<PAGE>

                                  SCHEDULE 14A
                                 (Rule 14a-101)
                     INFORMATION REQUIRED IN PROXY STATEMENT

                            SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

Filed by the Registrant  [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ]     Preliminary Proxy Statement

[ ]     CONFIDENTIAL, FOR USE OF THE
        COMMISSION ONLY (AS PERMITTED BY
        RULE 14A-6(E)(2))

[X]     Definitive Proxy Statement

[ ]     Definitive Additional Materials

[ ]     Soliciting Material Under Rule 14a-12



                           AMBAC FINANCIAL GROUP, INC.
................................................................................
                (Name of Registrant as Specified In Its Charter)


................................................................................
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)



Payment of Filing Fee (Check the appropriate box):

[X]  No fee required.

[ ]  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
     0-11.
     1)   Title of each class of securities to which transaction applies:


--------------------------------------------------------------------------------
     2)   Aggregate number of securities to which transaction applies:


--------------------------------------------------------------------------------
     3)   Per unit price or other underlying value of transaction computed
          pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
          filing fee is calculated and state how it was determined):

--------------------------------------------------------------------------------

     4)   Proposed maximum aggregate value of transaction:

--------------------------------------------------------------------------------
     5)   Total fee paid:

--------------------------------------------------------------------------------

[ ]  Fee paid previously with preliminary materials.

[ ]  Check box if any part of the fee is offset as provided by Exchange Act
     Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
     paid previously. Identify the previous filing by registration statement
     number, or the Form or Schedule and the date of its filing.

     1)  Amount Previously Paid:

--------------------------------------------------------------------------------
     2)  Form, Schedule or Registration Statement No.:

--------------------------------------------------------------------------------
     3)  Filing party:

--------------------------------------------------------------------------------
     4)  Date Filed:

--------------------------------------------------------------------------------

Notes:

Reg. (S) 240.14a-101

SEC 1913 (3-99)


<PAGE>

                                 AMBAC FINANCIAL GROUP, INC.


[LOGO] Ambac

                                 NOTICE OF
                                 2002 ANNUAL MEETING

                                 OF STOCKHOLDERS
                                 AND
 
                                PROXY STATEMENT

                                 Meeting Date:

                                 Tuesday, May 7, 2002
                                 at 11:30 A.M. (local time)

                                 Meeting Place:

                                 Ambac Financial Group, Inc.
                                 One State Street Plaza
                                 New York, New York 10004


<PAGE>

                                                          AMBAC FINANCIAL
                                                          GROUP, INC.
                                                          One State Street Plaza
                                                          New York, NY 10004
                                                          212.668.0340

                                                          PHILLIP B. LASSITER
                                                          Chairman and
                                                          Chief Executive
                                                          Officer

 
                        March 28, 2002

[LOGO] Ambac
                         Dear Stockholders:

                         It is my pleasure to invite you to Ambac's 2002 Annual
                         Meeting of Stockholders.

                         We will hold the meeting on Tuesday, May 7, 2002, at
                         11:30 a.m. at our executive offices in New York City.
                         In addition to the formal items of business, I will
                         review the major developments of 2001 and answer your
                         questions.

                         This booklet includes the Notice of Annual Meeting and
                         the Proxy Statement. The Proxy Statement describes the
                         business that we will conduct at the meeting.

                         Your vote is important. Whether you plan to attend the
                         meeting or not, please complete, sign and return the
                         enclosed proxy card in the envelope provided. If you
                         attend the meeting you may vote in person, even if you
                         previously submitted your proxy.

                         We look forward to seeing you at the meeting.

                         Sincerely,
                         /s/ Phillip B. Lassiter


<PAGE>

                                                          AMBAC FINANCIAL
                                                          GROUP, INC.
                                                          One State Street Plaza
                                                          New York, NY 10004
                                                          212.668.0340


                         NOTICE OF 2002 ANNUAL MEETING OF STOCKHOLDERS

                         March 28, 2002

[LOGO] Ambac
                         Dear Stockholders:

                         We will hold the 2002 Annual Meeting of Stockholders
                         on Tuesday, May 7, 2002 at 11:30 a.m. (local time) at
                         our executive offices at One State Street Plaza in New
                         York City. At our Annual Meeting, we will ask you to:

                          .  Elect seven directors;

                          .  Ratify the selection of KPMG LLP as independent
                             auditors for 2002; and

                          .  Consider any other business that is properly
                             presented at the Annual Meeting.

                         You may vote at the Annual Meeting if you were an
                         Ambac stockholder at the close of business on March
                         18, 2002.

                         Along with the attached Proxy Statement, we are also
                         sending you the Ambac 2001 Annual Report, which
                         includes our financial statements.

                         /s/ Anne G.Gill
                         Anne G. Gill
                         First Vice President, Corporate Secretary
                         and Assistant General Counsel


<PAGE>

 
                              TABLE OF CONTENTS


<TABLE>
<S>                                                                                      <C>
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING.........................................  1

   Why Did You Send Me this Proxy Statement?............................................  1
   Who Is Entitled to Vote?.............................................................  1
   How Many Votes Do I Have?............................................................  1
   How Do I Vote by Proxy?..............................................................  1
   May I Vote by Telephone or via the Internet?.........................................  2
   May I Revoke My Proxy?...............................................................  2
   How Do I Vote in Person?.............................................................  2
   How Do Employees in the Ambac Stock Fund Vote?.......................................  3
   What Votes Do We Need to be Present to Hold the Annual Meeting?......................  3
   What Vote Is Required to Approve Each Proposal?......................................  3
   What Is the Effect of Broker Non-Votes?..............................................  3
   Is Voting Confidential?..............................................................  4
   What Are the Costs of Soliciting these Proxies?......................................  4
   How Do I Obtain an Annual Report on Form 10-K?.......................................  4
   Where Can I Find the Voting Results?.................................................  4
   Whom Should I Call If I Have Any Questions?..........................................  4

INFORMATION ABOUT AMBAC COMMON STOCK OWNERSHIP..........................................  5

   Which Stockholders own at least 5% of Ambac?.........................................  5
   How Much Stock is Owned By Directors and Executive Officers?.........................  6
   Did Ambac Insiders Comply with Section 16(a) Beneficial Ownership Reporting in 2001?.  7

INFORMATION ABOUT DIRECTORS.............................................................  8

   The Board of Directors...............................................................  8
   The Committees of the Board..........................................................  8
   How We Compensate Directors..........................................................  9

THE AUDIT COMMITTEE REPORT.............................................................. 11

INFORMATION ABOUT THE EXECUTIVE OFFICERS................................................ 12

   The Executive Officers............................................................... 12
   How We Compensate Executive Officers................................................. 14
   The Pension Plan..................................................................... 16
   Employment Agreement with the Chief Executive Officer................................ 18
   Management Retention Agreements with Executive Officers.............................. 19
   Definitions.......................................................................... 20

REPORT ON EXECUTIVE COMPENSATION FOR 2001 BY THE COMPENSATION AND
  ORGANIZATION COMMITTEE................................................................ 22

   What is Our Executive Compensation Philosophy?....................................... 22
   What is Our Position on Maximizing the Deductibility of Executive Compensation?...... 22
   What are the Elements of Executive Compensation?..................................... 23
   How Did We Determine Base Salaries for 2001?......................................... 23
   How Did We Determine Bonuses for 2001?............................................... 24
   What Were the Long-Term Incentive Awards in 2001?.................................... 25

PERFORMANCE GRAPH....................................................................... 27

DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD........................................ 28


   Proposal 1: Elect Seven Directors.................................................... 28
 
  Proposal 2: Ratify Selection of KPMG LLP as Independent Auditors for 2002............ 30

INFORMATION ABOUT STOCKHOLDER PROPOSALS................................................. 31
</TABLE>



<PAGE>

              PROXY STATEMENT FOR THE AMBAC FINANCIAL GROUP, INC.
                      2002 ANNUAL MEETING OF STOCKHOLDERS

                INFORMATION ABOUT THE ANNUAL MEETING AND VOTING

WHY DID YOU SEND ME THIS PROXY STATEMENT?

    We sent you this Proxy Statement and the enclosed proxy card because
Ambac's Board of Directors is soliciting your proxy to vote at the 2002 Annual
Meeting of Stockholders.

    This Proxy Statement summarizes the information you need to vote at the
Annual Meeting. You do not need to attend the Annual Meeting to vote your
shares. You may simply complete, sign and return the enclosed proxy card or
vote by telephone or over the Internet.

WHO IS ENTITLED TO VOTE?

    If you owned Ambac common stock at the close of business on March 18, 2002,
you are entitled to vote. On that date, there were 105,909,028 shares of Ambac
common stock outstanding. Ambac common stock is our only class of voting stock.
We will begin mailing this Proxy Statement on March 28, 2002 to all
stockholders entitled to vote.

HOW MANY VOTES DO I HAVE?

    You have one vote for each share of Ambac common stock that you owned at
the close of business on March 18, 2002. The proxy card indicates the number.

HOW DO I VOTE BY PROXY?

    If you properly fill in your proxy card and send it to us in time to vote,
your "proxy" (one of the individuals named on your proxy card) will vote your
shares as you have directed. If you sign the proxy card but do not make
specific choices, your proxy will vote your shares as recommended by the Board:

   .   "FOR" Proposal 1 (Elect Seven Directors); and
   .   "FOR" Proposal 2 (Ratify Selection of KPMG LLP as Independent Auditors
       for 2002).

    If any other matter is presented, your proxy will vote in accordance with
his or her best judgment. At the time we began printing this Proxy Statement,
we knew of no matters that needed to be acted on at the Annual Meeting, other
than those discussed in this Proxy Statement.


<PAGE>

MAY I VOTE BY TELEPHONE OR VIA THE INTERNET?

    Yes. Instead of submitting your vote by mail on the enclosed proxy card,
you may be able to vote via the Internet or by telephone. Please note that
there are separate Internet and telephone arrangements depending on whether you
are a registered stockholder (that is, if you hold your stock in your own
name), or whether you hold your shares in "street name" (that is, if your stock
is held in the name of your broker or bank).

    If you are a registered stockholder, you may vote by telephone, or
electronically through the Internet, by following the instructions provided on
your proxy card.

    If your shares are held in "street name", you may need to contact your bank
or broker to determine whether you will be able to vote by telephone or
electronically.

    The telephone and Internet voting procedures are designed to authenticate
stockholders' identities, to allow stockholders to give their voting
instructions and to confirm that stockholders' instructions have been recorded
properly. If you vote via the Internet, you may incur costs, such as usage
charges from Internet access providers and telephone companies. You will be
responsible for those costs.


     Whether you plan to attend the Annual Meeting or not, we urge you to vote.
     Returning the proxy card or voting by telephone or over the Internet will
     not affect your right to attend the Annual Meeting and vote.

MAY I REVOKE MY PROXY?

    Yes. You may change your mind after you send in your proxy card by
following any of these procedures. To revoke your proxy:

   .   Send in another signed proxy with a later date; or

   .   Send a letter revoking your proxy to Ambac's Corporate Secretary at the
       address indicated on page 31 under "Information about Stockholder
       Proposals"; or

   .   Attend the Annual Meeting and vote in person.

HOW DO I VOTE IN PERSON?

    If you plan to attend the Annual Meeting and vote in person, we will give
you a ballot when you arrive.

    If your shares are held in the name of your broker, bank or other nominee,
you must bring an account statement or letter from the nominee. The account
statement or letter must show that you were the direct or indirect (beneficial)
owner of the shares on March 18, 2002.

                                      2


<PAGE>

HOW DO EMPLOYEES IN THE AMBAC STOCK FUND VOTE?

    If you are an employee who participates in our Savings Incentive Plan
("SIP"), you are receiving this material because of shares held for you in the
Ambac Stock Fund in the SIP. The SIP Trustee will send you a voting instruction
card instead of a proxy card. This voting instruction card will indicate the
number of shares of Ambac common stock credited to your account in the Ambac
Stock Fund as of March 18, 2002.

   .   If you complete, sign and return the voting instruction card on time,
       the SIP Trustee will vote the shares as you have directed.

   .   If you do not complete, sign and return the voting instruction card on
       time, the SIP Trustee will not vote the shares credited to your account.

WHAT VOTES DO WE NEED TO BE PRESENT TO HOLD THE ANNUAL MEETING?

    We need a majority of the shares of Ambac common stock outstanding on March
18, 2002 to be present, in person or by proxy, to hold the Annual Meeting.

WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?

PROPOSAL 1: ELECT       The seven nominees for director who receive the most
SEVEN DIRECTORS         votes will be elected. If you do not vote for a
                        nominee, or you indicate "withhold authority to vote"
                        for any nominee on your proxy card, your vote will not
                        count either for or against the nominee.

PROPOSAL 2: RATIFY      The affirmative vote of a majority of the votes present
SELECTION OF            and entitled to vote at the Annual Meeting is required
AUDITORS                to ratify the selection of independent auditors. So, if
                        you "abstain" from voting, it has the same effect as if
                        you voted "against" this proposal.

WHAT IS THE EFFECT OF BROKER NON-VOTES?

    Under the rules of the New York Stock Exchange, if your broker holds your
shares in its "street" name, the broker may vote your shares on both proposals
even if it does not receive instructions from you.

    However, if your broker does not vote on either of the proposals, it will
have no effect on the outcome of the proposal.

                                      3


<PAGE>

IS VOTING CONFIDENTIAL?

    We maintain a policy of keeping all the proxies, ballots and voting
tabulations confidential. The Inspectors of Election will forward to management
any written comments that you make on the proxy card.

WHAT ARE THE COSTS OF SOLICITING THESE PROXIES?

    Ambac will pay all the costs of soliciting these proxies. Although we are
mailing these proxy materials, our directors and employees may also solicit
proxies by telephone, by fax or other electronic means of communication, or in
person. We will reimburse banks, brokers, nominees and other fiduciaries for
the expenses they incur in forwarding the proxy materials to you. Georgeson
Shareholder Communications, Inc. is assisting us with the solicitation of
proxies for a fee of $8,500 plus out-of-pocket expenses.

HOW DO I OBTAIN AN ANNUAL REPORT ON FORM 10-K?

    IF YOU WOULD LIKE A COPY OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 2001 THAT WE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, WE WILL SEND YOU ONE WITHOUT CHARGE. PLEASE WRITE TO:

                     INVESTOR RELATIONS
                     AMBAC FINANCIAL GROUP, INC.
                     ONE STATE STREET PLAZA
                     NEW YORK, NEW YORK 10004
                     ATTENTION: BRIAN MOORE, MANAGING DIRECTOR, INVESTOR
                     RELATIONS

OR CONTACT MR. MOORE AT (212) 208-3333 OR AT BMOORE@AMBAC.COM.

WHERE CAN I FIND THE VOTING RESULTS?

    We will publish the voting results in our FORM 10-Q for the second quarter
of 2002, which we will file with the SEC in August 2002. You can also find the
results on Ambac's website at WWW.AMBAC.COM.

WHOM SHOULD I CALL IF I HAVE ANY QUESTIONS?

    If you have any questions about the Annual Meeting or voting, please
contact ANNE GILL, OUR CORPORATE SECRETARY, AT (212) 208-3355 OR AT
AGILL@AMBAC.COM.

    If you have any questions about your ownership of Ambac common stock,
please call BRIAN MOORE, MANAGING DIRECTOR, INVESTOR RELATIONS, AT (212)
208-3333 OR AT BMOORE@ AMBAC.COM.

                                      4


<PAGE>

                INFORMATION ABOUT AMBAC COMMON STOCK OWNERSHIP

WHICH STOCKHOLDERS OWN AT LEAST 5% OF AMBAC?

    The following table shows all persons we know to be direct or indirect
owners of at least 5% of Ambac common stock as of December 31, 2001. Our
information is based on reports filed with the Securities and Exchange
Commission by each of the firms listed in the table below. If you wish, you may
obtain these reports from the SEC.


<TABLE>
<CAPTION>
        ----------------------------------------------------------------

                                                  NUMBER OF
                                                 SHARES OWNED PERCENT OF
          NAME AND ADDRESS OF BENEFICIAL OWNER   BENEFICIALLY   CLASS
        ----------------------------------------------------------------
        <S>                                      <C>          <C>
          J.P. MORGAN CHASE & CO.                 15,601,552     14.7%
             270 Park Avenue
             New York, New York 10017

          WELLINGTON MANAGEMENT COMPANY, LLP       7,580,796      7.2%
             75 State Street
              Boston, Massachusetts 02109

          GOLDMAN SACHS & CO.                      6,828,131      6.5%
              85 Broad Street
              New York, New York 10004

          CITIGROUP INC.                           6,620,326      6.3%
             339 Park Avenue
             New York, New York 10043
        ----------------------------------------------------------------
</TABLE>


                                      5


<PAGE>

HOW MUCH STOCK IS OWNED BY DIRECTORS AND EXECUTIVE OFFICERS?

    The following table shows the Ambac common stock owned directly or
indirectly by Ambac's directors and executive officers as of February 1, 2002.
Except for Mr. Lassiter, no director or executive officer beneficially owns 1%
or more of the shares of Ambac common stock. All directors and executive
officers as a group beneficially own 3.31% of the shares of Ambac common stock.


<TABLE>
<CAPTION>
                                                 SHARES
                                              BENEFICIALLY                             TOTAL HOLDINGS
                                                  OWNED      PERCENT  UNVESTED         (INCLUDING RSUS
NAME OF BENEFICIAL OWNER                     (1)(2)(3)(4)(5) OF CLASS RSUS(6)  PSUS(7)    AND PSUS)
------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>      <C>      <C>     <C>

OUTSIDE DIRECTORS
  Michael A. Callen.........................       30,237        --     4,655   8,282        43,174
  Renso L. Caporali.........................       19,669        --     3,038   6,115        28,822
  Jill M. Considine.........................        4,376        --     3,038   1,132         8,546
  Richard Dulude............................       20,979        --     4,655   9,034        34,668
  W. Grant Gregory..........................       17,715        --     4,655  10,120        32,490

EXECUTIVE OFFICERS
  Phillip B. Lassiter.......................    1,737,662      1.64%   18,897       0     1,756,559
  Robert J. Genader.........................      746,340        --    12,501       0       758,841
  Frank J. Bivona...........................      442,881        --     6,608       0       449,489
  David L. Boyle............................      322,563        --     6,794       0       329,357
  Kevin J. Doyle............................       92,230        --     3,104       0        95,334
  All executive officers and directors as a
   group (11 persons).......................    3,503,588      3.31%
------------------------------------------------------------------------------------------------------
</TABLE>


  (1)To our knowledge, except for Messrs. Lassiter, Genader and Boyle, who
     share voting and investment power with their spouses, each of the
     directors and executive officers has sole voting and investment power over
     his shares.

  (2)The number of shares shown for Mr. Lassiter includes 12,000 shares owned
     by his spouse. Mr. Lassiter disclaims beneficial ownership of these shares.

     The number of shares shown for Mr. Boyle includes 500 shares owned by his
     spouse. Mr. Boyle disclaims beneficial ownership of these shares.

     The number of shares shown for Mr. Gregory includes 5,000 shares held in
     the Gregory 1997 Children's Trust, of which his daughter is a beneficiary.
     Mr. Gregory disclaims beneficial ownership of these shares.

  (3)The number of shares shown for each director and executive officer
     includes shares that may be acquired upon exercise of stock options that
     were exercisable as of February 1, 2002 or that will become exercisable
     within 60 days after February 1, 2002. These shares are shown in the
     following table


<TABLE>
<CAPTION>
     OUTSIDE DIRECTORS NUMBER OF SHARES EXECUTIVE OFFICERS NUMBER OF SHARES
     ----------------- ---------------- ------------------ ----------------
     <S>               <C>              <C>                <C>
     Mr. Callen.......      12,750      Mr. Lassiter......     398,939
     Dr. Caporali.....       9,750      Mr. Genader.......     387,741
     Ms. Considine....       4,376      Mr. Bivona........     331,500
     Mr. Dulude.......      12,750      Mr. Boyle.........     315,000
     Mr. Gregory......      12,750      Mr. Doyle.........      84,750
</TABLE>


  (4)The number of shares shown for each executive officer also includes the
     number of shares of Ambac common stock owned indirectly as of February 1,
     2002 by these executive officers in our Savings Incentive Plan ("SIP ").
     Our information on these shares is based on reports from the SIP Trustee.


                                      6


<PAGE>

  (5)The number of shares shown for Messrs. Lassiter, Genader, Bivona, Boyle
     and Doyle include vested restricted stock units ("RSUS") that we awarded
     under our equity plans. These RSUs are shown in the following table:


<TABLE>
<CAPTION>
EXECUTIVE OFFICERS NUMBER OF VESTED RSUS
------------------ ---------------------
<S>                <C>
   Mr. Lassiter...        978,584
   Mr. Genader....        315,020
   Mr. Bivona.....         95,809
   Mr. Boyle......              0
   Mr. Doyle......              0
</TABLE>


  (6)This column shows the 4,500 RSUs that were granted to each of Messrs.
     Callen, Dulude and Gregory at the 1997 Annual Meeting under the 1997
     Non-Employee Directors Equity Plan and accrued dividends and the 3,000
     RSUs that were granted to Dr. Caporali and Ms. Considine at the 2000
     Annual Meeting under the 1997 Non-Employee Directors Equity Plan and
     accrued dividends. These RSUs generally will vest on the date of the
     Annual Meeting held in the fifth calendar year following the date of
     grant. At that time, each of these directors will receive one share of
     Ambac common stock in settlement of each RSU. For more information on
     these RSUs, see below at page 9 under "How We Compensate Directors."

     This column also shows RSUs for Messrs. Lassiter, Genader, Bivona, Boyle
     and Doyle that were awarded as part of each executive officer's 1999
     bonus, 2000 bonus and 2001 bonus pursuant to the Ambac Deferred
     Compensation Sub-Plan of the 1997 Equity Plan (the "SUB-PLAN") and accrued
     dividends. See page 25 for more detailed descriptions of these awards made
     pursuant to the Sub-Plan.

  (7)Under Ambac's Deferred Compensation Plan, directors may defer their cash
     compensation. If a director has elected to defer cash compensation into
     Phantom Stock Units ("PSUS"), these PSUs are shown in this column. For
     more information on the Deferred Compensation Plan, see below at page 10.

DID AMBAC INSIDERS COMPLY WITH SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING IN
2001?

    Section 16(a) of the Securities Exchange Act of 1934 requires that our
insiders--our directors, executive officers, and greater-than-10%
stockholders--file reports with the SEC and the New York Stock Exchange on
their initial beneficial ownership of Ambac common stock and any subsequent
changes. They must also provide us with copies of the reports.

    We reviewed copies of all reports furnished to us and obtained written
representations that no other reports were required. Based on this, we believe
that all of our insiders complied with their filing requirements for 2001,
except that, due to administrative error, one stock option exercise and the
related exempt sale of stock sold to pay taxes and the exercise price was not
timely reported by Mr. Lassiter.


                                      7


<PAGE>

                          INFORMATION ABOUT DIRECTORS

THE BOARD OF DIRECTORS

    The Board of Directors oversees the business of Ambac and monitors the
performance of management. In accordance with corporate governance principles,
the Board does not involve itself in day-to-day operations. The directors keep
themselves informed by discussing matters with the Chairman, other key
executives and our principal external advisers (legal counsel, outside
auditors, investment bankers and other consultants) by reading the reports and
other materials that we send them regularly and by participating in Board and
committee meetings.

    Ambac's Board usually meets five times per year in regularly scheduled
meetings, but will meet more often if necessary. The Board met five times
during 2001. All directors attended at least 75% of the Board meetings and
meetings of the Committees of which they were members.

    Each of our directors also serves as a director of our principal operating
subsidiary, Ambac Assurance Corporation, a leading triple-A rated financial
guarantee insurance company.

THE COMMITTEES OF THE BOARD

    The Board has three standing committees: the Audit Committee, the
Compensation and Organization Committee and the Nominating Committee. None of
the directors who serve as members of these committees is, or has ever been, an
employee of Ambac or our subsidiaries.

T
HE AUDIT COMMITTEE     The Audit Committee recommends the selection of the
                        independent auditors to the Board, approves the scope
                        of the annual audit by the independent auditors and our
                        internal auditors, reviews audit findings and
                        accounting policies, assesses the adequacy of internal
                        controls and risk management, reviews and approves
                        Ambac's financial disclosures and oversees compliance
                        with Ambac's Code of Business Conduct. The Committee
                        also meets privately, outside the presence of Ambac
                        management, with both the independent auditors and the
                        internal auditors. Under the rules of the New York
                        Stock Exchange, all of the members of the Audit
                        Committee are independent. The Committee's Report for
                        2001 is printed below at page 11.

                        In December 2001, the Board approved a revised Audit
                        Committee Charter, which is attached to this Proxy
                        Statement as Appendix A.

                        The Committee met three times during 2001.

                        Messrs. Callen, Dulude and Gregory and Dr. Caporali and
                        Ms. Considine currently serve as members of the
                        Committee. Mr. Callen serves as Chairman of the
                        Committee.

                                      8


<PAGE>

THE COMPENSATION        The Compensation and Organization Committee establishes
AND ORGANIZATION        and approves all elements of compensation for the
COMMITTEE               executive officers. Each year, as the SEC requires, the
                        Committee reports to you on executive compensation. The
                        Committee's Report on Executive Compensation for 2001
                        is printed below, starting at page 22.

                        The Committee administers Ambac's 1997 equity plan and
                        has sole authority for awards under the plan. The
                        Committee evaluates existing and proposed employee
                        benefit plans and may approve of plan changes. The
                        Committee also administers the 1997 Executive Incentive
                        Plan and Ambac's Deferred Compensation Plan for Outside
                        Directors and Ambac's Senior Officer Deferred
                        Compensation Sub-Plan of the 1997 Equity Plan.

                        The Committee met three times during 2001.

                        Messrs. Callen, Dulude and Gregory and Dr. Caporali and
                        Ms. Considine currently serve as members of the
                        Committee. Mr. Dulude serves as Chairman of the
                        Committee.

THE NOMINATING          The Nominating Committee is responsible for identifying
COMMITTEE               and recommending qualified candidates to the Board for
                        election as directors. In addition, our By-laws provide
                        a procedure for you to recommend candidates for
                        director at an annual meeting. For more information,
                        see below at page 31 under "Information About
                        Stockholder Proposals."

                        The Committee did not meet during 2001.

                        Messrs. Callen, Dulude and Gregory currently serve as
                        members of the Committee. Mr. Gregory serves as
                        Chairman of the Committee.

HOW WE COMPENSATE DIRECTORS

ANNUAL CASH FEE         We compensate directors who are not employees of Ambac
                        or our subsidiaries with an annual cash fee of $20,000
                        per year.

ANNUAL                  We also grant each non-employee director 3,750 stock
STOCK OPTION AWARD      options on the date of each annual meeting. These
                        options have an exercise price equal to the average of
                        the high and low trading price of our stock on the New
                        York Stock Exchange on the date of grant. The options
                        generally will vest on the first anniversary of the
                        date of the grant and expire on the date of the annual
                        meeting held in the seventh calendar year following the
                        date of the grant.

AWARD OF                Ambac grants each non-employee director 3,000
RESTRICTED STOCK        restricted stock units ("RSUS") at the annual meeting
UNITS EVERY             at which the director is first elected to the Board.
FIVE YEARS
                         .  These RSUs generally will vest on the date of the
                            annual meeting held in the fifth year following the
                            date of grant and will be settled by the delivery
                            of one share of Ambac common stock for each RSU.

                                      9


<PAGE>

                         .  If the director remains on the Board after the
                            first award of RSUs vests, Ambac will grant the
                            director a second award of 3,000 RSUs, subject to
                            similar vesting conditions and restrictions on
                            transfer.

MEETING FEES            We also pay each non-employee director a meeting fee of:

                         .  $1,000 for attendance at each meeting of
                            stockholders and each Board meeting; and

                         .  $1,000 for attendance at each committee meeting.

FEE FOR CHAIRING        We pay an annual fee of $1,500 to each non-employee
A COMMITTEE             director who chairs a committee.

EXPENSES AND            Ambac reimburses all directors for travel and other
BENEFITS                related expenses incurred in attending stockholder,
                        Board and committee meetings.

                        We provide non-employee directors with life and health
                        insurance benefits. We also allow them to participate
                        in our Matching Gift Program up to $20,000. Under this
                        Program, Ambac will match gifts by directors to
                        qualified organizations.

THE DEFERRED            Under our Deferred Compensation Plan for Outside
COMPENSATION            Directors, non-employee directors may elect to defer
PLAN                    all or part of their director compensation that is paid
                        in cash.

                         .  At the director's election, we credit deferrals to
                            a bookkeeping account that we maintain on the
                            director's behalf either as a cash credit (which we
                            credit with interest quarterly), or as phantom
                            stock units ("PSU") based on the market value of
                            Ambac common stock (on which we pay quarterly
                            dividend equivalents in additional PSUs) or as
                            performance units measured by the performance of
                            those mutual funds the director selects out of a
                            limited group of funds.

                         .  We do not fund the Deferred Compensation Plan. We
                            settle accounts only in cash.

SERVICE ON THE          Although Ambac Assurance does not pay its non-employee
AMBAC ASSURANCE         directors an annual fee for serving on its Board of
BOARD                   Directors, it does pay them meeting fees (in the same
                        amounts as we do for the Ambac Board) and reimburses
                        all directors for expenses.

DIRECTORS               We do not compensate our employees or employees of our
WHO ARE                 subsidiaries for service as a director. We do, however,
AMBAC                   reimburse them for travel and other related expenses.
EMPLOYEES

                                      10


<PAGE>

                          THE AUDIT COMMITTEE REPORT

    The Audit Committee of Ambac is responsible for providing independent,
objective oversight of Ambac's accounting functions and internal controls. The
Audit Committee recommends the selection of the independent auditors to the
Board. The Audit Committee is currently composed of five independent directors,
each of whom is independent as defined under the rules of the New York Stock
Exchange. The Audit Committee operates under a written charter adopted by the
Board of Directors, attached to this Proxy Statement as Appendix A.

    Management is responsible for Ambac's internal controls and financial
reporting process. The independent auditors are responsible for performing an
independent audit of Ambac's consolidated financial statements in accordance
with auditing standards generally accepted in the United States of America and
to issue a report thereon. The Audit Committee's responsibility is to monitor
and oversee these processes. However, none of the members of the Committee is
professionally engaged in the practice of accounting or auditing nor are all of
our members experts in those fields. The Committee relies without independent
verification on the information provided to it and on the representations made
by management and the independent auditors.

    In connection with these responsibilities, we met with management and KPMG
LLP to review and discuss the December 31, 2001 financial statements. We also
discussed with the independent accountants the matters required by Statement on
Auditing Standards No. 61 (Communication with Audit Committees). The
Corporation's independent accountants also provided us the written disclosures
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees), and we discussed with KPMG LLP its
independence.

    Based upon the review and discussions referred to above, we recommended to
the Board of Directors, and the Board of Directors has approved, that Ambac's
audited financial statements be included in Ambac's Annual Report on SEC Form
10-K for the fiscal year December 31, 2001. We also recommended the selection
of KPMG LLP as Ambac's independent auditors for 2002 and, based on that
recommendation, the Board has selected KPMG LLP as Ambac's independent auditors
for 2002.

PRINCIPAL ACCOUNTING FIRM FEES

    Fees paid to KPMG LLP for the fiscal year ended December 31, 2001 were:
Audit: $752,000; Financial Information Systems Design and Implementation Fees:
$0 and All Other Fees: $428,000. Of the $428,000 All Other Fees, $206,500 were
fees paid to KPMG LLP for consents and comfort letters provided by KPMG LLP in
connection with the registration of securities of our clients which were
guaranteed by Ambac Assurance. These fees were reimbursed to Ambac by the
clients.

                                          THE AUDIT COMMITTEE

                                          Michael A. Callen, Chairman
                                          Renso L. Caporali
March 22, 2002                            Jill M. Considine
                                          Richard Dulude
                                          W. Grant Gregory


                                      11


<PAGE>

                   INFORMATION ABOUT THE EXECUTIVE OFFICERS

THE EXECUTIVE OFFICERS

    These are the biographies of Ambac's current executive officers, except for
Mr. Lassiter, the Chief Executive Officer, and Mr. Genader, the President and
Chief Operating Officer, whose biographies are included below at pages 28 and
29 under "Proposal 1: Elect Seven Directors."

FRANK J. BIVONA         VICE CHAIRMAN--FINANCE AND INVESTMENT GROUP AND CHIEF
Age 46                  FINANCIAL OFFICER.
                        Since January 2001, Mr. Bivona has served as Vice
                        Chairman and Chief Financial Officer--Finance and
                        Investment Group of Ambac and Ambac Assurance. In
                        February 2000, he was named as Head of the Finance and
                        Investment Group, in addition to his position as
                        Ambac's Chief Financial Officer. Mr. Bivona also has
                        executive responsibility for managing Ambac's
                        investment portfolio, asset and liability management
                        services, cash management services and investor and
                        public relations. Mr. Bivona served as Executive Vice
                        President and Chief Financial Officer of Ambac and
                        Ambac Assurance from January 1998 to January 2001. Mr.
                        Bivona served as Senior Vice President and Chief
                        Financial Officer of Ambac from 1993 to January 1998
                        and Ambac Assurance from 1987 to January 1998. Mr.
                        Bivona also served as Treasurer of Ambac from 1993 to
                        July 1998 and Ambac Assurance from 1987 to July 1998.
                        Mr. Bivona also serves as a trustee of Cadre
                        Institutional Investors Trust. Mr. Bivona joined Ambac
                        Assurance from Citibank in 1986.

DAVID L. BOYLE          VICE CHAIRMAN--PORTFOLIO RISK MANAGEMENT GROUP.
Age 55                  In February 2000, Mr. Boyle was named Vice Chairman of
                        Ambac's Portfolio Risk Management Group. The Portfolio
                        Risk Management Group is responsible for surveillance
                        of Ambac's specialized finance and public finance
                        portfolios, risk analysis and reporting, reinsurance
                        and risk transfer, rating agency relationships and
                        technology. Mr. Boyle previously served as Vice
                        Chairman of the Municipal Financial Services Group from
                        January 1998 to February 2000. Mr. Boyle joined Ambac
                        and Ambac Assurance in March 1997 as Senior Vice
                        President of the Financial Management Services
                        Division. He became an Executive Vice President in July
                        1997. Mr. Boyle joined Ambac from Citibank, where, as a
                        Managing Director, he held various management positions
                        in corporate banking over a 22-year career.

GREGG L. BIENSTOCK      MANAGING DIRECTOR, HUMAN RESOURCES AND EMPLOYMENT
Age 37                  COUNSEL.
                        Mr. Bienstock has been Managing Director, Human
                        Resources and Employment Counsel since January 1999. In
                        January 2002, Mr. Bienstock assumed executive
                        responsibility for corporate marketing and corporate
                        administration. Mr. Bienstock served as First Vice
                        President, Director of Human Resources and Employment
                        Counsel of Ambac and Ambac Assurance from February 1997
                        to January 1999. Mr. Bienstock joined Ambac from the
                        Bristol Myers-Squibb Corporation, where he served as a
                        Director of Human Resources from February 1996 to
                        February 1997. From September 1993 to February 1996,
                        Mr. Bienstock was an associate with the New York law
                        firm of Proskauer Rose LLP. Prior to joining Proskauer,
                        from April 1992 to September 1993, Mr. Bienstock was an
                        Assistant General Counsel for the Mayor's Office of
                        Labor Relations for the City of New York.

                                      12


<PAGE>

KEVIN J. DOYLE          MANAGING DIRECTOR AND GENERAL COUNSEL. Mr. Doyle was
Age 45                  named Managing Director and General Counsel of Ambac
                        and Ambac Assurance in January 2000. Mr. Doyle is
                        Ambac's chief legal officer. From January 1996 to
                        January 2000, Mr. Doyle served as the Managing Director
                        and General Counsel of the Specialized Finance Division
                        of Ambac Assurance. Mr. Doyle served as First Vice
                        President and General Counsel of the Specialized
                        Finance Division of Ambac Assurance from July 1995 to
                        January 1996. Mr. Doyle joined Ambac Assurance as a
                        Vice President and Assistant General Counsel from the
                        New York law firm LeBoeuf, Lamb, Greene & MacRae in
                        1991.

                                      13


<PAGE>

HOW WE COMPENSATE EXECUTIVE OFFICERS

    The tables on pages 14 through 16 show salaries, bonuses and other
compensation paid during the last three years, options granted in 2001, options
exercised in 2001 and option values as of year-end 2001 for the Chief Executive
Officer and our next four most highly compensated executive officers.


                          SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                            LONG-TERM
                                  ANNUAL COMPENSATION  COMPENSATION AWARDS
                                  -------------------------------------------
                                                      RESTRICTED  SECURITIES  ALL OTHER
                                                         STOCK    UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION  YEAR SALARY($)  BONUS($) UNITS($)(1) OPTIONS(2)    ($)(3)
-----------------------------------------------------------------------------------------
<S>                          <C>  <C>        <C>      <C>         <C>        <C>
PHILLIP B. LASSITER          2001 $620,000   $930,000  $413,335    503,242     $66,302
 Chairman and                2000  620,000    930,000   413,335    287,232      78,509
 Chief Executive Officer     1999  560,000    750,000   333,350    375,096      52,340

ROBERT J. GENADER            2001  400,000    637,500   283,335    180,259      46,499
 President and Chief         2000  345,000    600,000   266,685    140,241      31,049
 Operating Officer           1999  310,000    487,500   216,680     95,832      28,973

FRANK J. BIVONA              2001  310,000    352,500   156,695     75,000      38,400
 Vice Chairman--Finance and  2000  270,000    318,750   141,687     86,730      24,301
 Investment Group and        1999  245,000    240,000   106,681     70,725      22,615
 Chief Financial Officer

DAVID L. BOYLE               2001  330,000    337,500   150,036     75,000      40,200
 Vice Chairman--Portfolio    2000  330,000    318,750   141,687     90,000      29,699
 Risk Management Group       1999  300,000    281,250   125,045     30,000      28,040

KEVIN J. DOYLE               2001  174,000    335,000         0     18,000      26,160
 Managing Director           2000  174,000    232,500   103,346     21,750      15,660
 and General Counsel         1999  164,000    206,250    91,729     15,000      15,327
-----------------------------------------------------------------------------------------
</TABLE>


  (1)Pursuant to the Ambac Deferred Compensation Sub-Plan of the 1997 Equity
     Plan (the "SUB-PLAN"), the Compensation and Organization Committee paid
     25% of each executive officer's bonus for 1999 and 2000 in restricted
     stock units ("RSUS"). For 2001, the Compensation and Organization
     Committee paid 25% of Messrs. Lassiter, Genader, Bivona and Boyle's bonus
     in RSUs. Amounts shown in this column are based on the market value of the
     underlying Common Stock on the date of grant and do not reflect the
     discount attributed to such value by the Committee to take account of
     vesting requirements, restrictions on transfer and other limitations. See
     page 25 for more detailed descriptions of these awards made pursuant to
     the Sub-Plan. As dividends are paid on the common stock, dividend
     equivalents are accrued on the RSUs as additional RSUs and vest according
     to the same schedule.

  (2)The number of securities underlying options for 1999, 2000 and 2001
     includes restoration options awarded upon the exercise of stock options in
     accordance with Ambac's Restoration Option Program. For the specific
     breakdown of option and restoration option grants made in 2001, please
     refer below to the table on page 15 under "Option Grants in 2001." For a
     more detailed description of our Restoration Option Program, please see
     footnote 2 under the "Option Grants in 2001" table on page 15.

                                      14


<PAGE>

  (3)The column called "ALL OTHER COMPENSATION" includes the amounts that Ambac
     contributed or credited on behalf of the named officers in 2001 to (a) our
     Savings Incentive Plan (the "SIP "), and (b) our Non-Qualified SIP. We
     credit amounts that we are precluded from contributing to the SIP because
     of limitations under the Internal Revenue Code to accounts that we
     maintain under Ambac's Non-Qualified SIP.


<TABLE>
<CAPTION>
                                                                 CREDITS TO THE
                                                   CONTRIBUTIONS NON-QUALIFIED
                                                    TO THE SIP        SIP
                                                   ------------- --------------
<S>                                                <C>           <C>
Mr. Lassiter.....................................     $20,700       $45,602
Mr. Genader......................................      20,700        25,799
Mr. Bivona.......................................      20,700        17,700
Mr. Boyle........................................      20,700        19,500
Mr. Doyle........................................      20,700         5,460
</TABLE>



                             OPTION GRANTS IN 2001


<TABLE>
<CAPTION>
                                                INDIVIDUAL GRANTS
                    ---------------------------------------------------------------------------
                    NUMBER OF SECURITIES UNDERLYING
                          OPTIONS GRANTED (#)       PERCENT OF TOTAL
                    --------------------------------OPTIONS GRANTED                             GRANT DATE
                                        RESTORATION TO EMPLOYEES IN  EXERCISE PRICE EXPIRATION PRESENT VALUE
       NAME          OPTIONS(1)         OPTIONS(2)        2001         ($/SH)(3)       DATE       ($)(4)
------------------------------------------------------------------------------------------------------------
<S>                 <C>                 <C>         <C>              <C>            <C>        <C>
Phillip B. Lassiter  225,000                             12.76%          $48.66      1/22/08    $4,012,285
                                           81,661         4.63            55.80      1/27/05     1,214,559
                                           76,239         4.32            57.98      1/26/06     1,383,185
                                          120,392         6.83            57.98      1/24/07     2,184,242
Robert J. Genader    110,000                              6.24            48.66      1/22/08     1,961,561
                                           36,640         2.08            54.50      1/28/04       461,309
                                           33,619         1.91            49.45      4/26/04       303,236
Frank J. Bivona       75,000                              4.25            48.66      1/22/08     1,337,428
David L. Boyle        75,000                              4.25            48.66      1/22/08     1,337,428
Kevin J. Doyle        18,000                              1.02            48.66      1/22/08       320,983
</TABLE>

 (1)Options awarded to the named executive officers by the Compensation and
    Organization Committee were long-term incentive awards granted on January
    22, 2001. Each executive officer's options will vest in two equal
    installments when the market price of Ambac common stock meets or exceeds
    $64.00 and $78.00 for twenty consecutive trading days or no later than the
    sixth anniversary of the grant date. Vesting is accelerated upon
    retirement, death or permanent disability. Generally, all of the executive
    officers' options will expire seven years from the date of grant or,
    earlier, if employment terminates.
 (2)Restoration options were awarded upon the exercise of stock options in
    accordance with Ambac's Restoration Option Program. A restoration option is
    awarded automatically when the underlying option is exercised by tendering
    shares of common stock to pay the exercise price. Each restoration option
    will vest one year from the date of grant and has the same exercise,
    transfer and expiration provisions as its underlying option.
 (3)The exercise price per share is the fair market value of the common stock
    on the date of grant. We determine this by calculating the average of the
    high and low price of Ambac common stock on the New York Stock Exchange on
    the date of grant.
 (4)We calculated these values by using the Black-Scholes stock option pricing
    model as follows:

   FOR THE JANUARY OPTION GRANTS.  The model, as we applied, uses the grant
   date of January 22, 2001. The fair market value on that date was $48.66 per
   share as we discussed above. The model also assumes: (a) a risk-free rate of
   return of 4.88% (which was the yield on a U.S. Treasury Strip zero coupon
   bond with a maturity that approximates the term of the option); (b) stock
   price volatility of 32.50%; (c) a constant dividend yield of 0.66% based on
   the quarterly cash dividend rate at the time of grant on Ambac common stock;
   and (d) an exercise date, on average, of 5.5 years after grant.

                                      15


<PAGE>

   FOR THE RESTORATION OPTION GRANTS.  We use the following assumptions in
   applying the model for each Restoration Option Grant: (a) a risk-free rate
   of return equal to the yield on grant date of a U.S. Treasury Strip zero
   coupon bond with a maturity that approximates the term of the option; (b)
   stock price volatility of Ambac common stock calculated using month-end
   closing prices of Ambac common stock on the New York Stock Exchange for the
   three year period prior to the grant date; (c) a constant dividend yield
   based on the quarterly cash dividend rate at the time of grant on Ambac
   common stock; and (d) exercise of the restoration option at the end of its
   term.

   WE DID NOT ADJUST THE MODEL FOR NON-TRANSFERABILITY, RISK OF FORFEITURE, OR
   VESTING RESTRICTIONS. THE ACTUAL VALUE (IF ANY) AN EXECUTIVE OFFICER
   RECEIVES FROM A STOCK OPTION WILL DEPEND UPON THE AMOUNT BY WHICH THE MARKET
   PRICE OF AMBAC COMMON STOCK EXCEEDS THE EXERCISE PRICE OF THE OPTION ON THE
   DATE OF EXERCISE. THE HYPOTHETICAL VALUES ARE PRESENTED PURSUANT TO SEC
   RULES AND THERE CAN BE NO ASSURANCE THAT THE AMOUNT STATED AS "GRANT DATE
   PRESENT VALUE" WILL ACTUALLY BE REALIZED.

      AGGREGATED OPTION EXERCISES DURING 2001 AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                NUMBER OF SECURITIES
                                 NUMBER OF                     UNDERLYING UNEXERCISED             VALUE OF UNEXERCISE
                                  SHARES                           OPTIONS HELD AT            IN-THE-MONEY OPTIONS HE
                                ACQUIRED ON     VALUE             DECEMBER 31, 2001             DECEMBER 31, 2001 ($)
                                                           -----------------------------------------------------------
         NAME                    EXERCISE    REALIZED($)   EXERCISABLE  UNEXERCISABLE   EXERCISABLE    UNEXERCISABLE
<S>                             <C>         <C>            <C>          <C>           <C>              <C>
---------------------------------------------------------------------------------------------------------------------
Phillip B. Lassiter               495,000   $12,414,665      257,328       563,242    $ 4,468,322       $3,500,955
Robert J. Genader                 210,000     7,179,612      357,741       210,259     10,103,903        2,049,051
Frank J. Bivona                         0            --      378,459        95,000     12,645,237        1,110,810
David L. Boyle                          0            --      267,500       122,500      7,568,062        3,253,886
Kevin J. Doyle                          0                     79,750        23,000      2,534,981          270,800
-------------------------------------------------------------------------------------------------------------------------

 (1)This valuation represents the difference between $57.86, the closing price of Ambac common stock on the New
    York Stock Exchange on Monday, December 31, 2001, and the exercise price of the stock options. "In-the-money"
    stock options are options for which the exercise price is less than the market price of the underlying stock on a
    particular date.
</TABLE>


THE PENSION PLAN

    Ambac's Pension Plan is a defined benefit pension plan intended to be
tax-qualified under Section 401(a) of the Internal Revenue Code.

   .   In general, officers and employees of Ambac and its subsidiaries become
       participants in the Pension Plan after one year of service. All
       executive officers participate in the Pension Plan. Non-employee
       directors of Ambac and our subsidiaries are not eligible to participate
       in the Pension Plan.

   .   Benefits under the Pension Plan vest after five years. Upon normal
       retirement at age 65, a retired employee receives an annual pension from
       the Pension Plan, subject to a statutory limit. The Pension Plan also
       contains provisions for early retirement and survivor benefits.

                                      16


<PAGE>

    The table below illustrates the annual pension benefits payable to
executive officers under the Pension Plan. The table also reflects the excess
and supplemental benefit plans that we have established to provide retirement
benefits over Internal Revenue Code limitations. We calculated the benefits
before offsetting (a) an employee's primary Social Security benefit and (b)
benefits payable under the retirement plan of Citibank, N.A., Ambac's former
parent company (the "CITIBANK PLAN"). Benefits shown in the table reflect a
straight life form of annuity benefit. If payment is made in the form of a
joint and survivor annuity, the annual amounts of benefit could be
substantially below those illustrated.


<TABLE>
<CAPTION>

  AVERAGE       YEARS OF                TOTAL YEARS OF SERVICE AT RETIREMENT
  COVERED      SERVICE AT    ------------------------------------------------------------
COMPENSATION TRANSITION DATE    10       15       20        25         30         35
----------------------------------------------------------------------------------------
<S>          <C>             <C>      <C>      <C>      <C>        <C>        <C>
----------------------------------------------------------------------------------------
 $150,000          30              NA       NA       NA         NA $   90,000 $   97,500
                   15              NA $ 45,000 $ 52,500 $   60,000     67,500     75,000
                    0        $ 15,000   22,500   30,000     37,500     45,000     52,500
----------------------------------------------------------------------------------------
  200,000          30              NA       NA       NA         NA    120,000    130,000
                   15              NA   60,000   70,000     80,000     90,000    100,000
                    0          20,000   30,000   40,000     50,000     60,000     70,000
----------------------------------------------------------------------------------------
  500,000          30              NA       NA       NA         NA    300,000    325,000
                   15              NA  150,000  175,000    200,000    225,000    250,000
                    0          50,000   75,000  100,000    125,000    150,000    175,000
----------------------------------------------------------------------------------------
1,000,000          30              NA       NA       NA         NA    600,000    650,000
                   15              NA  300,000  350,000    400,000    450,000    500,000
                    0         100,000  150,000  200,000    250,000    300,000    350,000
----------------------------------------------------------------------------------------
1,500,000          30              NA       NA       NA         NA    900,000    975,000
                   15              NA  450,000  525,000    600,000    675,000    750,000
                    0         150,000  225,000  300,000    375,000    450,000    525,000
----------------------------------------------------------------------------------------
2,000,000          30              NA       NA       NA         NA  1,200,000  1,300,000
                   15              NA  600,000  700,000    800,000    900,000  1,000,000
                    0         200,000  300,000  400,000    500,000    600,000    700,000
----------------------------------------------------------------------------------------
2,500,000          30              NA       NA       NA         NA  1,500,000  1,625,000
                   15              NA  750,000  875,000  1,000,000  1,125,000  1,250,000
                    0         250,000  375,000  500,000    625,000    600,000    875,000
</TABLE>


SERVICE FROM 1992       For service on or after January 1, 1992, the annual
                        retirement benefit is equal to 1% (without an offset
                        for any Social Security benefits) of an employee's
                        Average Compensation (as described in the next
                        sentence) multiplied by the employee's years of
                        credited service. "Average Compensation" is defined,
                        generally, as average annual base salary (which, in the
                        case of executive officers identified in the Summary
                        Compensation Table on page 14, is the amount shown
                        under the column called "SALARY") for the five highest
                        consecutive paid years of the ten years of employment
                        preceding retirement.

SERVICE BEFORE 1992     For service prior to January 1, 1992, the annual
                        retirement benefit is equal to 2% (with an offset for
                        Social Security benefits) of an employee's Average
                        Compensation (determined as if the employee retired on
                        December 31, 1991) multiplied by years of credited
                        service up to thirty years.

                                      17


<PAGE>

YEARS OF SERVICE        In view of the change in the formula for determining
                        benefits under the Pension Plan that became effective
                        as of January 1, 1992 (the "TRANSITION DATE"), we
                        prepared the above table to show the benefits payable
                        depending on how many years of service the executive
                        officer would have:

                            .   prior to the Transition Date, and

                            .   at Retirement.

                        In order to simplify the chart, we show only 0, 15 and
                        30 years of service at Transition, since those values
                        cover the range for our executive officers.

                        The years of credited service under the Pension Plan
                        (including credit for years of past service under the
                        Citibank Plan) as of December 31, 2001 for executive
                        officers named in the Summary Compensation Table were
                        as follows: Mr. Lassiter--32 years, Mr. Genader--27
                        years, Mr. Bivona--24 years, Mr. Boyle--5 years, and
                        Mr. Doyle--10 years.

                        Under the terms of a special pension arrangement for
                        Mr. Boyle, as of March 31, 2002, he will be credited
                        with an additional five years of service.

                        The benefits payable under the Pension Plan to
                        employees who receive credit for years of past service
                        under the Citibank Plan will be reduced by the amount
                        of any benefits payable under the Citibank Plan.

EMPLOYMENT AGREEMENT WITH THE CHIEF EXECUTIVE OFFICER

IN GENERAL              Ambac's employment agreement with Mr. Lassiter provides
                        that he shall serve as the Chairman and Chief Executive
                        Officer and as a director.

                        .   The agreement has a two year term, which is
                            extended on a daily basis, until Ambac or Mr.
                            Lassiter terminates it.

                        .   Mr. Lassiter is to receive a base salary at a rate
                            not less than his current rate.

                        .   He is to participate in bonus arrangements under
                            which he is eligible to earn an annual bonus based
                            on Ambac's achieving certain performance goals to
                            be established by the Board.

                        Mr. Lassiter has a supplemental pension benefit that
SUPPLEMENTAL PENSION    will be based on the benefit formula of the Pension
BENEFIT                 Plan that was in effect until the end of 1991. The
                        formula, however, will take into account his bonus
                        compensation (including that portion of his bonus paid
                        in RSUs) and will be determined without giving effect
                        to provisions of the Internal Revenue Code that limit
                        the amount of compensation that may be taken into
                        account in calculating benefits and the amount of
                        annual benefits that may be paid. Mr. Lassiter's
                        supplemental pension benefit will be reduced, however,
                        to take account of enhancements in Ambac's
                        contributions to the Savings Incentive Plan ("SIP")
                        that we introduced in 1992.

                                      18


<PAGE>

PAYMENTS                If Mr. Lassiter's employment is terminated other than
AND BENEFITS            for "Cause" (as we define it below), or if he resigns
                        for "Good Reason" (as we define it below), Mr. Lassiter
                        will:

-- AFTER                .   receive, for the remainder of the term (which
    TERMINATION OR          typically would be for two years), compensation at
    RESIGNATION             an annualized rate equal to the sum of his base
                            annual salary and target bonus at the time of
                            termination;

                        .   be fully vested in all awards under the 1991 Stock
                            Incentive Plan and the 1997 Equity Plan;

                        .   receive a lump-sum payment equal to the amount that
                            we would have contributed to his account under the
                            SIP and any nonqualified plan we maintained during
                            the two years following termination;

                        .   be credited with an additional two years of service
                            under the Pension Plan; and

                        .   continue to participate in all Ambac medical and
                            other welfare plans for a limited time following
                            termination.

-- AFTER CHANGE IN      All stock options and other awards under the 1997
        CONTROL         Equity Plan that are made to Mr. Lassiter after January
                        1, 1998 will vest in full upon the occurrence of a
                        "Change in Control" (as we define it below), whether or
                        not his employment is subsequently terminated.

                        In addition, if Mr. Lassiter's employment terminates
                        following a Change in Control, his severance amount
                        would be calculated and paid in the same manner as we
                        describe below under "Management Retention Agreements
                        with Executive Officers."

                        Mr. Lassiter would also be entitled to the "gross up"
                        payment described in that section.

OTHER RESTRICTIONS      Mr. Lassiter will be subject to certain restrictions
                        prohibiting him from engaging in competition with Ambac
                        or any of our subsidiaries (except that these
                        restrictions will not apply following a Change in
                        Control) and from divulging any confidential or
                        proprietary information he obtained while he was our
                        employee.

MANAGEMENT RETENTION AGREEMENTS WITH EXECUTIVE OFFICERS

IN GENERAL              We have entered into management retention agreements
                        with each of our executive officers (other than Mr.
                        Lassiter) to provide for payments and certain benefits
                        if they are terminated following a "Change in Control"
                        (as we define it below).

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<PAGE>

PAYMENTS                If there is a Change in Control and, within three years
AND BENEFITS            of the Change in Control, the executive's employment is
AFTER CHANGE IN         terminated by Ambac or its successor other than for
CONTROL                 "Cause" (as we define it below), or if the executive
                        resigns for "Good Reason" (as we define it below), the
                        executive will

                        .   receive cash payments equal to two times the sum of
                            (a) the executive's highest annual base salary and
                            (b) the product of the executive's highest bonus
                            percentage (as a percentage of base salary) times
                            his highest base salary;

                        .   be fully vested in all stock options and other
                            awards under the 1991 Stock Incentive Plan and the
                            1997 Equity Plan;

                        .   receive a lump-sum payment equal to the amount that
                            we would have contributed to the executive's
                            account under the SIP and any nonqualified plan we
                            maintained during the two years following
                            termination;

                        .   be credited with an additional two years of service
                            under the Pension Plan; and

                        .   continue to participate in Ambac's medical and
                            other welfare benefits programs for a limited time
                            following termination.

                        All stock options and other awards under the 1997
                        Equity Plan that are made to executive officers after
                        January 1, 1998 will vest in full upon the occurrence
                        of a Change in Control, whether or not the executive's
                        employment is subsequently terminated.

                        The agreements also provide for a "gross up" payment in
                        an amount that is intended to make the executive whole,
                        on an after-tax basis, for any excise tax (but not any
                        other tax) imposed on the payments described above.

DEFINITIONS

    The following definitions are used in the Management Retention Agreements
and the Employment Agreement with the Chief Executive Officer described above:

"CHANGE IN CONTROL"     A "Change in Control" generally occurs if

                        .   an individual, entity or group acquires beneficial
                            ownership of 20% or more of the outstanding common
                            stock. Acquisitions by Ambac and its affiliates or
                            any employee benefit plan that they sponsor and
                            certain acquisitions by persons who owned at least
                            15% of the outstanding shares of common stock on
                            January 31, 1996 are not considered a change in
                            control;

                                      20


<PAGE>

                        .   the individuals who, as of January 29, 1997,
                            constitute the Board, and subsequently elected
                            members of the Board whose election is approved or
                            recommended by at least a majority of these members
                            or their successors whose election was so approved
                            or recommended, cease for any reason to constitute
                            at least a majority of the Board; or

                        .   our stockholders approve a merger or similar
                            business combination, or a sale of all or
                            substantially all of Ambac's assets, unless the
                            Ambac stockholders immediately prior to the
                            completion of the transaction will continue to own
                            at least 70% of outstanding shares and voting power
                            of the corporation that results from the
                            transaction.

"CAUSE"                 "Cause" for an executive's termination generally
                        includes:

                        .   the willful commission of acts that are dishonest
                            and demonstrably and materially injurious to Ambac;

                        .   the conviction of certain felonies; or

                        .   a material breach of any of the executive's
                            agreements concerning confidentiality and
                            proprietary information.

                        An executive's termination will not be considered to
                        have been for Cause unless at least three-quarters of
                        the members of the Board adopt a resolution finding
                        that the executive has engaged in conduct that
                        constitutes Cause as defined in the agreement.

"GOOD REASON"           An executive will generally have "Good Reason" to
                        terminate his employment if:

                        .   there is substantial adverse change in the
                            executive's duties or responsibilities;

                        .   the office of the executive is relocated more than
                            25 miles from the location where the executive
                            worked immediately prior to the Change in Control;
                            or

                        .   Ambac fails to honor its obligations under the
                            agreement.

                        During a 30-day period following the first anniversary
                        of a Change in Control, a resignation by the executive
                        for any reason will be considered a termination for
                        Good Reason.

                                      21


<PAGE>

                   REPORT ON EXECUTIVE COMPENSATION FOR 2001
                BY THE COMPENSATION AND ORGANIZATION COMMITTEE

    The Compensation and Organization Committee of the Board administers
Ambac's executive compensation program. The members of the Committee are
independent non-employee, non-affiliated directors. The Committee has furnished
the following report on executive compensation for 2001:

WHAT IS OUR EXECUTIVE COMPENSATION PHILOSOPHY?

    The Committee has designed Ambac's executive compensation program to
support what we believe to be an appropriate relationship between executive pay
and the creation of stockholder value. To emphasize this relationship, we link
a significant portion of executive compensation to the market performance of
Ambac common stock. The objectives of our program are:

   .   To support a pay-for-performance policy that differentiates bonus
       amounts among all executives based on both their individual performance,
       the performance of their respective groups and the performance of Ambac;

   .   To align the interests of executives with the long-term interests of
       stockholders through stock option and restricted stock unit awards whose
       value over time depends upon the market value of Ambac's common stock;

   .   To provide compensation comparable to that offered by other leading
       companies in our industry, enabling Ambac to compete for and retain
       talented executives who are critical to our long-term success; and

   .   To motivate key executives to achieve strategic business initiatives and
       to reward them for their achievement.

WHAT IS OUR POSITION ON MAXIMIZING THE DEDUCTIBILITY OF EXECUTIVE COMPENSATION?

    In 1997, our stockholders approved the 1997 Executive Incentive Plan
("EIP") and the 1997 Equity Plan. We designed these plans to allow Ambac to
receive a tax deduction for incentive compensation payments to our Chief
Executive Officer and our other four most highly paid executive officers.
Without these qualifying performance-based plans, Ambac could not deduct
incentive compensation payments to the extent the amounts paid to any of these
executive officers in any year exceeded $1 million.

    The Committee intends to pursue a strategy of maximizing the deductibility
of the compensation we pay to our executives. However, we intend to retain the
flexibility to take actions that we consider to be in the best interests of
Ambac and our stockholders and which may be based on considerations in addition
to tax deductibility.

                                      22


<PAGE>

WHAT ARE THE ELEMENTS OF EXECUTIVE COMPENSATION?

    We compensate our executives through base salary, bonus (paid in a
combination of cash and restricted stock units) and long-term incentive awards
in the form of stock options. We target total compensation for our executive
officers so that at least 50% (and in the case of the Chairman, 75%) consists
of bonus and long term incentive awards. In this way, a significant portion of
the value ultimately realized by the executives will depend upon Ambac's
performance and can be considered "at risk."

    Our executives participate in retirement plans, health plans, and other
voluntary benefit plans that we make available to all Ambac employees
generally. We also provide our executives with long-term disability insurance
for the cash bonus portion of their annual compensation. In addition, we offer
our executives and managing directors a voluntary deferred compensation program.

    Ambac has also entered into management retention agreements with our
executive officers to provide for certain payments and other benefits if they
are terminated following a change in control of Ambac. These agreements, and
the employment agreement with Ambac's Chief Executive Officer, which includes
comparable change in control provisions, are discussed elsewhere in the Proxy
Statement.

HOW DID WE DETERMINE BASE SALARIES FOR 2001?

IN GENERAL              We annually review the base salaries of our executives
                        to determine if adjustments are appropriate to ensure
                        that their salaries are competitive and that they
                        reflect the executive's increased responsibilities as
                        Ambac grows.

                        For executives other than the Chief Executive Officer,
                        we also consider the recommendations of Mr. Lassiter,
                        Ambac's Chairman and Chief Executive Officer.

COMPARATIVE DATA        In conducting our review for 2001, we considered
                        comparative data prepared by both Ambac's senior human
                        resources officer and by Johnson Associates, Inc., the
                        Committee's outside consultant for executive
                        compensation.

                        The comparison group we chose for compensation purposes
                        (the "COMPARISON GROUP") consisted mainly of our
                        competitors in the financial guarantee insurance
                        industry. The index we chose for our performance graph
                        was the Investor's Business Daily Insurance
                        Property/Casualty/Title Index. This was the publicly
                        available index that we found best corresponded to our
                        business and included the greatest number of companies
                        in the Comparison Group. The performance graph follows
                        this Report in the Proxy Statement.

                                      23


<PAGE>

                        We obtained data for the Comparison Group from a number
                        of sources, including proxy statements, public
                        information available from regulatory agencies and
                        surveys by consulting firms. We used this comparative
                        data as a benchmark in reaching our own determination
                        of what were appropriate salary levels for our
                        executives.

BASE SALARIES OF        Although the data for the Comparison Group supported an
THE EXECUTIVES          increase in base salaries for 2001, the Committee
                        accepted Mr. Lassiter's recommendation to only increase
                        those base salaries of those named executives who were
                        promoted or had not received an increase last year. We
                        note that the base salaries of our executives
                        (excluding the Chief Executive Officer) are generally
                        at or below the median for salaries of executives in
                        the Comparison Group. The base salary for each of the
                        named executive officers is reported in the "Summary
                        Compensation Table" elsewhere in the Proxy Statement.

BASE SALARY OF          In light of our practice to only increase base salaries
THE CHIEF               of those Ambac executives who had not received an
EXECUTIVE OFFICER       increase in the previous year, the Committee did not
                        increase the base salary of Mr. Lassiter for 2001.
                        Mr. Lassiter's base pay remained at the 2000 level of
                        $620,000. We note that Mr. Lassiter's base salary in
                        2001 was in the median for salaries of chief executive
                        officers in the Comparison Group.

HOW DID WE DETERMINE BONUSES FOR 2001?

2001 OVERALL            In January 2002, the Committee evaluated Ambac's
PERFORMANCE             performance during 2001 under each of the nine
                        categories set out in the EIP: return on equity;
                        core/operating earnings growth; total return to
                        stockholders; expense management; risk management;
                        market share/position; industry leadership/image
                        building; new products/initiatives; and organizational
                        development/corporate culture. We did not weight the
                        categories but instead arrived at an overall "grade"
                        for corporate performance. We determined Ambac's
                        overall performance to be quite strong with all
                        performance categories ranked superior to excellent.

BONUSES FOR             The Committee awarded bonus compensation for 2001 to
THE EXECUTIVES          each executive based on the executive's scope of
                        responsibility, individual performance and specific
                        contribution to Ambac's overall performance. We again
                        considered the Chief Executive Officer's
                        recommendations and also took into account the
                        comparative data. The bonus for each of the named
                        executive officers is reported in the "Summary
                        Compensation Table" elsewhere in the Proxy Statement.

                        Under the Ambac Senior Officer Deferred Compensation
                        Sub-Plan of the 1997 Equity Plan, 25% of each executive
                        officer's bonus is paid in RSUs unless the executive
                        officer has satisfied the stock ownership target under

                                      24


<PAGE>

                        the Ambac Stock Ownership Program. An executive who has
                        met the ownership target may elect to receive 25% of
                        his or her bonus in the form of RSUs. Except for Mr.
                        Doyle, each executive officer elected to receive 25% of
                        his bonus in the form of RSUs. Bonus amounts are
                        reported in the Summary Compensation Table elsewhere in
                        this Proxy Statement.

                        The value we ascribed to the RSUs awarded under the
                        Sub-Plan for 2001 was based on a 25% discount from the
                        market value of Ambac's common stock on the date of
                        grant. The Committee decided to discount these RSUs in
                        order to account for vesting requirements and
                        restrictions on transfer of the RSUs. Accordingly, the
                        value we ascribed to the RSUs differs from the amounts
                        reported in the Summary Compensation Table under the
                        column headed "Annual Compensation--Restricted Stock
                        Units", as those amounts, in accordance with SEC
                        requirements, are based on the market price of the
                        Common Stock on the date of grant.

BONUSES FOR THE CHIEF   At our meeting in January 2001, the Committee selected
EXECUTIVE OFFICER       Messers. Lassiter and Genader as the only executives to
AND THE PRESIDENT       participate in the EIP. We then established a formula
                        under the EIP for determining Mr. Lassiter's and
                        Mr. Genader's bonuses for the performance year. The
                        formula emphasized return on equity and core earnings
                        growth.

                        In January 2002, we applied the formula and awarded Mr.
                        Lassiter a bonus of $1,240,000 and Mr. Genader a bonus
                        of $850,000. Although we had the authority to award a
                        higher bonus under the formula for Messrs. Lassiter and
                        Genader, in view of market conditions, we awarded
                        Messrs. Lassiter and Genader less than the maximum
                        amount under the formula. Pursuant to the Sub-Plan,
                        Messrs. Lassiter and Genader elected to receive 25% of
                        their bonuses in the form of RSUs having the terms
                        described above.

                        For 2002, we selected Messrs. Lassiter and Genader as
                        the only executive officers to participate in the EIP.

WHAT WERE THE LONG-TERM INCENTIVE AWARDS IN 2001?

2001 GRANTS             In 2001, we provided long-term incentive awards for
                        executives by granting stock options. These awards
                        provide compensation to executives only if shareholder
                        value increases. We believe these awards focus
                        executives on the Company's long-term success. In
                        determining the number of stock options awarded, we
                        reviewed surveys of similar awards given by companies
                        within the Comparison Group and the executive's past
                        performance. We also considered the number of stock
                        options previously granted to executives.

                        This year, we decided to award again, performance-based
                        stock options to all of our executive officers and
                        managing directors. These options vest

                                      25


<PAGE>

                        only if the share price of Ambac's common stock meets
                        certain targets. For 2001, each of the options granted
                        to the executives will vest in two equal installments
                        when the market price of Ambac common stock meets or
                        exceeds $64.00 and $78.00 for twenty consecutive
                        trading days or no later than the sixth anniversary of
                        the grant date. As we have done since 1997, we again
                        limited the term of the stock options to seven years.
                        The number of stock options awarded to each of the
                        executives (including Mr. Lassiter) was in the top
                        quarter of recent awards given by companies within the
                        Comparison Group. The number of stock options awarded
                        to each of the named executive officers is reported in
                        the "Option Grants in 2001" table elsewhere in the
                        Proxy Statement.

STOCK                   The Committee continues to apply our stock ownership
OWNERSHIP               guidelines to all managing directors and executive
GUIDELINES              officers. The guidelines set an appropriate level of
                        ownership of Ambac stock (based on the market value of
                        Ambac common stock) as a multiple of the officer's
                        total cash compensation (base salary plus cash bonus).
                        The multiple ranges from a high of seven times total
                        cash compensation (in the case of Mr. Lassiter) to a
                        low of one and one-half times total cash compensation
                        for managing directors. Messrs. Lassiter, Genader,
                        Bivona and Doyle have all met their stock ownership
                        guidelines.

                        The Committee believes these guidelines have the
                        positive effect of further aligning the interests of
                        the executives with all stockholders.



                                    THE COMPENSATION AND ORGANIZATION COMMITTEE

                                    Richard Dulude, Chairman
                                    Michael A. Callen
                                    Renso L. Caporali
                                    Jill M. Considine
                                    W. Grant Gregory

March 22, 2002

                                      26


<PAGE>

 
                              PERFORMANCE GRAPH

    The graph below compares the five-year total return to stockholders (stock
price appreciation plus reinvested dividends) for Ambac common stock with the
comparable return of two indexes: the Standard & Poor's 500 Stock Index and the
Investor's Business Daily Insurance--Property/Casualty/ Title Index.

    The graph assumes that you invested $100 in Ambac common stock and in each
of the indexes on December 31, 1996, and that all dividends were reinvested.
Points on the graph represent the performance as of the last business day of
each of the years indicated.

                                    [CHART]

          Ambac Financial                 IBD-INS. Property/Casualty/
             Group, Inc.   S&P 500 Index          Title Index
          ---------------  -------------  ---------------------------
12/31/96      $100.0         $100.0              $100.0
12/31/97       139.9          133.4               123.1
12/31/98       184.3          171.5                98.4
12/31/99       161.0          207.6                74.8
12/31/00       272.1          188.7               105.0
12/31/01       271.6          166.2                91.0

    If you had invested $100 in Ambac common stock on the date of our Initial
Public Offering (July 18, 1991), your investment would have grown to
approximately $923.91 by the end of 2001. This compares with a $100 investment
growing to approximately $370.73 in the S&P 500 Index and to approximately
$170.43 in the IBD Insurance Index.

    For this computation, we assumed that all dividends were reinvested, just
as we did for the five-year total return comparison above.

                                      27


<PAGE>

               DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD


PROPOSAL 1: ELECT SEVEN DIRECTORS

    The Board has nominated seven directors for election at the Annual Meeting.
Each nominee is currently serving as one of our directors. If you re-elect
them, they will hold office until the next annual meeting or until their
successors have been elected.

    As we noted above, each nominee also serves as a director of Ambac
Assurance.

    We know of no reason why any nominee may be unable to serve as a director.
If any nominee is unable to serve, your proxy may vote for another nominee
proposed by the Board, or the Board may reduce the number of directors to be
elected. If any director resigns, dies or is otherwise unable to serve out his
term, or the Board increases the number of directors, the Board may fill the
vacancy until the next annual meeting.

                                   NOMINEES

PHILLIP B.              CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER OF
LASSITER                AMBAC AND AMBAC ASSURANCE since April 1991. Mr.
Age 58 Director         Lassiter also served as President of Ambac and Ambac
since 1991              Assurance from August 1992 to January 2001. Mr.
                        Lassiter joined Ambac in 1991 from Citibank, where he
                        was a member of the Policy Committee and Finance
                        Committee and served as Deputy Sector Head for
                        Citibank's North American investment and corporate
                        banking activities. Mr. Lassiter also serves as a
                        director of Diebold Inc. and Worldinsure Limited.

MICHAEL A. CALLEN       PRESIDENT, AVALON ARGUS ASSOCIATES, LLC (financial
Age 61                  consulting) since April 1996. Mr. Callen was Special
Director since 1991     Advisor to the National Commercial Bank located in
                        Jeddah in the Kingdom of Saudi Arabia from April 1993
                        through April 1996. He was an independent consultant
                        from January 1992 until June 1993, and an Adjunct
                        Professor at Columbia University Business School during
                        1992. He was a director of Citicorp and Citibank and a
                        Sector Executive for Citicorp from 1987 until January
                        1992. Mr. Callen also serves as a director of Intervest
                        Corporation of New York and Intervest Bancshares
                        Corporation.


RENSO L. CAPORALI       RETIRED CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF GRUMMAN
Age 69                  CORPORATION (defense and aerospace). Dr. Caporali was
Director since 1995     Senior Vice President of Raytheon Company (electronics,
                        aircraft, engineering and construction) from April 1995
                        until he retired in May 1998. Previously, Dr. Caporali
                        had retired in June 1994 as Chairman and Chief
                        Executive Officer of Grumman Corporation. He was
                        Chairman and Chief Executive Officer of Grumman
                        Corporation from July 1990 until June 1994. Dr.
                        Caporali also serves as a director of Bank of Akron.

                                      28


<PAGE>

JILL M. CONSIDINE       CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF THE DEPOSITORY
Age 57                  TRUST & CLEARING CORPORATION since November 1999 and
Director since 2000     Chairman and Chief Executive Officer of The Depository
                        Trust Company (securities depository and clearing
                        house) since January 1999. Prior to joining The
                        Depository Trust Company, Ms. Considine served as the
                        President of the New York Clearing House Association,
                        L.L.C. from 1993 to 1999. Ms. Considine served as a
                        Managing Director, Chief Administrative Officer and as
                        a member of the Board of Directors of American Express
                        Bank Ltd., from 1991 to 1993. Prior to that, Ms.
                        Considine served as the New York State Superintendent
                        of Banks from 1985 to 1991. Ms. Considine also serves
                        as a director of the Atlantic Mutual Insurance
                        Companies and The Interpublic Group of Companies, Inc.

RICHARD DULUDE          RETIRED VICE CHAIRMAN OF CORNING INCORPORATED
Age 69                  (diversified manufacturing). Mr. Dulude was Vice
Director since 1992     Chairman of Corning Incorporated from November 1990
                        until he retired in April 1993. Mr. Dulude was Group
                        President of Corning Incorporated from 1983 until 1990.
                        Mr. Dulude also serves as a director of Landec
                        Corporation.

ROBERT J. GENADER       PRESIDENT AND CHIEF OPERATING OFFICER OF AMBAC AND
Age 55                  AMBAC. Since January 2001, Mr. Genader has served as
Director since 2001     the President and Chief Operating Officer of Ambac and
                        Ambac Assurance. From February 2000 to January 2001,
                        Mr. Genader served as Vice Chairman of Ambac's
                        Financial Insurance Business Group. From January 1998
                        to February 2000, Mr. Genader served as Vice Chairman
                        of the Specialized Finance Division when the
                        Specialized Finance Division and the Public Finance
                        Division were combined to create the Financial
                        Insurance Business Group. Mr. Genader has been a
                        director of Ambac Assurance since 1992. Mr. Genader
                        served as an Executive Vice President of Ambac from
                        1991 to January 1998 and Ambac Assurance from 1986 to
                        January 1998. He joined Ambac Assurance from Citibank
                        in 1986. Mr. Genader also served as Chairman of the
                        Association of Financial Guaranty Insurors from January
                        1994 to January 1996.

W. GRANT GREGORY        CHAIRMAN OF GREGORY & HOENEMEYER, INC. (merchant
Age 61                  banking) since 1988. Mr. Gregory retired in 1987 as
Director since 1991     Chairman of the Board of Touche Ross & Co., now
                        Deloitte and Touche. Mr. Gregory also serves as a
                        director of DoubleClick Inc.

T
he Board recommends that you vote "FOR" the election of all seven nominees for
director.

                                      29


<PAGE>


PROPOSAL 2: RATIFY SELECTION OF KPMG LLP AS INDEPENDENT AUDITORS FOR 2002

    We are asking you to ratify the Board's selection of KPMG LLP, certified
public accountants, as independent auditors for 2002. The Audit Committee
recommended the selection of KPMG LLP to the Board. KPMG LLP has served as the
independent auditors of Ambac Assurance since 1985 and of Ambac since our
incorporation in 1991.

    A representative of KPMG LLP will attend the Annual Meeting to answer your
questions.

    We are submitting this proposal to you because the Board believes that such
action follows sound corporate practice. If you do not ratify the selection of
independent auditors, the Board will consider it a direction to consider
selecting other auditors for next year. However, even if you ratify the
selection, the Board may still appoint new independent auditors at any time
during the year if it believes that such a change would be in the best
interests of Ambac and our stockholders.


 
   The Board recommends that you vote "FOR" ratification of the selection of
                   KPMG LLP as independent auditors for 2002.

                                      30


<PAGE>

                    INFORMATION ABOUT STOCKHOLDER PROPOSALS

    Under our By-laws, if you wish to nominate a director or bring other
business before the stockholders:

   .   You must notify the Corporate Secretary in writing not less than 60 days
       nor more than 90 days before the annual meeting.

   .   If we give you less than 70 days' notice of the meeting date, however,
       you may notify us within 10 days after the notice was mailed or publicly
       disclosed.

   .   Your notice must contain the specific information required in our
       By-laws.

    Please note that these By-laws requirements relate only to matters you wish
to bring before your fellow stockholders at an annual meeting. They do not
apply to proposals that you wish to have included in our proxy statement.

    If you wish to submit proposals to be included in our 2003 proxy statement,
we must receive them on or before Friday, November 29, 2002. Please address
your proposals to: ANNE G. GILL, CORPORATE SECRETARY, AMBAC FINANCIAL GROUP,
INC., ONE STATE STREET PLAZA, NEW YORK, NEW YORK 10004.

    If you would like a copy of our By-laws, we will send you one without
charge. Please write to the Corporate Secretary of Ambac.

                              By order of the Board of Directors,


                                         /s/ Anne G.Gill
                                          Anne G. Gill

                         First Vice President, Corporate Secretary and
                                   Assistant General Counsel

March 28, 2002

                                      31


<PAGE>

                                                                     APPENDIX A

                          AMBAC FINANCIAL GROUP, INC.

           CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

MISSION

The mission of the Ambac Financial Group, Inc. Audit Committee (the
"COMMITTEE") is to monitor the corporate control environment of Ambac Financial
Group, Inc. (the "COMPANY"). The Committee will assist the Board of Directors
in fulfilling its oversight responsibilities by reviewing: 1) the financial
information that is provided to stockholders; 2) the effectiveness of internal
controls in areas of greatest exposure to loss; 3) the compliance with relevant
legal, regulatory and accounting requirements and 4) the audit process of the
Company. It is the objective of the Committee to maintain free and open means
of communications among the Board, the independent auditors, the internal
auditors and the financial and senior management of the Company.

MEMBERSHIP AND MEETING REQUIREMENTS

The Committee will meet at least four times per year in conjunction with the
Company's quarterly board meetings.

The Committee will be comprised of at least four non-executive independent
directors who are financially literate or who become financially literate
within a reasonable period of time. Members of the Committee shall be
considered independent if they have no relationship to the Company that will
interfere with their exercise of independent judgment from management and the
Company. At least one member of the Committee will have accounting or related
financial management expertise, as such qualification may be determined in the
business judgment of the Board.

As directed or required by the Audit Committee, the Company's Director of
Internal Audit, Chief Financial Officer, representatives from the Company's
Independent Auditors, the Chief Executive Officer, President or other members
of management of the Company will attend Audit Committee meetings.

DUTIES AND RESPONSIBILITIES

The Company's management is responsible for preparing the Company's financial
statements and the independent auditors are responsible for auditing those
financial statements. The Committee is responsible for overseeing the conduct
of these activities by the Company's management and the independent auditors
and not to plan or conduct audits or to determine that the Company's financial
statements are complete and accurate and are in accordance with generally
accepted accounting principles. In carrying out its oversight responsibilities,
the Committee is not providing any expert or special assurance as to the
Company's financial statements or any professional certification as to the
independent auditor's work. While there is no

                                      A-1


<PAGE>

"blueprint" to be followed by the Committee in carrying out its duties and
responsibilities, the following should be considered within the authority of
the Committee:

   .   Prepare a Report, for inclusion in the Company's proxy statement as
       required by the rules of the Securities and Exchange Commission,
       disclosing that the Committee:

       1)  reviewed and discussed the audited financial statements with
           management;

       2)  discussed with the independent auditors the matters required by
           Statement on Auditing Standards No. 61 (which requires the
           independent auditors to communicate to the Committee matters related
           to the conduct of the audit ); and

       3)  received the written disclosures and the letter from the auditors
           regarding the auditors' independence, including all non-audit
           services and fees and discussed the auditors' independence as
           required by Independent Standards Board Standard No. 1 with the
           auditors (which requires the independent auditors to disclose any
           relationship that could impact the auditors' objectivity and
           independence);

       and that, based on the review and discussions referred to in paragraphs
       (1) through (3), recommended to the Board of Directors that the
       financial statements be included in the Company's annual report on Form
       10-K (or 10-KSB).

   .   Review and reassess the adequacy of the audit committee charter on an
       annual basis.

   .   Together with the Board, review and evaluate the performance of the
       independent auditors, which are ultimately accountable to the Board and
       the Committee, and annually recommend to the Board the selection of the
       independent auditors or recommend that the Board replace the independent
       auditors, when circumstances warrant.

   .   Evaluate whether management is setting the appropriate control
       environment by communicating the importance of internal controls.

   .   Review the Company's accounting practices, internal controls, and
       business ethics practices, as appropriate, including the monitoring of
       the enforcement of the Company's Code of Business Conduct.

   .   Review the scope of the annual audit of the Company's financial
       statements, the fees for the audit and for non-audit services, the
       findings and recommendations of the independent auditors, and
       management's response and implementation of such recommendations.

   .   Review the Company's internal audit function, including its
       independence, the scope of the audits, the findings of the internal
       auditors, and management's response and implementation of such
       recommendations.

   .   Review with management and the independent auditors the Company's
       quarterly financial statements prior to the filing of its Form 10-Q.

   .   Meet with management and internal auditors of the Company to review
       compliance with risk and underwriting policies related to its insured
       book of business.

                                      A-2


<PAGE>

   .   Review annually with the Company's general counsel, and outside counsel,
       when appropriate, legal and regulatory matters, if any, that may have a
       material impact on the financial statements and the Company's compliance
       policies.

   .   Conduct or authorize investigations into any matters within the
       Committee's scope of responsibilities, including retaining outside
       counsel or other consultants or experts for this purpose.

   .   Perform such additional activities, and consider such other matters,
       within the scope of its responsibilities, as the Committee or the Board
       deems necessary or appropriate.

In carrying out its responsibilities, the Committee may assume other
responsibilities as it deems necessary to ensure that the corporate accounting
and reporting practices are appropriate given the circumstances of the Company.

                                      A-3


<PAGE>

[LOGO] Ambac
                  ONE STATE STREET PLAZA, NEW YORK, NY 10004


<PAGE>

                                   ---------------------------------------------
                                                Vote by Telephone
                                   ---------------------------------------------
                                   Have your proxy card available when you call
                                   the Toll-Free number 1-800-542-1160 using a
                                   touch-tone telephone. You will be prompted to
                                   enter your Control Number and then you can
                                   follow the simple prompts that will be
                                   presented to you to record your vote.

                                   ---------------------------------------------
                                                Vote by Internet
                                   ---------------------------------------------
                                   Have your proxy card available when you
                                   access the website http://www.votefast.com.
                                   You will be prompted to enter your Control
                                   Number and then you can follow the simple
                                   prompts that will be presented to you to
                                   record your vote.

                                   ---------------------------------------------
                                                Vote by Mail
                                   ---------------------------------------------
                                   Please mark, sign and date your proxy card
                                   and return it in the postage-paid envelope
                                   provided or return it to: Corporate Election
                                   Services, PO Box 1150, Pittsburgh, PA 15230.

    --------------------------  ------------------------  ----------------------
        Vote by Telephone           Vote by Internet           Vote by Mail
      Call Toll-Free using a     Access the website and     Return your proxy
      touch-tone telephone:         cast your vote:        in the postage-paid
          1-800-542-1160        http://www.votefast.com     envelope provided.
    --------------------------  ------------------------  ----------------------

                          Vote 24 hours a day, 7 days a week!
 Your telephone or Internet vote must be received by 11:59 p.m. Eastern Daylight
           Time on May 6, 2002, to be counted in the final tabulation.

         -------------------------------------------------

              Your Control Number is:

         -------------------------------------------------

         . Please fold and detach card at perforation before mailing. .
--------------------------------------------------------------------------------
AMBAC FINANCIAL GROUP, INC.                                             PROXY
--------------------------------------------------------------------------------
This proxy is solicited on behalf of the Board of Directors for the Annual
Meeting of Stockholders on May 7, 2002.

The undersigned hereby appoints Phillip B. Lassiter, Frank J. Bivona and Anne G.
Gill, and each of them, proxies, with power of substitution, to vote all shares
of Common Stock of Ambac Financial Group, Inc. which the undersigned is entitled
to vote at the Annual Meeting of Stockholders to be held on Tuesday, May 7, 2002
at 11:30 a.m., local time, at Ambac's executive offices, One State Street Plaza,
New York, New York, and at any adjournments of the Annual Meeting. The proxies
have the authority to vote as directed on the reverse side of this card with the
same effect as though the undersigned were present in person and voting. The
proxies are further authorized in their discretion to vote upon such other
business as may properly come before the Annual Meeting and any adjournments of
the Annual Meeting. The undersigned revokes all proxies previously given to vote
at the Annual Meeting.


                                   _____________________________________________
                                   Signature(s)


                                   ____________________________________________
                                   Signature(s)

                                   IMPORTANT: Please sign EXACTLY as your
                                   name(s) appears on the left. Joint owners
                                   should each sign. If you are signing as an
                                   executor, administrator, trustee, guardian,
                                   attorney or corporate officer, please give
                                   your full title.

                                   Date:____________________________ , 2002


<PAGE>

                             Your vote is important!

     If you do not vote by telephone or Internet, please sign and date this
     proxy card and return it promptly in the enclosed postage-paid envelope, or
     otherwise to Corporate Election Services, PO Box 1150, Pittsburgh, PA
     15230, so that your shares may be represented at the Meeting. If you vote
     by telephone or Internet, it is not necessary to return this proxy card.

         . Please fold and detach card at perforation before mailing. .
--------------------------------------------------------------------------------
AMBAC FINANCIAL GROUP, INC.                                              PROXY
--------------------------------------------------------------------------------

Please indicate below how you wish your shares to be voted. Unless you indicate
otherwise, your proxy will vote "FOR" all of the Proposals on this card. We
cannot vote your shares unless you sign, date and return this card.

THE BOARD OF DIRECTORS RECOMMEND THAT YOU VOTE "FOR" ALL PROPOSALS.


<TABLE>
 1.  Elect Seven Directors
<S>                                     <C>                       <C>                      <C>
     Nominees: (01) Phillip B. Lassiter (02) Michael A. Callen   (03) Renso L. Caporali   (04) Jill M. Considine
               (05) Richard Dulude      (06) Robert J. Genader   (07) W. Grant Gregory

     [_] FOR all nominees listed above.               [_] WITHHOLD AUTHORITY
         (Except as listed to the contrary below.)        to vote for all nominees listed above.
</TABLE>



        To withhold authority to vote for any individual nominee, write that
        nominee's name or number below.

________________________________________________________________________________

 2.  Ratify Selection of KPMG LLP as Independent Auditors for 2002.

     [_] FOR               [_] AGAINST          [_] ABSTAIN

                     TO BE SIGNED AND DATED ON REVERSE SIDE