Ambac Financial Group, Inc. 3 rd Quarter 2008 Financial Highlights November 5, 2008

Transcription

1 Ambac Financial Group, Inc. 3 rd Quarter 2008 Financial Highlights November 5, 2008.

2 Market Overview & Business Update Market Overview: Financial markets are in disarray (Freddie, Fannie, Lehman, Bank Failures etc.) Mortgage markets continue their decline; increasing stress on consumer assets Home prices have continued to decline, resulting in higher potential loss severity Contagion into other markets has increased risk of broader economic disruption; further increasing stress on homeowners Business Update: Ratings: Moody s increased cumulative loss assumptions and subsequent decision to place Ambac s ratings on review Liquidity: Ratings-driven liquidity requirements in Ambac s Financial Services Business The current mortgage-environment is impacting both the assets and liabilities of our Financial Services business 2

3 3Q Highlights: Portfolio Summary 2Q Direct RMBS trends reflected a false positive : After initial signs of stabilization, recent second lien product performance has disappointed High Grade CDO of ABS impairments of $2.5 billion mainly reflect: Inter alia, increased cumulative assumptions across the RMBS securities underlying the CDOs, driven by recent mortgage data including loan loss severities Large-scale direct mortgage g support will benefit the RMBS underlying Ambac s High Grade CDO of ABS portfolio by diminishing the possibility of extreme loss assumptions As TARP and other Government programs are implemented, impairments should stabilize and potentially improve Rating Agency tail loss estimates are likely to moderate 3

4 Government and Bank Initiatives will likely help establish a floor for housing market fundamentals July 30, Economic and Housing Recovery Act of 2008 ( EHRA ) HOPE for Homeowners program provides for mortgage assistance for homeowners at risk of foreclosure October 3, Emergency Economic Stabilization Act of 2008 ( EESA ) The EESA gave the Treasury authority to deploy up to $700 billion, via the Troubled Asset Relief Program (TARP), into the financial system with an objective of restoring liquidity and stability to the U.S. capital markets On October 24, 2008 Capital Purchase Program Treasury announced plans for direct preferred stock investments in bank holding companies, financial holding companies, insured depository institutions and savings and loan holding companies JPM, B of A (Countrywide), FDIC (Indymac) have initiated programs to assist seriously delinquent borrowers 4

5 Ambac: Business Priorities Managing g and De-risking the Portfolio: Aggressively remediating RMBS and CDO risk Strengthening capital position through net exposure reduction Restructured and enhanced Risk Management function and culture Made significant progress towards establishing a pure play financial guarantor focused on municipal and global infrastructure Developing non-aaa strategy for AAC focused on reinsurance, remediation and surveillance capabilities, and primary insurance in select markets 5

6 Business model and demand for financial guarantee will prove to be resilient despite market pressures Financial Guarantee Recent high profile bank and broker/dealer failures highlight the strength of the financial guarantee business model Affords Ambac the ability to realize the benefits of TARP and other governmental programs, private sector remedies, and remediation gains No run on the bank risk Demand for Financial Guarantee remains robust Fragmented and less transparent issuer market 60% of municipal debt continues to be held by retail investors Credit market losses demonstrate value (RMBS, Jefferson County, Vallejo) Budgetary and economic pressure on municipalities Systemic widening of credit spreads and reduced liquidity in the municipal markets Limited supply (Aaa capacity, DPLOCs); a significant portion of muni market continues to be enhanced Direct feedback from issuers, intermediaries, and investors support demand thesis Fragmenting of distribution channel will further drive demand Value of Financial Guarantee broader than insurance and includes structuring, surveillance, and remediation (including control rights) 6

7 3 rd Quarter 2008 Financial Summary.

8 Summary Financial Results ($mm) 3rd Quarter 2008 YTD 2008 Net Premiums Earned $282.3 $794.7 Net Investment Income $126.8 $381.1 Net Change in Fair Value of Credit Derivatives ($2,705.2) ($3,436.8) Loss and LAE $607.7 $1,311.2 Financial Services Pre-Tax Loss ($125.4) ($578.4) Net (loss) Income ($2,431.2) ($3,268.4) GAAP net loss: $2.4 billion or $8.45 per share Increased loss provision for loss and loss adjustment expenses relates, primarily, to second-lien RMBS transactions Mark-to-market loss on the Credit Default Swaps of $3.4 billion (YTD) continues to be driven primarily il by lower prices and downgrades d of mortgage related CDO exposures 8

9 CORE versus Operating Earnings Third Quarter Nine Months Net (loss) per share/income per diluted share ($8.45) ($3.53) ($13.66) $0.25 Effect of net security losses Less impairment losses (5.67) (12.26) 26) Operating (loss) earnings ($7.81) $1.89 ($15.34) $5.88 Effect of accelerated earnings ($0.30) ($0.10) ($0.81) ($0.57) Core (loss) earnings ($8.11) $1.79 ($16.15) $5.31 Operating earnings exclude the impact of unrealized gains/losses from the CDO portfolio, but not the impact of estimated credit impairment within the portfolio Core earnings exclude the net income impact of accelerated earned premiums from refundings 9

10 Premiums and investment income contribute to revenue stability Total Financial Guarantee Core Operating Revenues $ thousands $306,753 $314,154 $314,125 $329,661 $321,945 $315,746 $294,377 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Investment Income Fees on Credit Derivatives Other income Normal Earned Premiums Despite insignificant business volume, total financial guarantee operating revenues, which includes normal earned premiums, fees on credit derivative derivatives contracts and investment income remains fairly steady Deferred earnings which represent future earnings on premiums already collected and the future value of installment premiums, amount to $5.6 billion at 9/30/08. $2.2 billion of premiums already collected and invested in our conservative investment portfolio; and $3.4 billion of premium estimated will be paid to us in installment premiums over the lives of the transactions 10

11 3Q Impact of Mortgage Market Deterioration Financial Guarantee Financial Services Loss & Loss Expectation Net Change in Net Realized Net Fair Value of Derivative Investment Mark-to-Market Credit Derivatives Products Losses(Gains) Losses on TRS Asset-backed securities, including ABS of CDO: - 2, RMBS - Subprime (12.1) 1) RMBS - Alt-A (11.9) RMBS - Second Lien RMBS - Other VRDO/ARS Total , Grand Total ,459.8 Substantially all of the credit and market deterioration is attributable to Ambac s mortgage-related exposures For the third quarter 2008, estimated credit impairments on CDOs of ABS amounted to approximately $2.5 billion Net loss reserves on our direct mortgage exposures increased $352 million during the quarter. Total RMBS incurred for the quarter was $539 million During the quarter we paid about $187 million in RMBS claims Million 11

12 Loss Reserves and Credit Derivative Impairments End of Period Balances Amounts in $ Millions 4,764 3,106 2,046 1, , Q07 1Q08 2Q08 3Q08 Case ACR Credit Derivative Impairment 12

13 Assessment of Ambac s Capital Adequacy: Rating Agency Models Cumulative Loss Projections Sub-Prime Ambac S&P Moody s* Severity 55% 50% 55% * Reflects published estimates Moody s excess capital as of the date of the last review (September 2008): approximately $3.1 billion S&P s excess capital position, based on the most current model run: approximately $1.9 billion (Ambac estimate) Ambac s reserves and impairment, to date, are within S&P s estimates of losses Rating Agency models do not account for the following: remediation, commutation, restructuring or any housing-related impact of TARP 13

14 $10 Billion Financial Guarantee Investment Portfolio Fixed Income Investment Portfolio As of September 30, 2008 Weighted Average YTD INCOME ANALYSIS BY TYPE OF SECURITY Fair Amortized Yield to After-Tax Investment Investment category ($ thousands) Value Cost Maturity Yield Income Financial Guarantee investments: Long-term investments U.S. government obligations $281,578 $284, % 1.60% $5,582 U.S. agency obligations , , % 2.64% 10,427 Municipal obligations ,682,720 6,884, % 4.48% 275,914 Foreign obligations , , % 2.99% 10,904 Corporate obligations , , % 3.93% 18,326 Mortgage and asset-backed securities , , % 3.98% 33, Total long-term investments ,727,888 8,947, % 4.23% 354,545 Short-term investments ,147,361 1,147, % 3.12% 18,693 Other ,378 12,904 11,311 Total Financial Guarantee investments ,887,627 10,107, % 4.10% 384,549 Highly Liquid id Securities Fair Amortized ($ thousands) Value Cost Short Term $1,147,361 $1,147,361 US Treasury 281, ,787 US Agency Senior Debentures 249, ,673 US Agency MBS 688, ,050 Muni Pre-Refunded 557, ,857 Muni Natural AAA 844, ,200 Muni Natural AA and Insured AA Underlying 3,906,886 4,051,156 $7,674,972 $7,861,083 14

15 Holding Company Liquidity AFG Cash at 9/30/2008 $186,689,833 October Dividend $54,634,950 Expenses $(2,826,183) Common Dividends $(2,868,000) Interest $(26,195,313) Interest Income $ 1,050,547 Miscellaneous $2,559,465 AFG projected cash at 12/31/2008* $213,045,299 Annual Debt Service $113,315,625 Debt Service Coverage 1.88 (*) Assumes inter-company loans are settled by quarter end Ambac has been building a cash cushion at the holding company to preserve flexibility $54 mm of dividends were paid in October 2008 Statutory net income for 2008 will prohibit dividends in 2009 ABK Cash Needs: $113 mm per year in interest $12 mm in anticipated expenses for

16 Statutory Capital and Dividends Changes to Ambac Assurance s Surplus to Policyholders for the 3Q is as follows: ` 1Q Q Q 2008 YTD 9/30/2008 Beginning Surplus to Policyholders $3,316,143 $3,629,301 $3,453,285 $3,316,143 Capital Contribution 1,310, ,310,706 Net (Loss) Income (844,991) 384,123 (2,111,917) (2,572,785) Dividends Paid (54,635) (54,635) (54,635) (163,905) Tax and Loss Bonds Benefit - (371,371) 371) - (371,371) 371) Reversal Contingency Reserves and Other (97,922) (134,133) (198,230) (430,285) Ending Surplus to Policyholders $3,629,301 $3,453,285 $1,088,503 $1,088, Dividends Limitation, without special approval, is $331 mm (or 10% of 12/31/07 Surplus to Policyholders) Dividends from Ambac Assurance to the parent company for 2008 totaled $216 mm (or $54 mm a quarter) 16

17 Financial Services Businesses AAC Rating Downgrades and Liquidity Requirements As of 9/30/08, aggregate g collateral and prospective p cash requirements for the GIC and Global Derivatives portfolios (excluding Total Return Swaps) at various AAC rating levels and incorporating the impact of Lehman s recent bankruptcy filing are as follows: Current AA/Aa3 A+/A1 A/A2 A-/A3 BBB+/ Baa1 BBB/ Baa2 BBB-/ Baa3 Cumulative Collateral Requirement $2.3B $3.4B $4.0B $4.0B $3.8B $3.7B $3.6B Prospective Cumulative Cash to be $0.4B $1.2B $1.5B $1.7B $2.1B $2.2B 2B $2.3B Returned Total Collateral and Cash $2.7B $4.6B $5.5B $5.7B $5.9B $5.9B $5.9B Incremental Collateral and Cash from $1.9B $2.8B $3.0B $3.2B $3.2B $3.2B AA/Aa3 Management continues to engage in dialogue with the Office of the Commissioner of Insurance for the State of Wisconsin (OCI) regarding the financial support needed from AAC in the event of additional credit rating downgrades 17

18 Portfolio Performance Update.

19 Mortgage-Related Insured Portfolio: 3Q Performance Update Direct MBS: $42.2 billion of net par insured as of 9/30/08 versus $ 44.5 billion at 6/30/08 Second Liens: Closed-End Seconds $4.6 billion HELOC: $10.8 billion Mid-Prime (Alt-A): $6.2 billion Sub-Prime: $7.5 billion CDO of ABS (>25% MBS) portfolio: $30 billion of net par insured High-Grade CDO of ABS: $25.5 billion Mezzanine CDO of ABS: $0.5 billion CDO of CDOs: $1.1 1 billion Includes commitment to provide a financial guarantee on CDOs: $2.9 billion 19

20 Mortgage-Related Reserves and Impairment (9/30/2008: $6.0 Bn) Direct MBS: $1,248 mm CDO of ABS: $4,759 mm HELOC: $468 mm CDO^2: $932 mm CES: $486 mm Mid-prime: $168 mm Hi-Grade & Other CDOs of ABS: $ 3,827 mm Sub-prime: $4 mm Other: $124 mm 20

21 Direct MBS.

22 Direct MBS Portfolio Composition and Vintage $42.2 Billion in Net Par Outstanding as of 9/30/08 Outstanding Net Par by Vintage Mortgages - Other 3.6% Manufactured Housing Pls 3.8% Net Interest Margins (NIMs) 0.1% $ Billions 2007 Residential Mortgages Prime 3.9% Pooled RMBS outside the US 90% 9.0% HELOC 25.5% Affordability Mortgage Product (i/o, neg am) 10.8% Residential Mortgages Mid-Prime Pi 14.7% Residential Mortgages Sub-Prime 17.7% Closed End 2nd Liens 10.9% pre-1998 All Other Sectors Subprime HELOC CES Mid-Prime $10.8 billion or 70% of Closed-End Second and HELOC exposure was originated in

23 Mortgage Related Insured Portfolio: Rating distribution as of 9/30/2008 2Q08 ABK Direct MBS Rating Distribution Net Par Outstanding $45 bn 3Q08 ABK Direct MBS Rating Distribution Net Par Outstanding $42 bn BIG AAA 17% AAA BIG 18% 27% 24% AA 7% BBB 36% A 17% AA 3% BBB 35% A 16% Ratings deterioration in the direct MBS book is driven by the second lien product: CES and HELOC account for 70% of the direct MBS rated below investment grade 23

24 MBS: Collateral Performance Trends HELOC and Closed End Seconds: As the exposures season, the combination of a shuttered non-conforming mortgage market, housing price depreciation, and poor origination continue to cause severe underperformance in the 2006/2007 vintages. Key factors driving collateral performance: Initial roll rates increased with subsequent rolls remaining severe Claims are more front loaded decreasing the positive impact of discounting Alt-A Alt-A A reserves are down $12 million from 2Q08 Slow prepayment rates increase spread and cause modeled losses to occur over a longer period Sub-Prime Reserves are down $14 million from 2Q08, mainly on slower prepayment rates as with the Alt-A s Lot Loans Newly reserved in 3Q08, exposure limited to four transactions ($344 mm net par) Limited refinancing opportunities available for underlying borrowers 24

25 Second Lien BIG and Reserving Summary HELOC Closed-End Seconds (CES) (BIG Par as a % of Total HELOC Par) Change in 3rd Quarter Reserves Net Outstanding Reserves (BIG Par as a % of Total CES Par) Change in 3rd Quarter Reserves Net Outstanding Reserves 35.6% / (7 deals) $133 mm $468 mm 65.8% / (8 deals) $170 mm $486 mm ABK Portfolio Update: 7 ($3.8 bn) of 46 transactions are now BIG, representing 36% of net par of the HELOC portfolio The 7 transactions are represented by 5 issuers and were originated in ABK Portfolio Update: 8 (representing $3.0 bn) of 31 transactions are now BIG, and represent 66% by net par of the CES portfolio These 8 transactions are represented by 6 issuers and were originated in

26 Select Second Lien Deals: Day Delinquency Trends Selected ABK 2nd Lien MBS: DQ 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% FFM07FFC, Group 1 FFM07FFC, Group 2 BSL07001, Group 2 BSL07001, Group 3 Average Source: Intex 26

27 Select Second Lien Deals: Voluntary Prepayment Trends Selected ABK 2nd Lien MBS: Voluntary Prepayments 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% FFM07FFC, Group 1 FFM07FFC, Group 2 BSL07001, Group 2 BSL07001, Group 3 Source: Intex 27

28 HELOC Performance Summary Bank Originated Non-Bank Originated Originated <2005 Net Par Outstanding $4,355 $4,141 $2,257 as of 9/30/08 Reserves $42 $444 $0 Weighted Average 60+ dlq. (incl. FC & REO) Weighted Average Loan Age (months) 0.4% 8.5% 6.5% Certain HELOC transactions have continued to show significant deterioration over the last few months HELOC claims paid in the quarter amounted to $79 mm or 42% of claims paid during the quarter 28

29 CES Performance Summary 80/20 Piggy-back CES with ($mm) Conventional CES High concentration of Purchase and Stated Doc Loans Net Par Outstanding at 9/30/08 $2,601 $2,025 Reserves $66 $419 Weighted Average 60+ del. (including FC & REO) 8.6% 14.6% Weighted Average Loan Age (months) Conventional CES showing acceptable performance despite selected increases in delinquencies and cumulative collateral loss Mainly refinance, full doc or streamlined loans with good geographic diversification and lower CLTVs Piggy-back CES with high concentrations of purchase and stated doc loans encompass almost 100% of CES reserves Claim payments in the quarter totaled $106 mm 29

30 Strong MBS Remediation Progress in the Quarter Breach of representation Our re-underwriting activities for the quarter increased estimated remediation recoveries by $250 mm relative to last quarter for a total offset of $512 mm This increase arises from additional re-underwriting of loans and additional put back notices issued to sponsors in nine transactions On average, 78% of loans re-underwritten uncovered breaches of reps and warranties with most loans exhibiting multiple breaches Overall loss mitigation We conducted five servicer reviews, approved two servicer transfers and have two pending transfers We are working with servicers to maximize collateral performance through loan modification programs based on federal guidelines as well as servicer recommendations 30

31 CDO of ABS Performance Update.

32 Declining Rating Trend of the ABS CDOs Continues CDO of ABS Insured Par vs. Ambac Rating Pa ar Amount ($/m mm) 35,000 30,000 25,000 20,000 15,000 10,000 5, Q2008 2Q2008 3Q2008 AAA AA A BBB BIG Commuted (AA Bespoke) Third quarter impairment driven by deterioration in the underlying sub-prime and Alt-A MBS collateral that was largely rated AA/A at inception Inner CDO bucket writedowns increased moderately during the quarter Cumulative loss estimates on all the MBS collateral have increased (e.g and 2007 sub-prime cumulative loss estimates have increased to 19% and 21% from 16% and 18%, respectively 32

33 CDO Loss Mitigation: Exercise of Control Rights Acceleration/Restructuring Accelerated four transactions totaling $4.2 billion of net par Restructuring 2 deals in discussion with counterparties Several other deals in early stage discussions Other Non-restructuring Remedies Enforcing indenture waterfalls Conducting investigative work on collateral Replacing collateral managers Verifying funding requirements 33

34 CDO Loss Mitigation: Risk Reduction through Commutation Commutation Progress Focused on targeted negotiations with select counterparties Executed AA Bespoke eliminating $1.4 billion of par outstanding and substantially reducing tail risk TARP and other governmental programs have slowed commutation progress Ambac s current commutation strategy is focused on transactions where: Counterparties have a significant exposure to Ambac Views on projected performance of the underlying transaction (including the cash flow profile) converge with those of the counterparty to allow for a meaningful negotiation Key factors in determining a commutation price: Ambac s estimate of ultimate payment, timing of potential cash flows and capital implications of reducing risk To date, Ambac has met with all selected counterparties and continues to actively negotiate the potential commutation of selected transactions 34

35 Appendix 1: Ambac Investment Agreement Business 3Q08.

36 Investment Agreement Book - Liability Details Diverse source of funds with differing types of withdrawal probability, frequency and magnitude ($MM) 3Q08 Book Value 2Q08 Book Value Change Book Value Purpose Contingent Draw 3,333 3,835 (502) ABS CDO (9 deals) 1,562 1,910 (348) Escrow of funded debt & equity for CDS claims, P&I payment CLN (15) 1,109 1,272 (163) Escrow of funded debt for CDS claims, P&I payment (62% AAA debt) Debt Service (79) Reserve used to pay debt service if pledged revenues insufficient Structured Insurance (2) Escrow of funded debt for insurance portfolio experience, P&I payment Capital Interest (3) (6) Pay debt service interest costs during the development stage Fixed Draw 1,570 2,692 (1,122) 122) Construction (7) 670 1,005 (335) Escrow of debt proceeds for the payment of international project costs CLN (8) (761) Escrow of funded debt for CDS claims (only at maturity), P&I payment Defeasance (37) (26) Escrow of debt or equity proceeds to secure final payment at maturity Full Flexible (60) Construction (3) (60) Escrow of debt proceeds for the payment of municipal project costs Float Fund (4) Escrow of recurring cash proceeds for the payment of debt service Total 5,059 6,743 (1,684) * Book Values reflect hedge adjustments 36

37 IA Projected Runoff IA Balance is projected to be approximately $2.7B in 5 years $5,500,000,000 $5,000,000,000 $4,500,000,000 Balance $4,000,000,000 $3,500,000,000 $3,000,000,000 $2,500,000,000 $2,000,000,000 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 37

38 Investment Agreement Book Downgrade Cure Provisions Ample resources exist to satisfy cure provisions The following table illustrates the estimated total collateral requirement and cumulative cash returned at various Ambac Assurance Corp. rating levels based on 9/30/08 balances: Current AA/Aa3 A+/A1 A/A2 A /A3 BBB+/Baa1 Cumulative Collateral Requirement $2.1 $3.1 $3.7 $3.7 $3.5 Cumulative Terminations $0.4 $1.2 $1.5 $1.5 $1.9 Total Cumulative Collateral and Terminations $2.5 $4.3 $5.2 $5.2 $5.4 Market Value Of Investment Agreement Asset Portfolio at 9/30/08 $3.7 $3.7 $3.7 $3.7 $3.7 Intercompany Payable $0.6 $0.6 $0.6 $0.6 $0.6 MV of Investments in Excess of/(deficient to) Cumulative Collateral Requirements and Terminations $0.6 ($1.2) ($2.1) ($2.1) ($2.3) Rating requirements and cure provisions vary across deals Typical cures include funds to be returned, collateral to be pledged, an additional collateral haircut based on asset type, and a replacement guarantor In the event of cash and/or security shortfalls in the investment agreement business, management anticipates utilizing the resources of AAC through intercompany transactions, pending approval by the Office of the Commissioner of Insurance for the State of Wisconsin AAC s investment portfolio is valued at approximately $10B with over $1B in cash and short- term securities as of September 30, 2008 Total cumulative collateral and termination requirements do not change from the BBB+/Baa1 level to the BBB/Baa2 or BBB-/Baa3 ratings level 38

39 Adjusted Net Book Value As of September 30, 2008 In Billions: Book Value of Securities: $5.17 Add: GAAP Impairment: $0.39 Less: Expected Impairment: ($0.04) Total Adjusted Book Value of Securities: $5.52 Add: Market Value of Interest Rate Derivatives: $0.17 Less: Net Intercompany Payable: ($0.56) Book Value of Liabilities: ($5.06) Adjusted Net Book Value: $

40 Investment Agreement Book - Investment Portfolio Market Value Change as of September 30, 2008 % of Book Value Book Value at 9/30/08 Market Value at 9/30/08 Market Value at 6/30/08 $ Change Market Value % Change Market Value Segment RMBS first lien Alt-A 53.5% 2,752 1,486 1,797 (311) -17.3% Student Loans 10.8% (72) -12.8% Credit Cards 7.3% (80) -18.0% U.S. GSE mortgages 7.3% (18) -4.6% Other 5.4% (129) -35.3% U.S. Agency obligations - Zero 3.5% (129) -39.7% Corporate obligations 2.4% (82) -40.6% Structured Insurance 2.5% % U.S. Agency obligations 1.6% (0) -0.1% CDO/CLO 1.6% (1) -1.5% U.S. Government obligations 1.1% % RMBS - Second lien 1.0% (85) -68.9% Auto Related 0.9% (3) -8.8% Municipal obligations - Zero 0.4% (0) -0.8% RMBS - Prime 0.3% (1) -4.2% Airplanes 0.2% (44) -84.5% Short-term 0.0% (568) -99.6% Municipal obligations 0.0% (24) % Total 100% 5,142 3,682 5,152 (1,470) -28.5% Weighted Avg Market Price 64.4% 74.1% -9.7% The $1500mm decrease in market value from 2Q08 to 3Q08 is due to: $1100mm in GIC withdrawals funded by: $400mm sale and maturities of securities $100mm of amortization $600mm reduction in Short-term securities $400mm in reduction in securities market value 40

41 Investment Agreement Book Investment Portfolio Overview Diversified high quality assets with long term positive profile Consists predominantly of high grade fixed income securities diversified across ABS, RMBS, GSE, Corporate and Taxable Municipal assets. About 57% in book value is rated Aaa/AAA including wrapped securities, i U.S. government, agency obligations and cash. About 75% in book value is rated Aa/AA or better when ignoring the wrap. The decline in market value during 2008 is across all credit sectors: RMBS Alt-A: A collapsing housing market combined with banks tightened credit standards are causing unprecedented delinquencies. The bid-side reflects the lack of liquidity in the market. The lack of trading signifies that sellers are waiting to see the impact of the governments market intervention (TARP). Ambac s mortgage portfolio receives a granular evaluation from a 3 rd party analytics source. Student Loans & Cards: FFELP student loan and credit card deals are trading in the current pay tranches, albeit, at deeper discounts than ever (low/mid 90 s). Longer average life tranches are not trading and have bids much lower than their perceived risk. Private student loans also are not trading given the economic pressure on the consumer that is causing delinquencies to rise. Other ABS: Airplanes & Auto related ABS continue to be negatively impacted by a weakening economy and poor auto industry performance. Structured Insurance deals have been impacted by market devaluation in the underling investment portfolios. Wrapped positions: 4.5% AAA wrapped (FSA and AGO) and 7% wrapped by MBIA, ABK, and FGIC continue to suffer significant devaluation due to negative market perceptions of monolines. As market valuations continue to deteriorate due to the mortgage and liquidity crisis, we continue to follow government developments and to sell assets strategically as the opportunity arises. The majority of the portfolio is expected to be held until maturity with unrealized losses expected to reverse over time. 41

42 Appendix 2: Financial Guarantee Investment Portfolio All information based on amortized cost as of September 30, 2008 unless otherwise indicated.

43 Financial Guarantee Investment Portfolio 12 Month Expected Cash Generation ($mm) Muni Portfolio Muni Portfolio Taxable Portfolio Taxable Portfolio Expected Principal Expected Interest Expected Principal Expected Interest Total Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

44 Financial Guarantee Investment Portfolio Tax Status Tax-Exempt $7.0 Billion Taxable $3.1 Billion 44

45 Financial Guarantee Investment Portfolio Sector Allocation Special Tax 5.5% State GO 8.3% AGY MBS 6.8% Power PreRe 66% 6.6% 54% 5.4% Water 5.0% Education 4.4% Lease 3.8% US Treasury 2.8% US Agency 2.5% Transportation 8.8% Housing 2.3% Industrial 1.8% Short Term Financial 11.3% Non 1.4% Local GO AGY Hospital 19.6% MBS 0.2% 1.4% Other 0.1% Credit Card 0.2% Foreign 1.8% *Includes Escrowed Municipals 45

46 Financial Guarantee Investment Portfolio Quality breakdown Insured Underlying Rating Insured Underlying Rating BBB 0.2 A Short Term 11.3 Other 0.1 US Treasury* 7.8 US Agency* 2.9 AGY MBS 6.8 AA 29.9 AA 12.8 AAA 11 A 13 Monoline BIG BBB Source: Lower of Moody s or S&P *Includes Escrowed Municipals 46

47 Financial Guarantee Investment Portfolio Guarantor and Underlying Credit Rating Breakdown ABK 3.4% FGIC 32% 3.2% FSA 15.4% MBIA 23.6% Includes Reinsured FGIC 47

48 Financial Guarantee Investment Portfolio Quality Breakdown Ignoring Insurance BBB 0.2 A 1.5 Short Term 11.3 Other 0.1 US Treasury* 7.8 US Agency* 2.9 AGY MBS 6.8 AA 12.8 AAA 11 Monoline 45.6 *Includes Escrowed Municipals 48

49 Appendix 3: Update on non-cdo of ABS Structured Finance Portfolio.

50 Structured Finance Portfolio Non-CDO of ABS Overview - 3Q Business Mix by Net Par and Rating Ambac s non-cdo of ABS portfolio is comprised mainly of high yield corporate CLOs. Over 97% of the Non-CDO of ABS portfolio have an Ambac rating of AA or better. Business Mix Description Net Par ($ Bn) %Total # of Deals High Yield Corporate CLOs Collateral is primarily secured leveraged loans on HY corporate names % 82 Pooled ABS (< 25% MBS) Includes $2.5bn reg cap deal % 4 Market Value CDOs Most of the collateral is leveraged loans MTM on regular basis If trip junior OC and EOD, Ambac can control the timing of the liquidation % 11 Investment Grade Corporate Collateral is unsecured bonds on IG % 6 CDOs names Pooled Financial Institutions Collateral pool is made up of TRUPS and tier 1 securities Preferred Shares of % 8 regional/community banks/insurance companies/global banks High Yield Corporate CDOs Collateral is bonds on HY names % 8 Other CDOs Pooled Emerging Markets Collateral is infrastructure-like assets that are structured like CDOs Collateral is corporate & sovereign emerging market USD denominated bonds % % 2 Total % 122 Ambac Rating Net Par (S Bn) % Total AAA % AA % A % 1.9% BBB % BIG % % S&P AAA % AA % A - 0.0% BBB % BIG % NR % % Moody's Aaa % Aa % A % Baa % 0.0% BIG % NR % % 50

51 Appendix 4: Exposure to the Financial Guarantee Sector.

52 Exposure to the Financial Guarantee Sector (By S&P Rating) (mm) Reinsurance Ceded Investment portfolio - FG Investment portfolio - FS CDS TRS Total AAA $4,706 $1,478 $152 $292 $91 $6,719 AA 44,548 1, ,144 A 7, ,400 BBB 11, ,992 BIG 643 1, ,882 Ttl Total $69,032 $4,111 $263 $1,575 $156 $75,137 52

53 Exposure to the Financial Guarantee Sector (By Bond Type) As of 3Q 2008 ($ millions) Exposure to the Financial Guaranty Sector (By Bond Type) As of September 30, 2008 ($ in millions) Reinsurance Investment Investment Ceded portfolio - FG portfolio - FS CDS TRS Total Public Finance: Lease and tax backed $10,506 $669 $0 $0 $30 $11,205 General obligation ,991 1, ,564 Utility revenue , ,035 Transportation revenue , ,820 Higher education , ,131 Health care revenue , ,158 Housing revenue , ,433 Other Total U.S. Public Finance ,511 4, ,631 Structure Finance: Mortgage-backed and home equity , ,815 Asset-backed and conduits , ,870 CDO of ABS >25% MBS Other CDOs Student loan , ,039 Investor-owned utilities , ,492 Other , ,804 Total Structured Finance , ,114 International Finance: Asset-backed and conduits , ,157 Other CDOs Investor-owned and public utilities , ,631 Transportation revenue , , Sovereign/sub-sovereign , ,585 Mortgage-backed & home equity Other Total International Finance , ,268-16,392 Grand Total $69,032 $4,111 $263 $1,575 $156 $75,137 Percent of Total Net Par Outstanding Public Finance % 97.7% 0.0% 3.8% 26.9% 55.4% Structured Finance % 18% 1.8% 100.0% 0% 15.7% 73.1% 22.8% International Finance % 0.5% 0.0% 80.5% 0.0% 21.8% Total Net Par Outstanding % 100.0% 100.0% 100.0% 100.0% 100.0% 53

54 Appendix 5: Book Value versus Adjusted Book Value.

55 Adjusted Book Value Analysis Adjusted Book Value Adjusted Book Value by Component $55.20 $15.83 $17.75 $7.18 4Q Q Q Q $ $ $6.11 $ $22.41 $4.88 $5.31 $ $4.52 $6.76 $ $ Q Q Q Q 2008 Book Value Net Unearned Premium PV of Future Installment Premiums 55

56 Appendix 6: MBS and CDO Claim Payment Projection.

57 MBS and CDO Claim Payment Projection Claims Payment Projection mm 2,300 1,800 1, (200) CDS *(mainly ABS CDOs) MBS Other Majority of HELOC & CES claims will largely occur over the next 2 to 3 years, inclusive of a sharp rise over the next two years followed by an equally sharp drop thereafter Only exceptions to this payment profile are three CES deals where payments of ultimate principal are due at maturity Single A CDO-Squared deals have triggered interest payments and account for early CDS payments as seen in the chart above High Grade CDOs of ABS claims are largely comprised of back-ended principal payments 57

58 Forward-Looking Statements This presentation contains statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of Any or all of management s forward-looking statements here or in other publications may turn out to be wrong and are based on Ambac s management current belief or opinions. Ambac s actual results may vary materially, and there are no guarantees about the performance of Ambac s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) changes in Ambac s and/or Ambac Assurance s credit or financial strength ratings; (2) the risk of credit and liquidity risk due to unscheduled and unanticipated withdrawals on investment agreements; (3) the risk that market risks impact assets in our investment portfolio; (4) inadequacy of reserves established for losses and loss expenses; (5) credit risk throughout our business, including credit risk related to residential mortgage-backed securities and CDOs and large single exposures to reinsurers; (6) market spreads and pricing on insured collateralized debt obligations ( CDOs ) and other derivative products insured or issued by Ambac; (7) the risk that holders of debt securities or counterparties on credit default swaps or other similar agreements seek to declare events of default or seek judicial relief or bring claims alleging violation or breach of covenants by Ambac or one of its subsidiaries; (8) default by one or more of Ambac Assurance s portfolio investments, insured issuers, counterparties or reinsurers; (9) the risk that we may be required to raise additional capital, which could have a dilutive effect on our outstanding equity capital and/or future earnings; (10) our ability or inability to raise additional capital, including the risks that regulatory or other approvals for any plan to raise capital are not obtained, or that various conditions to such a plan, either imposed by third parties or imposed by Ambac or its Board of Directors, are not satisfied and thus potentially necessary capital raising transactions do not occur, or the risk that for other reasons the Company cannot accomplish any potentially necessary capital raising transactions; (11) the risk that Ambac s holding company structure and certain regulatory and other constraints, including adverse business performance, affect Ambac s ability to pay dividends and make other payments; (12) legislative and regulatory developments, including the Troubled Asset Relief Program and other programs under the Emergency Economic Stabilization Act and other similar programs; (13) changes in the economic, credit, foreign currency or interest rate environment in the United States and abroad; (14) changes in capital requirements whether resulting from downgrades in our insured portfolio or changes in rating agencies rating criteria or other reasons; (15) changes in accounting principles or practices relating to the financial guarantee industry or that may impact Ambac s reported financial results; (16) the level of activity within the national and worldwide credit markets; (17) competitive conditions, pricing levels and reduction in demand for financial guarantee products; (18) changes in our business plan, our decision to discontinue writing new business in the financial services area, to significantly reduce new underwriting of structured finance business and to discontinue all new underwritings of structured finance business; (19) the risk that our underwriting and risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss as a result of unforeseen risks; (20) the risk of volatility in income and earnings, including volatility due to the application of fair value accounting, or FAS 133, to the portion of our credit enhancement business which is executed in credit derivative form; (21) changes in expectations regarding future realization of gross deferred tax assets; (22) risks relating to the re-launch of Connie Lee as Everspan Financial Guaranty Corp.; (23) operational risks, including with respect to internal processes, risk models, systems and employees; (24) the risk of decline in market position; (25) changes in prepayment speeds on insured asset-backed securities; (26) factors that may influence the amount of installment premiums paid to Ambac; (27) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on our business, operations, financial position, profitability or cash flows; (28) changes in tax laws; (29) the policies and actions of the United States and other governments; (30) other factors described in the Risk Factors section in Part I, 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, and also disclosed from time to time by Ambac in its subsequent reports on Form 10-Q and Form 8-K, which are or will be available on the Ambac website at and at the SEC s website, and (31) other risks and uncertainties that have not been identified at this time. Readers are cautioned that forward-looking statements speak only as of the date they are made and that Ambac does not undertake to update forward-looking statements to reflect circumstances or events that arise after the date the statements are made. You are therefore advised to consult any further disclosures we make on related subjects in Ambac s reports to the SEC. 58