Ambac Assurance Corp AAA Claims-Pay Abil Rtg Affd By Fitch IBCA.

NEW YORK--(BUSINESS WIRE)--June 29, 1999--

Fitch IBCA affirms Ambac Assurance Corp.'s (Ambac) `AAA' claims-paying ability rating. Ambac is a leading financial guarantor of U.S. municipal, structured finance, and international transactions. It is the major subsidiary of Ambac Financial Group, Inc. (Ambac Financial Group); affiliated companies provide interest rate swaps, investment agreements, and other financial products to public sector clients. The company's various business lines allow Ambac to diversify its risk, reduce dependence on any one market sector for new business, and provide flexibility for allocating capital to where it can achieve the highest risk- adjusted return. Ambac Financial Group's return on equity (ROE) for 1998 and the five-year period ended Dec. 31, 1998 were 12.8% and 14.1%, respectively, the highest in the industry. However, Ambac is also among the most highly leveraged of the major bond insurers, with $211 billion of net principal in force, backed by $4.3 billion in total claims-paying resources for a ratio of 49:1.

Municipal bond insurance premium rates have climbed since last year, in some sectors by as much as 30%-50%. This is due mainly to a decision by industry leader MBIA Insurance Corp.'s (MBIA) new management to raise rates given its largest ever loss stemming from the bankruptcy of Allegheny Health, Education, and Research Foundation (AHERF), a municipal hospital credit. Ambac and the other two major bond insurers -- Financial Security Assurance Inc. (FSA) and Financial Guaranty Insurance Co. (FGIC) -- have also raised rates. This shift strengthens Ambac and the industry as a whole, whose ROE, while still adequate, has shrunk somewhat over the past five years. Ambac has lost market share in the lowest risk municipal sectors -- general obligation, water and sewer, transportation, and public higher education -- due to very low pricing by FGIC, a trend that is not likely to reverse itself even with the overall price increases.

U.S. asset-backed securities (ABS) and mortgage-backed securities (MBS) constitute about 15% of Ambac's 1998 adjusted gross premiums (AGPs) written. The liquidity crunch of subprime ABS and MBS seller/servicers has had relatively little negative effect on Ambac because, for the most part, Ambac only insures ABS and MBS transactions serviced directly by large, stable financial institutions or by companies owned by large, stable institutions. As a result, Ambac has not needed to devote management resources to effect servicing transfers, as have the other bond insurers.

Ambac's international activity, which represented 27% of its 1998 AGP but only 8.2% of its insured par, is written through a joint venture with MBIA called MBIA-AMBAC International. MBIA- AMBAC International concentrates on highly rated countries in Europe and in Japan, where it has entered into a partnership with two large multiline insurers, The Mitsui Marine and Fire Insurance Co. (Mitsui Marine and Fire) and The Yasuda Fire and Marine Insurance Co., Ltd. (Yasuda Fire and Marine). Future participation in emerging markets is not expected except where political, crossborder, and currency risks can be effectively mitigated. These opportunities include dollar-denominated future flow transactions of essential national products like petroleum or highly diversified collateralized bond obligations (CBOs) with sufficient first-loss protection to sustain economic depressions in any given region.

Ambac's `AAA' claims-paying ability rating is supported by $2.0 billion in qualified statutory capital, $1.4 billion in additional policyholders' reserves, $337 million in present value of future installment premiums, and $555 million in capital support agreements from highly rated international banks, which are triggered in the unlikely event municipal losses greatly exceed historical levels. Ambac's 169:1 ratio of net principal and interest in force divided by qualified statutory capital as of March 31, 1999 is the highest of the bond insurers, and its 49:1 ratio of net par outstanding to total claims-paying resources is second highest. Offsetting this high leverage is the company's conservative risk guidelines. The insured portfolio is well diversified by sector, geographical region, and business line. Credits are underwritten to a zero expected loss standard and closely surveilled. Furthermore, Ambac's loss ratio (losses incurred net of recoveries divided by premiums earned) was just 0.8% for the five-year period from 1994-1998, the lowest in the industry. Ambac's investment portfolio, of which 99% is rated `A' or higher, is composed mostly of high credit quality municipal bonds, with no equities, real estate, or junk bonds. Ambac has ample liquidity from operating cash flow, short-term investments, and revolving credit lines to pay unexpected claims. Even when subjected to a stress test projecting an economic depression equivalent to the Great Depression of the 1930s, resulting claims are within Ambac's financial resources to pay them.

Like the other major bond insurers, Ambac's `AAA' claims-paying ability rating is very stable due to the low-risk nature of its underwriting and effective portfolio surveillance. In addition, the `AAA' monolines have an extremely strong incentive to maintain their ratings since this is the basis of their product, particularly in the municipal market. Finally, a bond insurer has a good deal of flexibility in maintaining its rating by controlling the risk level and volume of its new business, as well as adding claims-paying resources. Additional capacity can be achieved either through soft capital, i.e. reinsurance or standby capital agreements, or an injection of hard capital from its holding company, funded from available cash or an equity or debt offering. Ambac has used most of these mechanisms throughout its 27-year history in maintaining its robust claims-paying strength.

For further information, see Fitch IBCA's special report, titled `Ambac Assurance Corp.', which is available on the agency's web site at 'www.fitchibca.com' or by calling Market Services at 1-212-908-0500 in New York.