AMBAC FINANCIAL GROUP, INC. 2015 ANNUAL REPORT About Ambac Ambac Financial Group, Inc. (“Ambac”), 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 and other financial services to clients in both the public and private sectors globally. AAC, including the Segregated Account of AAC (in rehabilitation), is a guarantor of public finance and structured finance obligations. Ambac is also selectively exploring opportunities involving the acquisition and/or development 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. 2015 Annual Report NADER TAVAKOLI President and Chief Executive Officer Dear Fellow Shareholders, A year ago I wrote to you as the newly appointed interim CEO of your company with an ambitious agenda of near-term goals. Specifically, we set out to: improve the sense of urgency and proactivity at Ambac generally and particularly in our risk and loss management efforts; aggressively pursue our residential mortgage backed securities (“RMBS”) related law suits and expedite their resolution; prioritize more active derisking of the insured book of Ambac Assurance Corporation (“AAC”); focus on accretive market and privately negotiated liability management transactions; continue to improve our relationship with our regulator toward better outcomes for our near and longer-term goals; continue to right size the company as our portfolio shrinks; and, finally, improve our communication with stakeholders. This was a lofty and ambitious set of goals during operating earnings since emerging from bankruptcy a management transition year, but I can confidently in May 2013, improving our claims paying ability and report to you today that, thanks to the hard work and creating over $750 million of adjusted book value(1). dedication of our valued employees, Ambac met or I would like to provide some details of your company’s exceeded even my expectations across each of these accomplishments for 2015 starting with our financial strategic goals over the last year. Moreover, we exceeded performance, and then address some challenges and all expectations for profits in 2015 by generating record goals as we look ahead. 1 Ambac Financial Group, Inc. 2015 Annual Report FINANCIAL PERFORMANCE In 2015 we generated net income of $493.4 million, or $10.72 per diluted share, and $1.2 billion of operating earnings(1), or $25.32 per diluted share. At the end of December 2015, our book value was $1.7 billion, or $37.41 per share, a 20% increase from December 31, 2014, and our adjusted book value increased to nearly $25 per share. As detailed below, these results were generated in large part due to our very active and successful asset and liability management program, and in spite of a 33% increase in loss reserves in our domestic public finance book, which was primarily attributable to our Puerto Rico exposure. Since emerging from bankruptcy, Ambac has generated $2.5 billion of operating earnings, or nearly $55 per diluted share. Operating Earnings(1) ($ in millions) $600 $477 $481 $500 $400 $292 $248 $266 $300 $203 $193 $177 $171 $200 $143 $100 $0 May-June 3Q 2013 4Q 2013 1Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 -$100 2013 ($113) -$200 2Q 2014(2) Book Value / Share Adjusted Book Value / Share(1) $45 $40 $30 $39.39 $24.78 $35 $37.41 $25 $34.74 $30 $31.09 $20 $17.81 $30.10 $16.49 $25 $15 $10.64 $21.18 $21.07 $21.68 $20 $10 $7.50 $15.62 $15 $5 $13.59 $0.98 $10 $0 $6.38 ($1.11) $5 ($5) ($2.47) ($1.44) ($6.07) $0 ($10) ($7.23) Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 (1) Ambac reports two non-GAAP financial measures: Operating Earnings (Losses) and 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 and the impact of certain items that the Company believes will reverse from GAAP book value over time through the GAAP statements of comprehensive income. Operating Earnings (Losses) 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 performed reconciliations of net income (loss) attributable to common shareholders to the non-GAAP measure of Operating Earnings (Losses) and Total Ambac Financial Group, Inc. stockholders’ equity per share (“Book Value”) to the non-GAAP measure of Adjusted Book Value per share and is presented in Appendix A to this Annual Report. (2) 2Q 2014 Operating Earnings (Losses) 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 Q 2014. 2 Ambac Financial Group, Inc. 2015 Annual Report As a result of our strong 2015 performance, and pur- Insured Portfolio suant to existing intercompany tax sharing agreements, (as of December 31, 2015) Ambac’s holding company, Ambac Financial Group, Inc. (“AFG”), will receive $71 million of tolling payments International in May 2016 from AAC. The receipt of these payments, Finance which is an important milestone for the company, will 20% Public occur far earlier and in more substantial size than any Finance previous expectations. Upon receipt of these tolling 60% payments, AFG will have nearly $7 per share of cash and Structured securities, another $165 million in potential additional Finance tolling payments to be paid over time, $1.4 billion of fully 20% usable net operating loss carry-forwards and no debt. LIABILITY MANAGEMENT $108.3 BILLION NET PAR(3) Risk Reduction In 2015, we devoted substantial efforts to risk reduction, risk and loss management and analytics. We surpassed even our own optimistic expectations by reducing our reduced the cost of these efforts through more insured portfolio by a full 25% from $144.7 billion to efficient use of market and ratings flags and a flatter $108.3 billion. Importantly, we reduced our adversely organizational structure. classified credits by 23%. Much of this reduction was the result of active engagement and effective negotiation. Puerto Rico Exposure For example, we were able to procure the cancellation With respect to our Puerto Rico exposures, we identified of $229 million in net par of our Puerto Rico Highway the issues early, assembled a world class team of exposure under very challenging circumstances. This professionals in San Juan, Washington and New York, amounted to a 9% reduction in our overall Puerto and have been at the leading edge of discussions and Rico net par, which has been the subject of much negotiations. We have been instrumental in educating attention of late.