Net (loss) income per diluted share $(11.69) Book value per share Adjusted book value per share

Transcription

1 Share price $5.75 Market capitalization $1,649.3 million Net (loss) income $(1,660.3) million Net (loss) income per diluted share $(11.69) Book value per share $4.52 Adjusted book value per share $15.83

2 Company Profile Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. The principal operating subsidiary, Ambac Assurance Corporation, a leading guarantor of public finance and structured finance obligations, has earned triple-a ratings from Moody s Investors Services, Inc. and Standard & Poor s Ratings Services, and a double-a rating from Fitch, Inc. All of these ratings have a Negative Outlook. Ambac Financial Group, Inc., through its subsidiaries, also provide investment agreements, interest rate swaps, total return swaps and funding conduits, principally to clients of the financial guarantee business, which include municipalities and their authorities, health care organizations and asset-backed issuers. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange (ticker symbol ABK). Company Information Corporate headquarters are located at: Ambac Financial Group, Inc. One State Street Plaza New York, New York (212) (212) (fax) Investor Relations Contact: Vandana Sharma (212) (212) (fax) vsharma@ambac.com To obtain a copy of Ambac Financial Group, Inc. s latest annual or quarterly report filed with the Securities and Exchange Commission or the most recent Annual Report to Stockholders, please call, write or the Investor Relations Department at the above number or address or download it from our website at

3 Ambac Financial Group, Inc. Quarterly Operating Supplement First Quarter 2008 Table of Contents Annual Financial and Statistical Data. 1 Key Financial Highlights... 2 Earnings Analysis... 3 First Quarter 2008 Earnings Release Consolidated Statements of Operations Consolidated Balance Sheets.. 14 Financial Guarantees Normal Net Insurance Premiums Earned and Fees on Credit Derivatives.. 16 Effect of Refundings, Calls and Other Accelerations. 16 Public Finance New Issuance.. 17 Net Exposure Amortization. 18 Net Unearned Premium Amortization and Estimated Future Installment Premiums Fixed Income Investment Portfolio Rating Distribution of Investment Portfolio Ratio of Net Claims Paid Summary of Net Insurance Loss Reserves and Credit Derivatives Summary of Below Investment Grade Exposures Expense Analysis Deferred Expense Ratio Analysis Historical Financial Guarantee Exposures Outstanding Bond Type Distribution of Financial Guarantee Exposures Geographic Distribution of Financial Guarantee Exposures Rating Distribution of Net Financial Guarantee Exposures Largest Domestic Public Finance Exposures Largest Domestic Healthcare Exposures Largest Structured Finance Exposures Largest International Finance Exposures Statutory Accounting, Financial and Capital Information Note 1: Throughout this Supplement adjusted book value (ABV) per share is reported and analyzed. ABV, is not promulgated in conformity with U.S. generally accepted accounting principles (GAAP) and should not be considered a substitute for actual book value. It is used by management, equity analysts and investors as a measurement of the Company s estimated intrinsic value with no benefit given for ongoing business activity. Management derives adjusted book value by beginning with stockholders equity (book value) and adding or subtracting the after-tax value of: the net unearned premium reserve; deferred acquisition costs; the present value of estimated net future installment premiums (discounted at 5.0% and 5.2% at March 31, 2008 and December 31, 2007, respectively); and the unrealized gain or loss on investment agreement liabilities. The definition of ABV used by the Company may differ from definitions of ABV used by other financial guarantors and should be considered in such context. The adjustments described above will not be realized until future periods and may differ materially from the amounts used in determining ABV. Note 2: Credit enhancement production (CEP) and net credit enhancement production (NCEP), which are not promulgated under GAAP, should not be considered a substitute for gross or net premiums written. CEP is used by management, equity analysts and investors as an indication of new business production. CEP, which Ambac reports as analytical data, is defined as gross (direct and assumed) up-front premiums written plus the present value of estimated installment premiums written on insurance policies, structured credit derivatives and other credit enhancement products issued in the period (discounted at 5.2% and 5.4% for the quarters ended March 31, 2008 and 2007, respectively). NCEP is defined as CEP less cessions to all reinsurers. The definition of CEP and NCEP used by Ambac may differ from definitions of CEP and NCEP used by other financial guarantors. Note 3: Internal Ambac credit ratings contained in this Supplement are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance. In cases where Ambac has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac credit ratings are subject to revision at anytime and do not constitute investment advice. Ambac Assurance, or one of its affiliates, has insured the obligations listed and may also provide other products or services to the issuers of these obligations for which Ambac may have received premiums or fees. Note 4: Information contained in this report is unaudited.

4 Annual Financial and Statistical Data (Dollars in millions except share data) 2007 (1) (2) Summary Financial Data: Financial Guarantee: Credit enhancement production (non-gaap) $1,414 $1,295 $1,249 $1,288 $1,489 $1,299 $974 $711 $652 $486 Gross premiums written 1, ,096 1,048 1, Net premiums/enhancement fees earned Net investment income (3) Loss and loss expenses (4) Underwriting and operating expenses Financial Services (5) : Revenue Expenses Net (loss) income per diluted share ($31.56) $8.15 $6.87 $6.53 $5.66 $3.97 $3.97 $3.41 $2.88 $2.37 Net (loss) income per diluted share growth rate n.m. 18.6% 5.2% 15.4% 42.6% 0.0% 16.4% 18.4% 21.5% 13.4% Return on equity -76.7% 15.1% 14.4% 15.6% 15.7% 13.1% 15.5% 15.9% 15.0% 12.8% Total investments 18,396 17,434 15,592 14,422 13,965 12,539 10,288 8,324 8,963 8,748 Total assets 23,565 20,268 18,546 17,673 16,747 15,356 12,340 10,120 11,345 11,212 Unearned premium reserve 3,124 3,038 2,941 2,779 2,545 2,129 1,780 1,546 1,431 1,294 Loss and loss expense reserve Obligations under investment, repurchase and payment agreements 8,706 8,357 7,253 7,081 7,076 7,283 5,512 4,893 6,140 5,957 Long-term debt (6) 1, , Stockholders' equity 2,280 6,190 5,388 5,024 4,255 3,625 2,984 2,596 2,019 2,096 Statutory Data: Qualified statutory capital $6,422 $6,383 $5,693 $5,264 $4,526 $3,736 $3,262 $2,736 $2,421 $1,936 Unearned premium reserve 3,320 3,373 3,208 2,972 2,649 2,223 1,860 1,615 1,486 1,334 Loss and loss expense reserve Estimated impairment losses on credit derivatives Policyholders' reserves 10,609 9,798 9,004 8,353 7,230 6,008 5,150 4,382 3,933 3,304 Third party capital support P.V. of future installment premiums 3,103 2,503 2,166 2,060 1,556 1, Total claims-paying resources $14,512 $13,101 $11,970 $11,213 $9,586 $8,150 $6,937 $5,946 $5,210 $4,168 Net par outstanding $524,025 $519,043 $479,085 $459,432 $425,854 $379,211 $318,043 $276,252 $240,307 $198,274 Net debt service outstanding $833,303 $802,694 $726,612 $685,234 $625,564 $557,422 $476,190 $418,386 $374,484 $317,668 Financial Ratios: Loss and loss expense ratio 148.4% 2.3% 17.3% 9.1% 8.2% 6.5% 5.3% 4.8% 4.2% 2.8% Underwriting expense ratio 15.2% 15.3% 13.6% 13.9% 13.8% 15.3% 17.0% 17.1% 18.2% 21.9% Combined ratio 163.6% 17.6% 30.9% 23.0% 22.0% 21.8% 22.3% 21.9% 22.4% 24.7% Stock Performance: Cumulative total return since IPO on 7/ % % % % 996.3% 782.5% 802.4% 804.0% 435.0% 512.4% Annual total return -70.6% 16.5% -5.5% 19.1% 24.2% -2.2% -0.2% 69.0% -12.6% 31.8% Dividends declared per common share $0.780 $0.660 $0.550 $0.470 $0.420 $0.380 $0.340 $0.307 $0.280 $0.253 Adjusted book value per share (non-gaap) $55.24 $87.81 $78.53 $71.73 $61.27 $49.84 $42.03 $36.35 $29.79 $28.00 (1) Net income was adversely impacted by mark-to-market losses on credit derivative contracts of $6,016.3 million, $3,910.6 million after-tax, or $37.99 per diluted share. (2) Net income was adversely impacted by a writedown of an investment security amounting to $139.7 million, $90.8 million after-tax or $0.83 per diluted share. (3) Excludes variable interest entity investment income of $4.8 million from (4) Includes losses of ($41.0) million, ($41.4) million and $91.5 million in 2007, 2006 and 2005, respectively, as a result of Hurricane Katrina. (5) Financial Services revenues exclude net realized investment gains/losses, net mark-to-market gains/losses on non-trading derivatives and net mark-to-market gains/losses on total return swaps. Amounts also exclude the discontinued operations of Cadre Financial Services, Inc. (6) Excludes the portion of long-term debt associated with a variable interest entity.

5 Key Financial Highlights KEY FINANCIAL LINES First First Quarter Quarter Net (loss) income ($ millions) ($1,660.3) $213.3 Stockholders' equity ($ millions) $1,296.5 $5,989.2 Return on equity % 14.0% Total capitalization (1) ($ millions) $2,915.2 $7,378.4 Debt/total capital (1) % 18.8% Capital ratio (2) :1 125:1 Claims-Paying ratio (2) :1 62:1 Loss ratio (3) % 4.9% Expense ratio (4) % 15.7% Combined ratio (3) (4) % 20.6% Effective tax rates: Financial Guarantee: Net investment income % 13.0% Realized securities gains % 35.0% Underwriting and other income % 35.6% Total Financial Guarantee % 27.0% Financial Services % 32.7% Other % 41.5% Consolidated total effective tax rate % 26.2% STOCKHOLDER DATA Market value per share $5.75 $86.39 Net income per share ($11.69) $2.04 Net income per diluted share ($11.69) $2.02 OTHER EARNINGS MEASURES (Per diluted share) Net (loss) income ($11.69) $2.02 Net security losses and (gains) (5) $4.76 ($0.02) Other items $0.00 $0.00 Operating earnings (non-gaap) ($6.93) $2.00 Refundings, calls and other accelerations, net ($0.15) ($0.24) Core earnings (non-gaap) ($7.08) $1.76 ADJUSTED BOOK VALUE ANALYSIS (Per share) Book value $4.52 $58.85 After-tax value of: Net unearned premium reserve less deferred acquisition costs Present value of future installment premiums Unrealized loss on investment agreement liabilities (0.47) (0.72) Adjusted book value $15.83 $89.46 (1) Excludes the portion of long-term debt associated with variable interest entities of $272.5 million at March 31, (2) Capital and financial resources ratios (Statutory) and loss, expense and combined ratios (GAAP) relate solely to Financial Guarantee operations. (3) Loss ratio is computed as insurance loss and loss expense plus credit derivative estimated credit impairment losses divided by net premiums earned and fees earned on credit derivatives. (4) Expense ratio is computed as financial guarantee underwriting and operating expenses divided by net premiums earned and fees earned on credit derivatives. (5) Includes net gains and losses from sales of investment securities, net mark-to-market gains and losses on credit derivatives, total return swaps and non-trading derivatives in both the Financial Services and the Medium-Term Notes Conduit businesses. 2

6 Earnings Analysis (Dollars in Millions) First First Quarter 2008 Quarter 2007 Pre-tax (loss) income. ($2,790.8) $289.2 Pre-tax Financial Guarantee: Net realized investment gains.. (22.2) (0.4) Credit default swaps - total. 1, Credit default swaps - estimated impairment losses (940.5) - Non-trading derivatives (1) Total Financial Guarantee Pre-tax Financial Services: Net realized investment gains (6.2) Non-trading derivatives Total return swaps 40.9 (3.2) Total Financial Services (8.9) Pre-tax Operating earnings. (1,815.7) Tax on Operating earnings. (830.8) 74.7 After-tax Operating earnings. ($984.9) $210.8 (1) Included within the line item "Other income" in the Consolidated Statements of Operations. 3

7 For Immediate Release AMBAC FINANCIAL GROUP, INC. ANNOUNCES FIRST QUARTER NET LOSS OF $1,660.3 MILLION First Quarter Net Loss Per Share of $11.69 Reflects Mortgage-related Losses NEW YORK, April 23, Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced a first quarter 2008 net loss of $1,660.3 million, or a net loss of $11.69 on a per share basis. This compares to first quarter 2007 net income of $213.3 million, or net income per diluted share of $2.02. The decrease is primarily due to non-cash, mark-to-market losses on credit derivative exposures amounting to $1,725.2 million in the first quarter 2008 driven by the continued disruption in the global credit markets impacting the fair value of Ambac s derivatives exposures during the quarter. The decrease was also caused in part by the current quarter s loss provision on Ambac s financial guarantee direct exposures to mortgage-related securities which amounted to $1,042.8 million, as well as by other than temporary impairment charges on certain investment securities within the financial services investment portfolio. Table I summarizes the pretax charges recorded during the first quarter 2008 related to direct and indirect exposure to residential mortgage securities. Table I Pre-tax $-millions First Quarter 2008 Financial Financial Guarantee Services Segment Segment 4 Total Mark-to-market - CDOs of ABS (a) $1,725.2 $ $1,725.2 Loss provision related to RMBS 1, ,045.8 Other than temporary impairment loss in investment portfolio Mark-to-market liquidity portfolio Interest rate swap basis risk losses Mark-to-market total return swap portfolio Total $2,771.0 $292.2 $3,063.2 (a) Amount includes $940.4 million, pre-tax, of estimated credit impairment. This amount is included in Operating Earnings/Losses in Table II, below. Mark-to-Market Loss The $1,725.2 million first quarter 2008 mark-to-market loss on credit derivative exposures includes estimated credit impairment of $940.4 million related to certain collateralized debt obligations of assetbacked securities backed primarily by residential mortgage-backed securities (RMBS). An estimate for credit impairment has been established because it is management s expectation that Ambac will have to make claim payments on these exposures in the future. As further described below, earnings measures reported by research analysts are on an operating basis and exclude the net income impact of mark-to-

8 market gains and losses on credit derivative contracts internally rated investment grade, as well as certain other items. Operating earnings 2 in the first quarter 2008 includes the impact of the estimated $940.4 million credit impairment. Net Income/(Loss) Per Share Net loss per share and net income per diluted share are computed in conformity with U.S. generally accepted accounting principles (GAAP). However, many research analysts and investors do not limit their analysis of our earnings to a strictly GAAP basis. In order to assist investors in their understanding of quarterly results, Ambac provides additional information. Earnings measures reported by research analysts exclude the net income/(loss) impact of net gains and losses from sales of investment securities and mark-to-market gains and losses on credit, total return and non-trading derivative contracts internally rated investment grade (collectively net security gains and losses ) and certain other items. Certain research analysts and investors further exclude the net income impact of accelerated premiums earned on guaranteed obligations that have been refunded and other accelerated earnings ( accelerated earnings ). During the first quarter 2008, net security losses had the effect of decreasing net income by $675.5 million, or $4.76 on a per share basis. Table II provides first quarter comparisons of earnings for 2008 and Table II Earnings Per Diluted Share First Quarter % Change Net (loss) per share / income per diluted share ($11.69) $2.02 n.m. Effect of net security losses /(gains) $8.39 ($0.02) Less impairment losses ($3.63) Operating earnings (a) (b) ($6.93) $2.00 n.m. Effect of accelerated earnings ($0.15) ($0.24) Core (loss) / earnings (b) ($7.08) $1.76 n.m. (a) Consensus earnings that are reported by earnings estimate services, such as First Call, are on this basis. (b) Operating and core earnings are non-gaap measures. See footnote 2, below. n.m. Not meaningful. Commenting on the financial results, Mr. Callen, noted, The housing market crisis continues to disrupt the global credit markets and our credit derivatives and direct mortgage portfolios were severely impacted once again. While we realize that these are disappointing credit results, we continue to believe that the capital raise and strategic business actions taken during the quarter will enable us to get beyond this credit market. The capital that we raised during the quarter in the midst of a very difficult market plus capital generated from the reduction in net par exposure helped bring our claims-paying resources to approximately $16.0 billion as of March 31, We currently exceed S&P s AAA target level of capital by a comfortable margin and we expect to meet our goal of exceeding Moody s Aaa target level of capital in the second quarter. Importantly, we generated positive operating cash flow during the quarter. Mr. Callen continued, Our team of professionals is working hard on restoring market faith in the Ambac brand and we have recently started to see some business come our way in the municipal markets. We feel strongly that our highly qualified professionals worldwide, our significant size and scale, and our expertise in select market sectors will result in new business opportunities." 5

9 Revenues Highlights Credit enhancement production (1) in the first quarter of 2008 was $40.5 million, down from production of $310.1 million reported in the first quarter of Table III provides the quarterly comparisons of credit enhancement production by market segment for 2008 and Table III Credit Enhancement Production (1) ($-millions) First Quarter % Change Public Finance $5.5 $ % Structured Finance % International % Total $40.5 $ % As previously reported, Ambac has written very little business since late 2007 as fixed income investors awaited the results of rating agency reviews and resultant actions. In the U.S. municipal market issuance was down 22% quarter on quarter. Market penetration declined from approximately 52% a year ago to approximately 27% in the current quarter. Subsequent to Ambac s successful $1.5 billion capital raise in early March, Ambac s ratings remain on negative outlook and issuers seeking insurance have thus far opted to insure with competitors with stable triple-a ratings. During the first quarter 2008, Ambac announced that it had suspended underwriting all structured finance business for six months in order to accumulate capital. Global infrastructure, private finance initiative transactions and privatization transactions which finance essential infrastructure are not considered structured finance and are therefore not subject to the six month suspension of underwriting. Also, in the student loan sector, transactions issued by state and local government agencies and nonprofit issuers are not subject to the six month suspension of underwriting. The structured finance business written during the quarter relates to transactions that closed and transactions to which Ambac had committed prior to the announcement of suspension of underwriting. Net premiums written in the first quarter of 2008 of $135.7 million were 38% lower than net premiums written of $220.4 million in the first quarter of The decrease is primarily a result of lower gross premiums written, as discussed above, and a higher percentage of ceded premiums written resulting from the reinsurance arrangement with Assured Guaranty Re Ltd. ( AG Re ) transacted in the fourth quarter Ceded premiums as a percentage of gross premiums written were 14.8% and 11.8% for the first quarter of 2008 and 2007, respectively. Net premiums earned for the first quarter of 2008 were $186.9 million, down 13% from $216.0 million earned in the first quarter of Normal earned premiums in the first quarter 2008 of $172.9 million were 2% lower than $176.3 million reported in the first quarter 2007, primarily due to the AG Re cede which took place in early December The AG Re cede reduced normal earned premiums by $6.9 million in the current quarter. 6

10 Net premiums earned include accelerated premiums, which result from refundings, calls and other accelerations recognized during the quarter. Accelerated premiums were $14.0 million in the first quarter of 2008, down 65% from $39.7 million in accelerated premiums in the first quarter of During the first quarter 2008 and 2007, approximately 66% and 85%, respectively, of the accelerated premiums related to U.S. public finance transactions. Ambac's U.S. public finance refundings, measured by par, were down 42% as compared to the overall market decline of approximately 46%. Realized gains and other settlements from credit derivative contracts, during the periods presented represents the normal accretion into income of premiums received for transactions executed in credit derivative format. Such accretion for the first quarter of 2008 amounted to $17.0 million, which represented a 9% increase from the $15.6 million in the first quarter of The increase was driven by the increased credit derivative business written during the first half of In previous periods these amounts were referred to as Other Credit Enhancement Fees in the Consolidated Statements of Operations. This reclassification is the result of an industry-wide effort, in consultation with the Securities and Exchange Commission, to present the results from credit derivative transactions consistently. A breakdown of net premiums earned by market sector for 2008 and 2007 are included in Table IV. Normal net premiums earned exclude accelerated premiums that result from refundings, calls and other accelerations. Table IV Net Premiums Earned ($-millions) First Quarter % Change Public Finance $55.8 $58.3-4% Structured Finance % International % Total Net Normal Premiums Earned % Accelerated Premiums % Total Net Premiums Earned $186.9 $ % Net investment income excluding net investment income from VIEs for the first quarter of 2008 was $120.0 million, representing an increase of 7% from $112.1 million in the comparable period of This increase was due primarily to growth in the investment portfolio driven by the ongoing collection of financial guarantee premiums and fees. Additionally, the net proceeds from the $1.5 billion capital raise had a minimal effect due to its timing at the end of the quarter. Investment income from VIEs is offset by interest expense on VIEs, shown separately in the Consolidated Statements of Operations. Financial services revenues. The financial services segment comprises the investment agreement business and the derivative products business. Gross interest income less gross interest expense from investment and payment agreements plus results from the derivative products business, excluding net realized investment gains and losses and unrealized gains and losses on total return swaps and nontrading derivative contracts, was ($72.9) million in the first quarter of 2008, down from $10.6 million in the first quarter of The decrease resulted primarily from turmoil in short-term municipal rates and their impact on the interest-rate swap business. In certain interest rate swaps where a municipality is the counterparty, Ambac's swap subsidiary is required to pay the actual issue-specific variable rate paid by the municipality on its Ambac-wrapped floating-rate debt, in exchange for receiving a fixed rate. These municipal interest rate swaps are hedged against general interest rate fluctuations but are not hedged between taxable index rates (such as LIBOR) and issue-specific rates (this is generally known as basis 7

11 risk ). A decline in demand for variable-rate municipal debt has driven issue-specific rate resets to very high levels thereby increasing Ambac's payment obligations under the interest rate swaps resulting in a ($16.8) million realized loss and a ($56.9) million mark-to-market loss for the quarter on this portfolio. During the first quarter 2008, Ambac announced that it would discontinue writing new Financial Services business as part of its capital preservation strategy. The interest rate swap and investment agreement businesses will be run off. In the process of doing so, we expect to execute hedging transactions to mitigate risks in the respective books of business. Such hedging transactions may include execution of new investment agreement transactions whereby the proceeds of such new transactions would be invested in assets selected to improve duration matching of the investment agreement business assets and liabilities or to improve the cash flow profile of the portfolio. Expenses Highlights Financial guarantee expenses of $1,095.3 million for the first quarter of 2008 increased significantly from $47.8 million of expenses for the first quarter of Financial guarantee loss and loss expenses were $1,042.8 million in the first quarter of 2008, up from $11.4 million in the first quarter of See Loss Reserve Activity, below, for additional information on losses. Gross underwriting expenses of $38.7 million in the first quarter 2008 are down 21% from $49.2 million in the comparable prior quarter primarily as a result of lower compensation expense, primarily driven by prior year bonus accrual reversal and reduced equity-based compensation costs, and lower premium taxes driven by lower premiums written during the period. These decreases were partially offset by higher consulting and legal expenses related to the credit derivatives portfolio. As a result of the recent decline in underwriting, during the first quarter 2008 Ambac significantly reduced the level of expenses it defers to future periods. As a result, net underwriting expenses are not comparable, period to period. Loss Reserve Activity Case basis loss reserves (loss reserves for exposures that have defaulted) increased $240.8 million during the first quarter of 2008 from $109.8 million at December 31, 2007 to $350.6 million at March 31, The increased case reserves relate primarily to second-lien RMBS transactions that are underperforming original expectations. Poor transaction performance accelerated during the quarter, particularly during February and March. Total net claims paid during the quarter amounted to $34.1 million. Active credit reserves ( ACR ) are established for probable and estimable losses due to credit deterioration on certain adversely classified insured transactions. The ACR increased by $767.9 million during the quarter, from $363.4 million at December 31, 2007 to $1,131.3 million at March 31, The increase was driven primarily by unfavorable credit activity within the second lien segment of the RMBS portfolio and to a lesser extent by Alt-A RMBS transactions. Case reserves and ACR for all direct residential mortgage-backed securities exposures amounted to $303.5 million and $1,011.3 million, respectively, at March 31, 2008, which on a combined basis represents 89% of Ambac s net loss and loss expense reserves. Other Items Total net securities gains/(losses) for the first quarter of 2008 were ($1,915.5) million, consisting of net realized losses or other than temporary impairments on investment securities of ($147.6) million, net mark-to-market losses on credit and total return derivatives of ($1,766.1) million and net mark-tomarket losses on non-trading derivative contracts of ($1.8) million. Included in the net realized losses on 8

12 investment securities are ($95.4) million of other than temporary impairment losses on five highly-rated mortgage-related securities in the investment agreement portfolio with current par outstanding of approximately $233 million. Additionally, the net realized losses include ($82.2) million of mark-tomarket losses on a liquidity portfolio within the investment agreement portfolio. That portfolio consists of highly-rated asset-backed securities which are reported as available for sale with mark-tomarket losses reported through the Consolidated Statements of Operations in accordance with GAAP. The liquidity portfolio, consisting of securities with par outstanding of approximately $1,267 million, was established to fund potential pay downs and/or collateral needs of the investment agreement business. During the quarter a net mark-to-market loss amounting to ($1,725.2) million was recorded related to contracts executed in credit default format, primarily in our collateralized debt obligation exposures. The negative mark-to-market continues to be driven by dramatically lower prices in certain structured finance asset classes particularly with respect to CDOs of ABS with subprime RMBS exposure. Pricing declines were observed throughout the quarter but were exceptionally large in March as recent poor transactional performance became public. Prices continue to be driven down by poor collateral performance, rating agency downgrades and uncertainty regarding the ultimate outcome of subprime and other residential mortgage-backed securities losses. In the first quarter of 2007, net securities gains/(losses) were $3.7 million, consisting of net realized gains on investment securities of $6.6 million, net mark-to-market losses on credit and total return derivatives of ($1.9) million and net mark-to-market losses on non-trading derivative contracts of ($1.0) million. Balance Sheet Highlights Total assets as of March 31, 2008 were $24.93 billion, up 6% from total assets of $23.57 billion at December 31, The increase was primarily driven by cash generated from the capital raise in March and from an increase in the deferred tax asset, partially offset by the increase in net unrealized losses in the investment portfolio. The increased net unrealized losses are primarily due to credit spread widening in highly rated asset-backed securities within the investment agreement investment portfolio. As of March 31, 2008, stockholders equity was $1.30 billion, a 43% decrease from year-end 2007 stockholders equity of $2.28 billion. The decrease was primarily the result of the net loss reported for the period and the increase in net unrealized losses within the investment agreement investment portfolio as described above, partially offset by the capital raise in March Annual Meeting of Stockholders The Board of Directors set the 2008 Annual Meeting of Stockholders for Tuesday, June 3, 2008, at 11:30 a.m. in New York City. The record date for determining stockholders entitled to notice of, and to vote at, the annual meeting was the close of business, April 7,

13 Forward-Looking Statements This release 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 the economic, credit, foreign currency or interest rate environment in the United States and abroad; (2) the level of activity within the national and worldwide credit markets; (3) competitive conditions and pricing levels; (4) legislative and regulatory developments; (5) changes in tax laws; (6) changes in our business plan, including changes resulting from 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 for six months; (7) the policies and actions of the United States and other governments; (8) changes in capital requirements whether resulting from downgrades in our insured portfolio or changes in rating agencies rating criteria or other reasons; (9) changes in Ambac s and/or Ambac Assurance s credit or financial strength ratings; (10) changes in accounting principles or practices relating to the financial guarantee industry or that may impact Ambac s reported financial results; (11) inadequacy of reserves established for losses and loss expenses; (12) default by one or more of Ambac Assurance s portfolio investments, insured issuers, counterparties or reinsurers; (13) credit risk throughout our business, including large single exposures to reinsurers; (14) market spreads and pricing on insured collateralized debt obligations ( CDOs ) and other derivative products insured or issued by Ambac; (15) credit risk related to residential mortgage securities and CDOs; (16) 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; (17) 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; (18) 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; (19) operational risks, including with respect to internal processes, risk models, systems and employees; (20) the risk of decline in market position; (21) the risk that market risks impact assets in our investment portfolio; (22) the risk of credit and liquidity risk due to unscheduled and unanticipated withdrawals on investment agreements; (23) changes in prepayment speeds on insured asset-backed securities; (24) factors that may influence the amount of installment premiums paid to Ambac; (25) 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; (26) 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, including the transactions contemplated hereby; (27) 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; (28) 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; (29) other factors discussed under Risk Factors in this prospectus supplement, 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 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 (30) 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 10

14 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. Ambac may also, from time to time, disclose financial information on a non-gaap basis where management believes this information is valuable to investors in gauging the quality of Ambac s financial performance and identifying trends. ******************* Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac's principal operating subsidiary, Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations, has earned triple-a ratings from Moody's Investors Service, Inc. and Standard & Poor's Ratings Services; and a double-a rating from Fitch, Inc. Moody's, Standard & Poor's and Fitch all maintain a negative outlook. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange (ticker symbol ABK). ******************** Footnotes (1) Credit enhancement production, a non-gaap measure, is used by management, equity analysts and investors as an indication of new business production in the period. Credit enhancement production, which Ambac reports as analytical data, is defined as gross (direct and assumed) up-front premiums plus the present value of estimated installment premiums on insurance policies and structured credit derivatives issued in the period. The discount rate used to measure the present value of estimated installment premiums was 5.2% and 5.4% during the first quarter of 2008 and 2007, respectively. The definition of credit enhancement production used by Ambac may differ from definitions of credit enhancement production (or similar terms) used by other public holding companies of financial guarantors. The following table reconciles credit enhancement production to gross premiums written calculated in accordance with GAAP: $-millions First Quarter Credit enhancement production $ 40 $ 310 Present value of estimated installment premiums written on insurance policies and structured credit derivatives issued in the period (33) (198) Gross up-front premiums written Gross installment premiums written on insurance policies Gross premiums written $ 159 $

15 (2) Operating earnings and core earnings are not substitutes for net income computed in accordance with GAAP, but are useful measures of performance used by management, equity analysts and investors because they allow more consistent period-to-period comparison of our earnings without the effects of net securities gains/losses and accelerated earnings. Net securities gains/losses excluded from operating earnings consists of investment portfolio realized gains and losses, mark-to-market gains and losses on credit, total return and non-trading derivative contracts for investment grade rated exposures, and certain other items. Core earnings further exclude the impact of refundings, calls and other accelerations. The definitions of operating earnings and core earnings used by Ambac may differ from definitions of operating earnings and core earnings used by other public holding companies of financial guarantors. Contact Information: Investor/Media Contact: Vandana Sharma (212) Fixed Income Contact: Peter Poillon (212)

16 Consolidated Statements of Operations First Quarter ($ in Thousands, Except Share Data) Revenues: Financial Guarantee: Gross premiums written. $159,207 $249,912 Ceded premiums written. (23,534) (29,484) Net premiums written $135,673 $220,428 Normal net premiums earned. $172,870 $176,280 Accelerated net premiums earned. 13,996 39,726 Total net premiums earned. 186, ,006 Net investment income 120, ,064 Net investment income from VIEs. 3,631 - Net realized gains. 22, Realized gains and other settlements on credit derivative contracts.. 16,973 15,553 Unrealized losses on credit derivative contracts.... (1,725,172) (5,124) Net change in fair value of credit derivative contracts. (1,708,199) 10,429 Other income 8,457 2,856 Financial Services: Investment income.. 84, ,970 Derivative products. (68,820) 3,606 Net realized investment gains (169,792) 6,161 Net mark-to-market (losses) gains on total return swap contracts.. (40,928) 3,215 Net mark-to-market losses on non-trading derivatives contracts (1,833) (499) Corporate: Net investment income 827 1,581 Total revenues.. (1,562,639) 461,829 Expenses: Financial Guarantee: Losses and loss expenses. 1,042,761 11,422 Underwriting and operating expenses. 48,982 36,376 Interest expense on variable interest entity notes. 3,557 - Financial Services: Interest from investment and payment agreements.. 89,003 98,958 Other expenses 3,389 3,288 Corporate: Interest.. 24,377 19,289 Other expenses. 16,076 3,256 Total expenses.. 1,228, ,589 (Loss) income before income taxes. (2,790,784) 289,240 Provision for income taxes (1,130,441) 75,897 Net (loss) income ($1,660,343) $213,343 Net (loss) income per share ($11.69) $2.04 Net (loss) income per diluted share.. ($11.69) $2.02 Weighted average number of shares outstanding 142,032, ,643,529 Weighted average number of diluted shares outstanding.. 142,032, ,600,555 13

17 Consolidated Balance Sheets March 31, December 31, ($ in Thousands, Except Share Data) ASSETS Investments: Fixed income securities, at fair value (amortized cost of $17,367,835 in 2008 and $17,225,611 in 2007) $16,507,745 $17,127,485 Fixed income securities pledged as collateral, at fair value (amortized cost of $0 in 2008 and $345,140 in 2007) ,840 Short-term investments (amortized cost of $1,552,893 in 2008 and $879,039 in 2007) ,552, ,067 Other (cost of $13,573 in 2008 and $13,571 in 2007) ,824 14,278 Total investments ,074,462 18,395,670 Cash , ,933 Receivable for securities sold ,111 11,068 Investment income due and accrued , ,737 Reinsurance recoverable on paid and unpaid losses ,810 11,862 Prepaid reinsurance , ,028 Deferred taxes ,571,193 2,116,380 Deferred acquisition costs , ,639 Loans , ,676 Derivative assets ,265, ,534 Other assets , ,484 Total assets $24,930,059 $23,565,011 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Unearned premiums $3,059,295 $3,123,860 Loss and loss expense reserve ,512, ,276 Ceded reinsurance balances payable ,205 32,435 Obligations under investment and payment agreements ,709,892 8,570,902 Obligations under investment repurchase agreements , ,524 Securities sold under agreement to repurchase ,000 Current income taxes ,044 97,826 Long-term debt ,891,183 1,669,945 Accrued interest payable , ,443 Derivative liabilities ,744,697 6,685,528 Other liabilities , ,734 Payable for securities purchased , Total liabilities ,633,524 21,285,118 Stockholders' equity: Preferred stock Common stock ,944 1,092 Additional paid-in capital ,024, ,952 Accumulated other comprehensive loss (554,578) (22,138) Retained earnings ,598 2,107,773 Common stock held in treasury at cost (636,933) (646,786) Total stockholders' equity ,296,535 2,279,893 Total liabilities and stockholders' equity $24,930,059 $23,565,011 Number of shares outstanding (net of treasury shares) ,829, ,550,023 Book value per share $4.52 $22.45 Adjusted book value per share $15.83 $

18 Financial Guarantees (1)(2)(3) First Quarter ($ Thousands) Public Finance: Gross Par Guaranteed $517,061 $13,906,376 Up-front Premium $4,849 $106,089 Installment Premium ,358 8,301 Gross Premium $13,207 $114,390 Credit Enhancement Production $5,524 $114,614 Net Credit Enhancement Production $5,038 $100,409 Structured Finance: Gross Par Guaranteed $3,828,012 $15,065,618 Up-front Premium $1,690 $4,309 Installment Premium ,537 78,927 Gross Premium $82,227 $83,236 Credit Enhancement Production $29,356 $135,350 Net Credit Enhancement Production $26,816 $118,695 International Finance: Gross Par Guaranteed $541,535 $2,535,594 Up-front Premium $377 $1,824 Installment Premium ,396 50,462 Gross Premium $63,773 $52,286 Credit Enhancement Production $5,603 $60,115 Net Credit Enhancement Production $5,413 $42,690 Grand Total: Gross Par Guaranteed $4,886,608 $31,507,588 Up-front Premium $6,916 $112,222 Installment Premium , ,690 Gross Premium $159,207 $249,912 Credit Enhancement Production $40,483 $310,079 Net Credit Enhancement Production $37,267 $261,794 (1) Credit enhancement production (CEP) and net credit enhancement production (NCEP) includes reinsurance assumed of $2.4 million and $12.8 million for the three months ended March 2008 and 2007, respectively. NCEP is defined as CEP less reinsurance cessions. (2) International Finance includes components of domestic exposure. (3) CEP and NCEP were discounted at rates of 5.2% and 5.4% in the first quarter of 2008 and 2007, respectively. 15