ONE VISION CULTURE MISSION PURPOSE COMPANY AMBAC. 2018 Annual Report ABOUT AMBAC Ambac Financial Group, Inc. (“Ambac” or “AFG”), headquartered in New York City, is a holding company whose subsidiaries, including its principal operating subsidiaries, Ambac Assurance Corporation (“AAC”), Everspan Financial Guarantee Corp. and Ambac Assurance UK Limited (“Ambac UK”), provide financial guarantees of obligations in both the public and private sectors globally. AAC is a guarantor of public finance and structured finance obligations. 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 or a holder of 5% or more of Ambac’s common stock increases its ownership interest. 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 residential mortgage backed securities litigations. For more information, please go to www.ambac.com. MISSION VISION VALUES n Optimize our business and its n Transition to a growth-oriented n Culture of respect, inclusion, components to achieve maximum platform sufficiently capitalized collaboration and transparency return for shareholders to support businesses that are synergistic with Ambac’s core n Attract, retain and reward n Aggressively pursue financially competencies top performers who meet sound strategies to reduce risk standards of excellence, and decrease the size of the integrity and collaboration insured portfolio 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,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which, may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking 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. 3 DEAR FELLOW SHAREHOLDERS “ 2018 was another milestone year for Ambac driven by the successful execution of our key strategic priorities.” CLAUDE LeBLANC President and Chief Executive Officer 2018 was another milestone year for Ambac driven by KEY ACCOMPLISHMENTS FOR THE YEAR: the successful execution of our key strategic priorities n Successfully executed a transformational holistic that we outlined last year. Ambac reported full year restructuring transaction resulting in the Segregated 2018 net income of $267 million, net income to common Account’s exit from rehabilitation, increasing Book shareholders of $186 million or $3.99 per diluted share Value per share by approximately $7.00 (1) and Adjusted Earnings of $301 million or $6.47 per n Significantly decreased our insured risk portfolio diluted share. Our performance was positively impacted from year-end 2017 by 25% to $46.9 billion by the successful close of a holistic restructuring n Decreased Adversely Classified Credits by 23% to transaction at the beginning of 2018, resulting in $10.9 billion and Watch List Credits by 19% to $9.0 the exit from rehabilitation of AAC’s Segregated Account billion through proactive efforts and runoff (the “Segregated Account”). The execution of this n Negotiated and executed a consensual agreement transaction together with the exit from rehabilitation of which served as the foundation for the COFINA the Segregated Account was the culmination of several Plan of Adjustment which became effective on years of hard work and created substantial value for our February 12, 2019 shareholders by significantly increasing Book Value and n Executed an Auction Market Preferred Shares Adjusted Book Value. Execution of this transaction also (“AMPS”) exchange transaction, capturing a provided several material benefits for Ambac including discount of approximately $250 million to the the simplification of our capital structure, greater financial liquidation preference and strategic flexibility, materially improved financial n Executed additional headcount and other cost strength at AAC, significant reduction in operating costs reductions which, together with measures implemented and a unified corporate governance structure. in late 2017, resulted in a 27% reduction in headcount and a lower run-rate for operating expenses n Refined our compensation program to create further alignment with shareholders 1 The completion of the holistic restructuring transaction also allowed us to accelerate other key priorities to create and unlock additional material shareholder value, including active de-risking initiatives, ongoing rationalization of our capital and liability structures, loss recovery through active litigation management, ongoing review of the effectiveness and efficiency of our operating platform and increased focus on future growth initiatives. HOLISTIC RESTRUCTURING TRANSACTION - Segregated Account Exit from Rehabilitation BENEFIT OUTCOME n Discharge of all outstanding deferred payment > SIMPLIFIED CAPITAL STRUCTURE AND PROVIDES obligations (“DPOs”) of the Segregated Account, FOR GREATER FINANCIAL AND STRATEGIC FLEXIBILITY totaling approximately $3.9 billion, including accretion n Cancellation of $810 million in principal plus accrued and unpaid interest of AAC general account surplus notes n Receipt of $240 million in new capital via the issuance of a Tier 2 note, backed by certain RMBS representation and warranty litigation recoveries n Merger of AAC’s Segregated Account into its general account n Created approximately $7.00 of Book Value per share n Full payment on all policy claims following the merger > GREATER FINANCIAL STRENGTH AT AAC of the Segregated Account into AAC’s general account n Realization of an effective discount of 6.5% on the accreted value of DPOs and the outstanding amount of principal and accrued and unpaid interest on general account surplus notes n Regulatory and other costs related to the rehabilitation > MATERIAL REDUCTION IN ONGOING REHABILITATION AND of the Segregated Account decreased $21 million for RESTRUCTURING COSTS AND OTHER RELATED EXPENSES the year ended December 31, 2018 from the prior year > UNIFIED CORPORATE GOVERNANCE STRUCTURE n Interlocking Boards at AAC and AFG We are extremely pleased with the outcome of this activities included, among other things, the execution of transaction and I believe that the resulting enhanced commutation transactions, risk transfer via reinsurance flexibility provides us with the opportunity to move to a transactions with multiple counterparties and the growth trajectory with expanded tools and resources to proactive facilitation of refinancing transactions and pursue opportunities focused on creating significant policy terminations. Our focus included both Adversely long-term value for our shareholders. Classified Credits and Watch List Credits, which represent During the year we also continued to aggressively exposures for which there may be heightened potential pursue Ambac’s key business activity, the active risk for future adverse development based on qualitative and management and stabilization of our insurance platform. quantitative stress assumptions. We took proactive steps to reduce and mitigate Our efforts, together with natural runoff, resulted in a potential adverse development in our insured portfolio, 25% reduction of the insured portfolio to $46.9 billion net which improves the quality of our Book Value and par outstanding at December 31, 2018 from $62.7 billion increases the optionality of our platform. Our targeted at December 31, 2017. In addition, Adversely Classified 2 BOOK VALUE/SHARE ADJUSTED BOOK VALUE/SHARE (1) (2) 18% CAGR +$19.26 $40 $37.41 $37.94 $3540 35 $35.12 $29.48 $35 $31.09 $30.52 $3035 $28.15 $27.58 30 $30 $2530 $24.34 25 $25 25 $20 20 $20 20 $15.01 $15.62 $15 15 $15 15 $10 $8.32 10 $10 10 $5 $5 5 5 $0 $0 0 0 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 2013 2014 2015 2016 2017