2014 Annual Report About Ambac Ambac Financial Group, Inc. (“Ambac”), headquartered in New York City, is a holding company whose subsidiaries, including its principal operating subsidiary, Ambac Assurance Corporation (“Ambac Assurance”), Everspan Financial Guarantee Corp., and Ambac Assurance UK Limited, provide financial guarantees and other financial services to clients in both the public and private sectors globally. Ambac Assurance, including the Segregated Account of Ambac Assurance (in rehabilitation), is a guarantor of public finance and structured finance obligations. Ambac is also selectively exploring opportunities involving the development and/or acquisition of new businesses. Ambac’s common stock trades on the NASDAQ Global Select Market under the symbol “AMBC”. The Amended and Restated Certificate of Incorporation of Ambac contains substantial restrictions on the ability to transfer Ambac’s common stock. Subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), any person or group of persons shall become a holder of 5% or more of Ambac’s common stock. Ambac is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, we use our website to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates to the status of certain primary residential mortgage backed securities litigations. For more information, please go to www.ambac.com. Forward-Looking Statements In this Annual Report, we have included statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “plan,” “believe,” “anticipate,” “intend,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which, may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in our most recently filed quarterly or annual report with the SEC. Ambac Financial Group, Inc. 2014 Annual Report 1 Dear Fellow Shareholders, NADER TAVAKOLI Interim President and Chief Executive Officer I am pleased to report that 2014 was a successful year for your company on many fronts. Fueled by developments at Ambac Assurance Corporation (“AAC”), Ambac Financial Group, Inc. (“Ambac”) posted net income for the year of $484 million, or $10.31 per diluted share, and operating earnings(1) of $683 million, or $14.54 per diluted share. Since emerging from Chapter 11 proceedings in the second quarter of 2013, Ambac has generated aggregate operating earnings of $1.4 billion, including positive quarterly operating earnings in every quarter but one. 2 Ambac Financial Group, Inc. 2014 Annual Report Operating Earnings(1) (2) Since Emergence ($ in millions) $600 $477 $500 $400 $292 $300 $203 $193 $177 $200 $143 $100 $0 May-June 3Q 2013 4Q 2013 1Q 2014 3Q 2014 4Q 2014 -$100 2013 -$200 -$113 2Q 2014 Furthermore, we continued to make solid or 62%, since the first quarter of 2010, our structured progress toward the deleveraging and derisking finance insured portfolio has decreased by $84 of Ambac’s insured portfolio. In addition to billion, or 76%, over the same time period. Much of amortization and refundings, the decrease in the this reduction in structured finance exposure has overall insured portfolio has been driven by our occurred in our highest risk exposures, including value creation initiatives. While Ambac continues residential mortgage backed securities (“RMBS”), to successfully derisk its insured portfolio, we have collateralized debt obligations of asset backed also improved our risk profile. While our overall securities (“CDO of ABS”), and student loans. insured exposure has shrunk by $234 billion, Insured Portfolio Since 1Q 2010 1Q 2010 4Q 2014 International International Finance Finance 13% 17% Public Public Finance Finance 58% 65% Structured Structured Finance Finance 29% 18% $379 BILLION NET PAR $145 BILLION NET PAR (1) Operating earnings is a non-GAAP measure. Refer to the MD&A - Non-GAAP Financial Measures section of the accompanying Form 10-K for a reconciliation of the most directly comparable financial measure calculated in accordance with GAAP. (2) 2Q 2014 Operating Earnings includes accrued interest on Deferred Amounts for the period from the beginning of the accrual period (September 2012 as per the Amended Rehabilitation Plan) through 2Q 2014 of $308 million pre-tax, or $304 million net of tax. Of these amounts, $50 million pre-tax, or $49 million net of tax, relates to 2Q 2014. Ambac Financial Group, Inc. 2014 Annual Report 3 Select Distressed Asset Classes Since 1Q 2010(3) ($ in billions) Net Par $75 1Q 2010 4Q 2014 $50 $25 -71% -56% -75% -100% $0 Seg Acct (3) RMBS Student Loans CDO of ABS Among many accomplishments in 2014, we: Exercised a disciplined approach to Reduced gross loss reserves by 31% to $3.8 investing in AAC insured securities which billion as a result of improvements in most contributed to a 12.25% total return on insured sectors and the payment of $1.1 billion our actively managed domestic Financial of deferred amounts Guarantee investment portfolio Successfully implemented changes to the Reached favorable outcomes with several Segregated Account Rehabilitation Plan, California municipalities avoiding ultimate including an increase in the Segregated losses; commuted $1.2 billion of exposure to Account payout ratio and the redemption Punch Taverns on very favorable terms; and of over $400 million of surplus notes and finalized bankruptcy related settlements accrued interest with Detroit Recovered an additional $212 million through Surveillance and Risk Management negotiated resolutions of RMBS disputes while Early identification, mitigation and remediation increasing our estimate of future subrogation of our risk are core to successfully managing recoveries by $300 million to $2.5 billion Ambac’s operations. Our risk professionals Monetized a significant portion of our junior proactively monitor our insured exposures for early surplus notes for over $220 million through a identification of portfolio problems, allowing us to private placement in August 2014, enhancing implement mitigation and remediation strategies Ambac’s financial flexibility and to reserve appropriately for potential losses. Purchased an additional $439 million of We are committed to continuously evaluating and AAC insured RMBS, bringing to approximately improving our quantitative and analytical modeling 20% the amount we own of the $3.3 billion and surveillance systems, over which we have a of deferred obligations outstanding at rigorous internal control framework to ensure year-end 2014 integrity of results. (3) 1Q 2010 is the first quarter reported after the Segregated Account was established and entered into Rehabilitation. The Segregated Account in 1Q 2010 included $23 billion of ceded exposures from our European subsidiary Ambac UK, which were subsequently commuted back to Ambac UK, and are no longer included in the Segregated Account exposures. 4 Ambac Financial Group, Inc. 2014 Annual Report One example of our early risk identification We intend to continue to vigorously pursue was the recognition of the increasing problems these cases to maximize our recoveries. Although confronting the Commonwealth of Puerto Rico. we are willing to settle if it is in our economic interest This proactive analysis led us to move our entire to do so, we are prepared to litigate these cases to exposure to the Commonwealth and its affiliated trial to recover all available damages, including agencies to below investment grade many months liability for interest, fees and, potentially, punitive before the major rating agencies did, and to damages. In his decision denying First Franklin’s establish meaningful reserves at that time. motion to dismiss our complaint, now retired Our loss mitigation efforts often involve capital Justice Schweitzer left the door open to such markets transactions or a negotiated resolution of recoveries, observing that “[t]hose who deliberately our contractual obligations, but increasingly such and coolly engage in a far-flung fraudulent activities require us to be fully engaged in scheme, systematically conducted for profit, are complicated restructuring processes. Over the last very much more likely to pause and consider the few months, for example, we have been actively consequences