Ambac Financial Group, Inc. Announces Third Quarter Net Income of $175.1 Million, Down 5%; Reports Hurricane Katrina Loss Estimate of $60.0 Million, After-Tax

Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announcedthird quarter 2005 net income of $175.1 million, or $1.61 per dilutedshare. This represents a 5% decrease from third quarter 2004 netincome of $183.5 million, and a 2% decrease in net income per dilutedshare from $1.65 in the third quarter of 2004. The third quarter 2005results were negatively impacted by a loss provision amounting to$60.0 million on an after-tax basis, or $0.55 per diluted share,related to its exposure to municipal finance credits impacted byHurricane Katrina.

Net Income Per Diluted Share

Net income and net income per diluted share are computed inconformity with U.S. generally accepted accounting principles (GAAP).However, many research analysts and investors do not limit theiranalysis of our earnings to a strictly GAAP basis. In order to assistinvestors in their understanding of quarterly results, Ambac providesother information.

Earnings measures reported by research analysts typically excludethe net income impact of net gains and losses from sales of investmentsecurities and mark-to-market gains and losses on credit, total returnand non-trading derivative contracts (collectively "net security gainsand losses") and certain non-recurring and other items. Certainresearch analysts and investors further exclude the net income impactof accelerated premiums earned on guaranteed obligations that havebeen refunded and other accelerated earnings ("accelerated earnings").During the third quarter 2005, net security gains and losses had theeffect of increasing net income by $8.8 million, $0.08 on a perdiluted share basis. Accelerated earnings had the effect of increasingnet income by $28.5 million, or $0.26 per diluted share for the thirdquarter 2005. Table I, below, provides third quarter and nine-monthcomparisons of earnings for the years 2005 and 2004.

Table I

Third Quarter Nine months
% %
2005 2004 Change 2005 2004 Change
---- ---- ------ ---- ---- ------
Net income per
diluted share $1.61 $1.65 - 2% $4.97 $4.84 + 3%
Effect of net n.a. n.a.
security gains ($0.08) ($0.06) ($0.27) ($0.17)
Non-recurring and n.a. n.a.
other(a) $0.00 $0.00 $0.00 ($0.02)
----- ----- ----- -------
Sub-total excluding
effect of net
security
gains/losses and
non-recurring
items(b) $1.53 $1.59 - 4% $4.70 $4.65 + 1%
Effect of n.a. n.a.
Accelerated
earnings ($0.26) ($0.11) ($0.56) ($0.35)
------- ------- ------- -------
Total excluding items $1.27 $1.48 - 14% $4.14 $4.30 - 4%
===== ===== ======= =======

(a) 2004 third quarter and nine months results have been adjusted by
$1.3 million and $3.5 million, respectively, for expenses related
to Ambac's contingent capital facility to be comparable with 2005
reporting.
(b) Consensus earnings that are reported by earnings estimate
services, such as First Call, are on this basis, which excludes
net security gains and losses and non-recurring items.

Commenting on the overall results, Ambac President and ChiefExecutive Officer, Robert J. Genader, noted, "Our operating results,excluding the $0.55 per share impact of Hurricane Katrina, were prettygood considering the tight credit spreads and increased competitionthat have persisted during the past 18 months. Domestic top-lineproduction in both public and structured finance was encouraging, withattractive deals closed in a wide array of sectors. European bookedbusiness was sparse despite strong activity and growing pipelines - itremains a lumpy and less predictable business flow with long leadtimes." Mr. Genader continued, "The story of the quarter was HurricaneKatrina and the physical destruction and human suffering that itwrought. While early in the assessment process, we have completed adetailed loss analysis using the best information we could develop. Byits very nature, it will be an evolving situation which will requireand get our full attention on surveillance and active remediation. Ona positive note, the balance of our risk portfolio showedimprovement."

Revenues

Highlights

Credit enhancement production(1) in the third quarter of 2005 was$256.6 million, down 6% from the third quarter of 2004 which came inat $273.7 million. Growth in U.S. public finance was more than offsetby a decline in production in U.S. structured finance andinternational.

Credit enhancement production for the nine months of 2005 of$853.5 million was 10% lower than credit enhancement production of$943.6 million in the same period of 2004 primarily driven by tightercredit spreads across many of the markets that Ambac serves.

Table II, below, provides the third quarter and nine-monthcomparisons of credit enhancement production by market sector, for2005 and 2004.

Table II
Credit Enhancement Production(1)

$-millions Third Quarter Nine months
% %
2005 2004 Change 2005 2004 Change
-------- ------ -------- -------- -------- --------
Public Finance $118.3 $105.9 + 12% $397.3 $440.5 - 10%
Structured Finance 110.5 123.5 - 11% 329.1 290.3 + 13%
International 27.8 44.3 - 37% 127.1 212.8 - 40%
-------- ------- -------- --------
Total $256.6 $273.7 - 6% $853.5 $943.6 - 10%
======== ======= ======== ========

In Public Finance, municipal market issuance, as reported by thirdparty sources, was 27% higher in the third quarter of 2005 than in thecomparable prior period while insured market penetration remainedstrong at 55% but slightly lower than third quarter of 2004.Transactions guaranteed during the quarter included strong writings inthe health care and municipal lease sectors of the market offset bylower writings in the municipal utilities and housing sectors. Spreadsin U.S. public finance remain fairly attractive, however, pricing hasbeen impacted by increased competition from other financialguarantors. U.S. structured finance production during the quarter wasgood but slightly lower than the comparable prior period assignificant commercial asset-backed securitization activity was offsetby lower consumer asset-backed writings. Competition from the marketin the form of senior/subordination execution remains strong in manysectors. International writings were slow for the quarter butopportunities are plentiful across many business sectors andgeographies. The international segment production is lumpy primarilydue to long transaction closing cycles typically caused by the sizeand complexity of the deals.

Net premiums written in the third quarter of 2005 of $203.6million were 6% higher than net premiums written of $191.9 million inthe same period of 2004. Gross premiums written in the third quarterof 2005 and 2004 were offset by $34.3 million and $18.7 million,respectively, in ceded premiums. Ceded premiums as a percentage ofgross premiums written were 14% and 9% for the third quarter of 2005and 2004, respectively. The mix of business underwritten and greaterreinsurance treaty participation during the quarter drove theincrease.

Net premiums written for the nine months of 2005 of $728.0 millionwere 5% lower than net premiums written of $763.6 million in the sameperiod of 2004. Excluding the impact of return premiums in each of theperiods ($55.8 million in the first quarter of 2005 and $64.8 millionin the second quarter of 2004), net premiums written are down 4%,period on period due to less U.S. public finance business written(where premiums are primarily collected up front) and greaterreinsurance treaty participation during 2005.

A breakdown of gross premiums written by market sector and cededpremiums for the third quarter and nine-month periods of 2005 and 2004are included below in Table III.

Table III
Premiums Written

$-millions Third Quarter Nine months
% %
2005 2004 Change 2005 2004 Change
------ ------ -------- ------ ------ --------
Public Finance $111.7 $93.1 + 20% $393.2 $431.8 - 9%
Structured Finance 78.1 69.6 + 12% 231.2 211.2 + 9%
International 48.1 47.9 0 % 165.3 157.2 + 5%
------- ------- ------- -------
Total Gross Premiums
Written 237.9 210.6 + 13% 789.7 800.2 - 1%
Ceded Premiums
Written (34.3) (18.7) + 83% (61.7) (36.6) +69%
------- ------- ------- -------
Net Premiums Written $203.6 $191.9 + 6% $728.0 $763.6 - 5%
======= ======= ======= =======

Net premiums earned and other credit enhancement fees for thethird quarter of 2005 were $231.1 million, which represented an 18%increase from the $195.3 million earned in the third quarter of 2004.Net premiums earned increased for all market sectors but was mostsignificant in U.S. public finance where accelerated premiums werevery strong during the quarter.

Net premiums earned include accelerated premiums, which resultfrom refundings, calls and other accelerations recognized during thequarter. Accelerated premiums were $48.9 million in the third quarterof 2005 (which had a net income per diluted share effect of $0.26), up133% from $21.0 million ($0.11 per diluted share) in acceleratedpremiums in the third quarter of 2004. The third quarter 2005 wasimpacted by one large refunded transaction, representing almost halfof the total accelerated amount. Long-term interest rates haveremained relatively low during 2005 and we continue to see strongrefunding activity in our public finance segment. However, as interestrates rise, the level of accelerated premiums should decline.

Net premiums earned and other credit enhancement fees for the ninemonths of 2005 were $648.6 million, which represented a 13% increasefrom $573.6 million earned in the nine months of 2004. Acceleratedpremiums were $107.9 million for the nine months of 2005 ($0.56 perdiluted share), up 56% from $69.2 million ($0.35 per diluted share) inaccelerated premiums for the nine months of 2004. Accelerated premiumsin 2005 include the impact of a reinsurance cancellation in the firstquarter of 2005 amounting to $4.5 million. Accelerated premiums in2004 include the impact of reinsurance cancellations in the secondquarter of 2004 amounting to $10.4 million.

A breakdown of net premiums earned and other credit enhancementfees by market sector for the third quarter and nine months of 2005and 2004 are included below in Table IV. Normal net premiums earnedexclude accelerated premiums that result from refundings, calls andother accelerations.

Table IV
Net Premiums Earned and Other Credit Enhancement Fees

$-millions Third Quarter Nine months
% %
2005 2004 Change 2005 2004 Change
------- ------- -------- -------- -------- --------
Public Finance $56.9 $53.5 + 6% $166.7 $153.3 + 9%
Structured Finance 71.4 70.2 + 2% 211.7 203.4 + 4%
International 53.9 50.6 + 7% 162.3 147.7 + 10%
------- ------- -------- --------
Total Normal
Premiums/Fees 182.2 174.3 + 5% 540.7 504.4 + 7%
Accelerated
Premiums/Fees 48.9 21.0 + 133% 107.9 69.2 + 56%
------- ------- -------- --------
Total $231.1 $195.3 + 18% $648.6 $573.6 + 13%
======= ======= ======== ========

Public finance earned premiums, before accelerations, grew 6%.Earned premium growth in this segment has been negatively impacted bythe high level of refunding activity in Ambac's public finance book.The high refunding level has substantially offset the positive impactresulting from our focus on higher value-added structured municipaltransactions.

Structured finance earned premiums and other credit enhancementfees grew 2%. The rate of growth in structured finance has slowedsignificantly over the past 18 months, adversely impacted by lowerpremium production in mortgage-backed and home equity securitizationsand pooled debt obligations. These relatively short-term asset classeshad experienced significant growth in years prior to 2004, fueled byheavy issuance and wide spreads. However, narrowing credit spreads andincreased competition has led to significantly lower writings in thesesegments. The lower business writings combined with the high level ofprincipal pay downs (mortgage-backed securities) and deal terminations(CDOs) has reduced the size of the portfolios, resulting in lowerearnings from these specific asset classes.

International earned premiums and other credit enhancement feesgrew 7%. The rate of growth in this sector has also slowed in 2005.The decline is driven primarily by maturities and calls of our pooleddebt obligations outstanding. Additionally, new business generation inthis asset class has slowed somewhat as credit spreads have generallynarrowed, reducing the need for financial guarantee protection.

Net investment income for the third quarter of 2005 was $110.6million, representing an increase of 22% from $90.5 million in thecomparable period of 2004. Net investment income excluding netinvestment income from Variable Interest Entities ("VIEs") for thethird quarter of 2005 was $98.5 million, representing an increase of10% from $89.6 million in the third quarter of 2004. This increase wasdue primarily to the growth in the investment portfolio driven byongoing collection of financial guarantee premiums and fees and a netpositive adjustment to investment income for certain municipalsecurities within the investment portfolio that have beenpre-refunded. A pre-refunding shortens the maturity of a bondresulting in accelerated amortization of bond premium or discountThese positive effects on investment income during the period werepartially offset by a lower reinvestment rate and use of cash forrepurchases of Ambac stock during 2005 totaling approximately $300million. Net investment income from VIEs for the third quarter of 2005was $12.1 million, up from $0.9 million in the third quarter of 2004.Investment income from VIEs results from the consolidation of certaintrusts that Ambac has insured and consolidated under accountingpronouncement FIN 46. The increase in interest income from VIEsreflects the consolidation of two transactions executed in the fourthquarter of 2004. Investment income from VIEs is offset by interestexpense on VIEs, shown separately in the Consolidated Statements ofOperations.

Net investment income (including net investment income from VIEs)for the nine months of 2005 was $317.1 million, representing anincrease of 19% from $267.1 million in the comparable period of 2004,primarily as a result of the reasons provided above.

Financial services. The financial services segment is comprised ofthe investment agreement business and derivative products business.The investment agreement business is managed with the goal ofapproximately matching the cash flows of the investment agreementliabilities with the cash flows of the related investment portfolio.The primary activities in the derivative products business areintermediation of interest rate and currency swap transactions andtaking total return swap positions on certain fixed incomeobligations. Gross interest income less gross interest expense frominvestment and payment agreements plus results from the derivativeproducts business, excluding net realized investment gains and lossesand unrealized gains and losses on total return swaps and non-tradingderivative contracts, were $17.1 million in the third quarter of 2005,up 23% from $13.9 million in the third quarter of 2004. The increasewas driven by spread improvement in the investment agreement businessand net mark-to-market gains in the derivative products businessprimarily resulting from the decrease in the ratio of tax-exemptinterest rates to taxable interest rates.

Financial services revenues, as defined above, were $35.4 millionin the nine months of 2005, down 15% from the $41.7 million in thefirst nine months of 2004, primarily due to lower revenues in thederivative products business.

Expenses

Highlights

Financial guarantee expenses of $128.6 million for the thirdquarter of 2005 increased by 188% over the $44.6 million of expensesfor the same quarter of 2004. Financial guarantee loss and lossexpenses grew significantly from $17.7 million in the third quarter of2004 to $89.1 million in the third quarter of 2005, due to increasedreserves resulting from municipal exposures in the region impacted byHurricane Katrina, as described below in "Loss Reserve Activity". Netunderwriting and operating expenses of the financial guarantee segmenttotaled $27.8 million in the third quarter of 2005, up 6% from $26.2in the third quarter of 2004. Interest expense on VIE notes amountingto $11.6 million and $0.7 million in the third quarter of 2005 and2004, respectively, result from the consolidation of certain truststhat Ambac has insured and consolidated under accounting pronouncementFIN 46.

Financial guarantee expenses of $259.2 million for the nine monthsof 2005 increased by 90% over the $136.1 million of expenses for thesame period of 2004. Financial guarantee loss and loss expenses of$134.3 million for the nine months of 2005 increased 155% from $52.7million in 2004 primarily due to the Hurricane Katrina provisioning,described below. Net underwriting and operating expenses of thefinancial guarantee segment for the first nine months totaled $89.9million, up 11% from $81.3 in the comparable period of 2004, primarilydue to higher compensation costs.

Financial services other expenses, which represent the operatingexpenses for the segment, amounted to $2.9 million for the thirdquarter of 2005, down 12% from $3.3 million in the comparable priorperiod.

Financial services other expenses for the nine months of 2005 of$10.2 million were relatively flat to the comparable prior period.

Loss Reserve Activity

Case basis loss reserves (loss reserves for exposures that havedefaulted) decreased $3.7 million during the third quarter of 2005from $86.6 million at June 30, 2005 to $82.9 million at September 30,2005.

Active credit reserves ("ACR") are established for probable andestimable losses due to credit deterioration on insured transactionsthat are considered adversely classified. Ambac continuously monitorsits insured portfolio actively seeking to mitigate claims. The ACRincreased by $79.3 million during the quarter, primarily as a resultof municipal exposures to the region impacted by Hurricane Katrina.Ambac's exposure to losses as a result of the hurricane is derivedprimarily from its guarantees of municipal bonds in the greater NewOrleans area and the Gulf-front regions that were most severelyimpacted by the storm. The company has classified 35 individualobligations in the region with total net par outstanding ofapproximately $1.1 billion. To date, Ambac has paid three claims onobligations in the region, totaling approximately $2.0 million and hassubsequently recovered the full amounts. In determining our lossestimate, our analysis has considered the unprecedented nature of thedisaster, including the displacement of the communities' residents,and the unique aspects of each insured bond, such as the nature of therevenue source, the level of debt service reserves, if any, and othertransaction protections. Ambac's estimate of losses related to thehurricane was made without regard to any potential federal, state orlocal government assistance to individual municipalities orinstitutions. The credit loss estimation process involves the exerciseof considerable judgment. Due to the nature of the loss reserveestimate, Ambac's ultimate actual loss associated with the hurricanemay be materially different than the current estimate and thereby mayaffect future operating results. Ambac will continue to assess theimpact of Hurricane Katrina on the fourth quarter and subsequentperiods as more information becomes available to us. Ambac does nothave material exposure to credits adversely affected by HurricaneRita. Outside of the ACR activity related to the hurricane, theremaining portfolio experienced slightly favorable credit migrationduring the quarter.

Other Items

Total net securities gains/(losses) for the third quarter of 2005were $14.5 million on a pre-tax basis, or $0.08 per diluted share;consisting of net realized gains on investment securities of $9.5million, net mark-to-market gains on credit and total returnderivatives of $3.9 million and net mark-to-market gains onnon-trading derivative contracts of $1.1 million. For the thirdquarter of 2004, net securities gains/(losses) were $10.1 million on apre-tax basis, or $0.06 per diluted share; consisting of net realizedgains on investment securities of $6.6 million, net mark-to-marketgains on credit and total return derivatives of $3.0 million and netmark-to-market gains on non-trading derivative contracts of $0.5million.

Total net securities gains/(losses) for the nine months of 2005were $53.1 million, or $0.27 per diluted share, consisting of netrealized gains on investment securities of $10.8 million, netmark-to-market losses on credit and total return derivatives of ($7.0)million and net mark-to-market gains on non-trading derivativecontracts of $49.3 million. As discussed in the previous quarter, themark-to-market gains on non-trading derivative contracts relatedalmost entirely to interest rate hedge contracts related to long-termfixed rate liabilities in Ambac's investment agreement business thatwere highly effective from an economic perspective but did not meetthe technical requirements of FAS 133. As of July 1, 2005, the hedgeswere redesignated to meet the technical requirements and it isexpected that the mark-to-market of the hedge and hedged item willsubstantially offset each other in the income statement prospectively.For the nine months of 2004 net securities gains were $29.3 million,or $0.17 per diluted share, consisting of net realized gains oninvestment securities of $27.6 million, mark-to-market gains on creditderivatives and total return swaps of $15.2 million and netmark-to-market losses on non-trading derivative contracts of ($13.5)million.

Balance Sheet

Highlights

Total assets as of September 30, 2005 were $19.06 billion, up 2%from total assets of $18.74 billion at December 31, 2004. The increasewas driven by cash generated from business written during the periodoffset by a decrease in the unrealized gains in the investmentportfolio driven by higher long-term interest rates and stockrepurchases during the period. As of September 30, 2005, stockholders'equity was $5.19 billion, a 3% increase from year-end 2004stockholders' equity of $5.02 billion. The increase was primarily theresult of net income during the period, offset by lower "AccumulatedOther Comprehensive Income," driven by higher long-term interest ratesand stock repurchases during the period.

Stock Repurchase Activity

During the quarter, Ambac repurchased approximately 2.4 millionshares of its stock at a total cost of approximately $164.4 million.Year-to-date repurchases have amounted to approximately 4.3 millionshares at a total cost of approximately $298.2 million. The companyhas approximately 4.6 million shares remaining under the Company'sShare Repurchase Program authorized by the Board of Directors earlierthis year.

Cash Dividend Declared

At its October 2005 Board meeting, the Board of Directors of AmbacFinancial Group, Inc. approved the regular quarterly cash dividend of$0.15 per share of common stock. The dividend is payable on December7, 2005 to stockholders of record on November 10, 2005.

Forward-Looking Statements

This release, in particular the President and Chief ExecutiveOfficer's remarks, contains statements about our future results thatmay be considered "forward-looking statements" under the PrivateSecurities Litigation Reform Act of 1995. These statements are basedon current expectations and the current economic environment. Wecaution you that these statements are not guarantees of futureperformance. They involve a number of risks and uncertainties that aredifficult to predict. Our actual results could differ materially fromthose expressed or implied in the forward-looking statements. Amongthe factors that could cause actual results to differ materially are(1) changes in the economic, credit, or interest rate environment inthe United States and abroad; (2) the level of activity within thenational and worldwide debt markets; (3) competitive conditions andpricing levels; (4) legislative and regulatory developments; (5)changes in tax laws; (6) the policies and actions of the United Statesand other governments; (7) changes in capital requirement or othercriteria of rating agencies; (8) changes in accounting principles orpractices that may impact the Company's reported financial results;(9) inadequacy of reserves established for losses and loss adjustmentexpenses; (10) default of one or more of the Company's reinsurers;(11) market spreads and pricing on insured pooled debt obligations andother derivative products insured or issued by the Company; (12)prepayment speeds on insured asset-backed securities and other factorsthat may influence the amount of installment premiums paid to theCompany; and (13) other risks and uncertainties that have not beenidentified at this time. We undertake no obligation to publiclycorrect or update any forward-looking statement if we later becomeaware that it is not likely to be achieved, except as required by law.

Ambac Financial Group, Inc., headquartered in New York City, is aholding company whose affiliates provide financial guarantees andfinancial services to clients in both the public and private sectorsaround the world. Ambac's principal operating subsidiary, AmbacAssurance Corporation, a leading guarantor of public finance andstructured finance obligations, has earned triple-A ratings, thehighest ratings available from Moody's Investors Service, Inc.,Standard & Poor's Ratings Services, Fitch, Inc. and Rating andInvestment Information, Inc. Ambac Financial Group, Inc. common stockis listed on the New York Stock Exchange (ticker symbol ABK).

Footnotes
---------

(1) Credit enhancement production, which is not promulgated under
GAAP, 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 definition of credit enhancement production used by Ambac may
differ from definitions of credit enhancement production 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 Third Quarter Nine months

2005 2004 2005 2004
------ ------ ------ ------
Credit enhancement production $257 $274 $854 $944
Present value of estimated installment
premiums written on insurance policies
and structured credit derivatives issued
in the period (143) (180) (446) (495)
------ ------ ------ ------
Gross up-front premiums written
$114 $ 94 $408 $449
Gross installment premiums written on
insurance policies 124 117 382 351
------ ------ ------ ------
Gross premiums written $238 $211 $790 $800
====== ====== ====== ======

Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three and Nine Months Ended September 30, 2005 and 2004
(Dollars in Thousands Except Share Data)


Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
------------------------- -------------------------
Revenues:
Financial Guarantee:
Gross premiums
written $237,943 $210,587 $789,697 $800,217
Ceded premiums
written (34,296) (18,649) (61,707) (36,586)
------------ ------------ ------------ ------------
Net premiums
written $203,647 $191,938 $727,990 $763,631
============ ============ ============ ============

Net premiums
earned $218,098 $183,499 $610,974 $538,527
Other credit
enhancement
fees 13,014 11,839 37,617 35,084
------------ ------------ ------------ ------------
Net premiums
earned and
other credit
enhancement
fees 231,112 195,338 648,591 573,611
Net investment
income 110,646 90,454 317,104 267,088
Net realized
investment
gains 5,013 7,358 6,004 22,523
Net mark-to-
market gains
(losses) on
credit derivative
contracts 1,555 (330) (4,785) 9,888
Other income (loss) 2,859 799 6,150 (10,014)
Financial Services:
Interest from
investment and
payment
agreements 70,854 48,452 192,951 146,542
Derivative
products 8,896 7,175 13,202 20,269
Net realized
investment
gains (losses) 4,520 (830) 4,808 5,013
Net mark-to-
market gains
(losses) on
total return
swap contracts 2,347 3,277 (2,255) 5,301
Net mark-to-
market
(losses) gains
on non-trading
derivatives (57) 22 48,869 126
Corporate:
Net investment
income 515 416 1,320 1,172
Net realized
investment
gains - - - 18
------------ ------------ ------------ ------------

Total revenues 438,260 352,131 1,231,959 1,041,537
------------ ------------ ------------ ------------

Expenses:
Financial Guarantee:
Loss and loss
expenses 89,126 17,700 134,255 52,700
Underwriting
and operating
expenses 27,844 26,186 89,939 81,299
Interest expense on
variable interest
entity notes 11,623 710 35,018 2,102
Financial
Services:
Interest from
investment
and payment
agreements 62,602 41,736 170,781 125,106
Other expenses 2,912 3,349 10,162 10,425
Interest 13,627 13,722 40,653 40,808
Corporate 3,548 2,678 11,291 7,468
------------ ------------ ------------ ------------

Total expenses 211,282 106,081 492,099 319,908
------------ ------------ ------------ ------------

Income before
income taxes 226,978 246,050 739,860 721,629
Provision for
income taxes 51,861 61,632 193,102 184,560
------------ ------------ ------------ ------------

Income from
continuing
operations 175,117 184,418 546,758 537,069
------------ ------------ ------------ ------------

Discontinued
operations:
Loss from
discontinued
operations - (799) - (1,349)
Income tax
benefit - 160 - (60)
------------ ------------ ------------ ------------
Net loss from
discontinued
operations - (959) - (1,289)
------------ ------------ ------------ ------------

Net income $175,117 $183,459 $546,758 $535,780
============ ============ ============ ============

Earnings per share:
Income from
continuing
operations $1.63 $1.68 $5.02 $4.90

Discontinued
operations $0.00 ($0.01) $0.00 ($0.01)
------------ ------------ ------------ ------------

Net income $1.63 $1.67 $5.02 $4.89
============ ============ ============ ============

Earnings per
diluted share:

Income from
continuing
operations $1.61 $1.66 $4.97 $4.85

Discontinued
operations $0.00 ($0.01) $0.00 ($0.01)
------------ ------------ ------------ ------------

Net income $1.61 $1.65 $4.97 $4.84
============ ============ ============ ============

Weighted average
number of common
shares outstanding:

Basic 107,392,176 109,771,249 108,891,738 109,468,844
============ ============ ============ ============

Diluted 108,484,035 111,107,367 110,121,701 110,777,264
============ ============ ============ ============


Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2005 and December 31, 2004
(Dollars in Thousands Except Share Data)



September 30, December 31,
2005 2004
-------------- --------------
(unaudited)
Assets
------

Investments:
Fixed income securities, at fair value
(amortized cost of $14,757,218 in
2005 and $13,425,475 in 2004) $15,155,998 $13,901,218
Fixed income securities pledged as
collateral, at fair value
(amortized cost of $383,545 in
2005 and $345,195 in 2004) 376,928 341,742
Short-term investments, at cost
(approximates fair value) 175,097 521,226
Other (cost of $3,781 in 2005 and
$3,731 in 2004) 4,412 4,234
-------------- --------------
Total investments 15,712,435 14,768,420

Cash 28,468 19,957
Securities purchased under agreements
to resell 32,000 353,000
Receivable for securities sold 1,136 1,319
Investment income due and accrued 155,715 162,506
Reinsurance recoverable on paid and
unpaid losses 1,160 16,765
Prepaid reinsurance 287,161 297,330
Deferred acquisition costs 201,734 184,766
Loans 1,347,136 1,405,700
Derivative assets 1,145,224 1,455,609
Other assets 150,132 77,523
-------------- --------------
Total assets $19,062,301 $18,742,895
============== ==============

Liabilities and Stockholders' Equity
---------------------------------------

Liabilities:
Unearned premiums $2,875,956 $2,778,893
Loss and loss expense reserve 288,822 254,055
Ceded reinsurance balances payable 19,072 18,248
Obligations under investment and
payment agreements 6,902,790 6,813,914
Obligations under investment
repurchase agreements 201,680 266,806
Deferred income taxes 266,199 217,373
Current income taxes 1,627 16,406
Long-term debt 1,860,727 1,866,207
Accrued interest payable 79,581 71,058
Derivative liabilities 987,545 1,206,740
Other liabilities 240,928 208,732
Payable for securities purchased 143,379 6
-------------- --------------
Total liabilities 13,868,306 13,718,438
-------------- --------------

Stockholders' equity:
Preferred stock - -
Common stock 1,091 1,089
Additional paid-in capital 716,870 694,465
Accumulated other comprehensive income 235,502 296,814
Retained earnings 4,520,475 4,032,089
Common stock held in treasury at cost (279,943) -
-------------- --------------
Total stockholders' equity 5,193,995 5,024,457
-------------- --------------
Total liabilities and
stockholders' equity $19,062,301 $18,742,895
============== ==============

Number of shares outstanding (net of
treasury shares) 105,150,417 108,915,944
============== ==============
Book value per share $49.40 $46.13
============== ==============


Ambac Assurance Corporation and Subsidiaries
Capitalization Table - GAAP
September 30, 2005 and December 31, 2004
(Dollars in Millions)


The following table sets forth Ambac Assurance's consolidated
capitalization as of September 30, 2005 and December 31, 2004,
respectively, on the basis of accounting principles generally accepted
in the United States of America.

September 30, December 31,
2005 2004
-------------- --------------
(unaudited)

Unearned premiums $2,888 $2,783
Long-term debt 1,069 1,074
Other liabilities 2,014 2,192
-------------- --------------
Total liabilities 5,971 6,049
-------------- --------------

Stockholder's equity:
Common stock 82 82
Additional paid-in capital 1,252 1,233
Accumulated other comprehensive income 165 238
Retained earnings 4,314 4,094
-------------- --------------
Total stockholder's equity 5,813 5,647
-------------- --------------
Total liabilities and stockholder's
equity $11,784 $11,696
============== ==============