Ambac Financial Group, Inc. Announces Second Quarter Net Income of $173.0 Million, Down 27%

Business Wire, July 25, 2007

Second Quarter Net Income Per Diluted Share of $1.67, down 25%,

Second Quarter Credit Enhancement Production((1)) $367.8 million, down 31%

NEW YORK -- Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced second quarter 2007 net income of $173.0 million, or $1.67 per diluted share. This represents a 27% decrease from second quarter 2006 net income of $238.6 million, and a 25% decrease in net income per diluted share from $2.22. The decrease is primarily due to unrealized mark-to-market losses amounting to ($56.9) million, or ($0.36) per diluted share, related to credit derivative exposures in the second quarter 2007. The comparable quarter of 2006 included net realized gains on investment securities of $44.4 million, or $0.27 per diluted share, primarily resulting from cash recoveries received related to a security in the investment agreement portfolio that had been written down in prior years. The second quarter 2007 unrealized mark-to-market losses on credit derivative exposures is the result of unfavorable market pricing of collateralized debt obligations with significant amounts of sub-prime residential mortgage collateral. As further described below, net mark-to-market gains and losses on credit derivatives and net gains and losses from sales of investment securities are excluded from the earnings measures used by research analysts.

Net Income Per Diluted Share

Net income 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 other information.

Earnings measures reported by research analysts exclude the net income 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 (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 second quarter 2007, net security gains and losses had the effect of decreasing net income by ($34.6) million, or ($0.34) on a per diluted share basis. Accelerated earnings had the effect of increasing net income by $25.6 million, or $0.25 per diluted share during the quarter. Table I, below, provides second quarter and six-month comparisons of earnings for 2007 and 2006.

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(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.

Commenting on the overall results, Ambac Chairman and Chief Executive Officer, Robert J. Genader, noted, "We are pleased with the breadth and quality of our business production in the quarter. Our rigorous and proven approach enabled us to deliver positive results despite the turmoil in the sub-prime mortgage market that resulted in a negative mark-to-market adjustment. Our triple-A business model offers us key advantages, including our ability to hold insured transactions to maturity; no collateral or margin requirements on transactions insured; and, in the unlikely event of default we pay scheduled principal and interest, thereby minimizing liquidity risk." Mr. Genader added, "Looking ahead, the disciplined execution of our strategy positions us well to benefit from the improving business conditions we see, with wider spreads, enhanced credit terms and increased demand for our valuable financial guarantee products."

Revenues

Highlights

Credit enhancement production(1) in the second quarter of 2007 was $367.8 million, down 31% from Ambac's record quarterly production of $531.0 million reported in the second quarter of 2006.

Credit enhancement production for the six months of 2007 of $677.9 million was 11% lower than credit enhancement production of $764.4 million in the same period of 2006.

Table II, below, provides the second quarter and six-month comparisons of credit enhancement production by market segment for 2007 and 2006.

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In public finance, Ambac's premium production decreased even though overall market issuance was up approximately 13%, quarter on quarter. The increase in issuance for the quarter was driven by strong refunding issuance. Ambac's market share of the insured market was approximately 21%, down slightly from 22% in the comparable prior year quarter. Ambac wrote fewer large, structured transactions in the second quarter of 2007 relative to the comparable prior quarter resulting in the decline in credit enhancement production.

U.S. structured finance second quarter credit enhancement production declined from the prior year as the second quarter 2006 production included two large transactions representing 46% of that quarter's total production. Capital market activity in the U.S. continues to be robust and during the current quarter Ambac benefited from strong writings in pooled debt obligations (CDOs) where both pricing and transaction structure have improved significantly since the beginning of the year. Competition from the senior/subordinated market has dissipated significantly in mortgage-related asset classes.