
operating expense and tax payments.

The significant differences between US GAAP and UK GAAP are that under UK GAAP:

•Loss reserves are only established for losses on guaranteed obligations when,
in the judgment of management, a monetary default in the timely payment of debt
service is likely to occur, which would result in Ambac UK incurring a loss. A
loss provision is established in an amount that is sufficient to cover the
present value of the anticipated defaulted debt service payments over the
expected period of default, less estimated recoveries under subrogation rights.
The discount rate is equal to the lower of the rate of return on invested assets
for either the current year or the period covering the current year plus the
four previous years, currently at 4.7%. Under U.S. GAAP, loss reserves are
established (net of US GAAP basis unearned premium

revenue) for obligations that have experienced credit deterioration, but have
not yet defaulted using a weighted-average risk-free discount rate.

•Investments in fixed maturity securities are stated at amortized cost, subject
to an other-than-temporary impairment evaluation. Under US GAAP, all bonds are
reported at fair value.

•VIEs are not required to be assessed for consolidation. Under US GAAP, as noted
under AAC Statutory Basis Financial Results above, VIE's with certain
characteristics are required to be consolidated. For several VIEs Ambac UK has
the power to direct the most significant activities of the VIE and accordingly
consolidates the related VIEs under U.S. GAAP.

•Upfront premiums written are earned on a basis proportionate to the remaining
scheduled debt service to the total principal and interest insured. Installment
premiums are reflected in income pro-rata over the period covered by the premium
payment. Under US GAAP, premium revenues for both upfront and installment
premiums are earned over the life of the financial guarantee contract in
proportion to the insured principal amount outstanding at each reporting date.

•Insurance intangibles that arose as a result of the implementation of Fresh
Start reporting is not a concept within UK GAAP. Under US GAAP, this insurance
intangible asset is amortized as an expense on a level yield basis over the life
of the related insurance risks.

•Unearned premiums and loss reserves are presented net of ceded amounts, while
under GAAP, they are reflected gross of ceded amounts.

Ambac UK is also required to prepare financial information in accordance with
the Solvency II Directive. The basis of preparation of this information is
significantly different from both US GAAP and UK GAAP.  The calculation of
capital resources, regulatory capital requirements and regulatory capital
surplus / deficit under Solvency II at December 31, 2021, will be published on
Ambac's website during March 2022. Final annual Solvency II data and Ambac UK's
annual Solvency and Financial Condition Report will be published on Ambac's
website during April 2022.

Available capital resources under Solvency II were a surplus of £245 at
September 30, 2021, the most recently published position, of which £237 are
eligible to meet solvency capital requirements. This is an increase from
December 31, 2020, when available capital resources were a surplus of £196 of
which £184 were eligible to meet solvency capital requirements. Eligible capital
resources at September 30, 2021 and December 31, 2020, are in comparison to
regulatory capital requirements of £247 and £256, respectively. Therefore, Ambac
UK was in a deficit position in terms of compliance with applicable regulatory
capital requirements by £10 at September 30, 2021 and was deficient in terms of
compliance by £72 at December 31, 2020. The deficit was reduced as at September
30, 2021, due to the combined impact of (i) the increase in long term interest
rates, which resulted in a decrease in technical provision liabilities and hence
an increase in eligible own funds and (ii) a decrease in capital requirements
for non-life risk due to the maturity and de-risking of certain policies,
together with

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natural run-off of the insured portfolio in the year. The regulators are fully
aware of the deficiency in capital resources as compared to capital requirements
as at September 30, 2021 and dialogue between Ambac UK management and its
regulators remains ongoing with respect to options for strengthening the capital
position further.

                          NON-GAAP FINANCIAL MEASURES
                                ($ in millions)

In addition to reporting the Company's financial results under GAAP, the Company
currently reports two non-GAAP financial measures: adjusted earnings and
adjusted book value. The most directly comparable GAAP measures are net income
attributable to common stockholders for adjusted earnings and Total Ambac
Financial Group, Inc. stockholders' equity for adjusted book value. A non-GAAP
financial measure is a numerical measure of financial performance or financial
position that excludes (or includes) amounts that are included in (or excluded
from) the most directly comparable measure calculated and presented in
accordance with GAAP. We are presenting these non-GAAP financial measures
because they provide greater transparency and enhanced visibility into the
underlying drivers of our business. Adjusted earnings and adjusted book value
are not substitutes for the Company's GAAP reporting, should not be viewed in
isolation and may differ from similar reporting provided by other companies,
which may define non-GAAP measures differently.

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

The following paragraphs define each non-GAAP financial measure and describe why
it is useful. A reconciliation of the non-GAAP financial measure and the most
directly comparable GAAP financial measure is also presented below.

Adjusted Earnings (Loss). Adjusted earnings (loss) is defined as net income
(loss) attributable to common stockholders, as reported under GAAP, adjusted on
an after-tax basis for the following:

•Non-credit impairment fair value (gain) loss on credit derivatives: Elimination
of the non-credit impairment fair value gains (losses) on credit derivatives,
which is the amount in excess of the present value of the expected estimated
credit losses. Such fair value adjustments are affected by, and in part
fluctuate with changes in market factors such as interest rates and credit
spreads, including the market's perception of Ambac's credit risk ("Ambac CVA"),
and are not expected to result in an economic gain or loss. These adjustments
allow for all financial guarantee contracts to be accounted for consistent with
the Financial Services - Insurance Topic of ASC, whether or not they are subject
to derivative accounting rules. This adjustment has become negligible and we
will discontinue reporting it beginning in the first quarter of 2022.

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

•Foreign exchange (gains) losses: Elimination of the foreign exchange gains
(losses) on the re-measurement of assets, liabilities and transactions in
non-functional currencies. This adjustment eliminates the foreign exchange gains
(losses) on all assets, liabilities and transactions in non-functional
currencies, which enables users of our financial statements to better view the
results without the impact of fluctuations in foreign currency exchange rates
and facilitates period-to-period comparisons of Ambac's operating performance.

The following table reconciles net income attributable to common stockholders to
the non-GAAP measure, Adjusted Earnings on a total dollar amount and per diluted
share basis, for all periods presented:

                                                 2021                                  2020                                  2019
($ in millions, except per share
data)                                                  Per Diluted                           Per Diluted                           Per Diluted
Year Ended December 31,               $ Amount            Share             $ Amount            Share             $ Amount            Share
Net income (loss) attributable to
common stockholders                 $     (17)         $   (0.61)         $    (437)         $   (9.47)         $    (216)         $   (4.69)
Adjustments:
Non-credit impairment fair value
(gain) loss on credit derivatives           -                  -                  -                  -                 (1)             (0.03)

Insurance intangible amortization          52               1.12                 57               1.23                295               6.43

Foreign exchange (gains) losses             7               0.15                  3               0.06                (12)             (0.26)

Adjusted Earnings (Loss) (1)        $      43          $    0.66          $    (378)         $   (8.19)         $      66          $    1.44

(1)Adjusted earnings per diluted share is calculated as adjusted earnings less
the change in the redemption value of redeemable noncontrolling interest,
divided by the GAAP weighted average number of diluted shares outstanding.

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

•Non-credit impairment 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

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economic credit loss. GAAP fair values are affected by, and in part fluctuate
with, changes in market factors such as interest rates, credit spreads,
including Ambac's CVA that are not expected to result in an economic gain or
loss. These adjustments allow for all financial guarantee contracts to be
accounted for within adjusted book value consistent with the provisions of the
Financial Services-Insurance Topic of the ASC, whether or not they are subject
to derivative accounting rules. This adjustment has become negligible and we
will discontinue reporting it beginning in the first quarter of 2022.

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

•Net unearned premiums and fees in excess of expected losses: Addition of the
value of the unearned premium revenue ("UPR") on financial guarantee contracts,
in excess of expected losses, net of reinsurance. This non-GAAP adjustment
presents the economics of UPR and expected

losses for financial guarantee contracts on a consistent basis. In accordance
with GAAP, stockholders' equity reflects a reduction for expected losses only to
the extent they exceed UPR. However, when expected losses are less than UPR for
a financial guarantee contract, neither expected losses nor UPR have an impact
on stockholders' equity. This non-GAAP adjustment adds UPR in excess of expected
losses, net of reinsurance, to stockholders' equity for financial guarantee
contracts where expected losses are less than UPR. This adjustment is only made
for financial guarantee contracts since such premiums are non-refundable.

•Net unrealized investment (gains) losses in Accumulated Other Comprehensive
Income: Elimination of the unrealized gains and losses on the Company's
investments that are recorded as a component of accumulated other comprehensive
income ("AOCI"). The AOCI component of the fair value adjustment on the
investment portfolio may differ from realized gains and losses ultimately
recognized by the Company based on the Company's investment strategy. This
adjustment only allows for such gains and losses in adjusted book value when
realized.


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

                                                                 2021                                  2020
($ in millions, except per share data) December 31,  $ Amount           Per Share          $ Amount           Per Share
Total Ambac Financial Group, Inc. stockholders'
equity                                              $  1,038          $    22.42          $  1,080          $    23.57
Adjustments:
Non-credit impairment fair value losses on credit
derivatives                                                -                0.01                 -                0.01

Insurance intangible asset                              (320)              (6.91)             (373)              (8.14)

Net unearned premiums and fees in excess of
expected losses                                          310                6.68               378                8.24
Net unrealized investment (gains) losses in
Accumulated Other Comprehensive Income (Loss)           (154)              (3.32)             (166)              (3.63)

Adjusted Book Value                                 $    874          $    18.88          $    919          $    20.05


The decrease in Adjusted Book was primarily attributable to the $10 reduction to
retained earnings from the increase to the carrying value of redeemable NCI, the
impact on expected future premiums from reinsurance and de-risking transactions
partially offset by Adjusted earnings for the year ended December 31, 2021
(excluding earned premium previously included in Adjusted Book Value).

Factors that impact changes to Adjusted Book Value include many of the same
factors that impact Adjusted Earnings, including the majority of revenues and
expenses, but generally exclude components of premium earnings since they are
embedded in prior period's Adjusted Book Value through the net unearned premiums
and fees in excess of expected losses adjustment. Net unearned premiums and fees
in excess of expected losses will affect Adjusted Book Value for (i) changes to
future premium assumptions (e.g. expected term, interest rates, foreign currency
rates, time passage) and (ii) changes to expected losses for policies which do
not exceed their related unearned premiums and (iii) new reinsurance
transactions.