Fitch Affirms Ambac's 'AAA' IFS Ratings.

NEW YORK -- Fitch affirms the 'AAA' insurer financial strength (IFS) rating assigned to Ambac Assurance Corporation and the 'AA' long-term debt rating assigned to Ambac Financial Group, Inc. (collectively, Ambac). The Rating Outlook is Stable.

Ambac's ratings reflect the company's high quality insured portfolio, strong capital base and claims-paying resources, predictable earnings trends, industry-leading financial performance, and effective risk management processes and procedures. Concerns center on increased competitive pressures within the financial guaranty sector and notable concentrations to several large issuers.

Despite a very competitive operating environment, Ambac has consistently posted strong financial results, with $459.7 million of consolidated net income for the first six months of 2006 and a 16.7% return on equity. While Ambac has the benefit of a strong book of public finance business that has embedded premiums that lock in stable earnings, Fitch anticipates a healthy portion of the company's structured finance business will be amortizing in the next couple of years, only to be replaced with lower premium business, which is expected to pressure earnings in the next few years.

Ambac's insured portfolio remained of high quality (weighted average rating of 'A') and continued to be supported by positive performance in insured exposures as a result of the continued benign credit environment. However, the challenging industry dynamics for financial guarantors has pressured Ambac's public finance new production. Consistent with its strategy, Ambac has been able to offset some of these challenges by focusing on less commoditized sectors, with increased underwriting activity in structured finance, healthcare, tax-backed and housing sectors. Overall, Ambac's below investment grade (BIG) exposure has remained relatively stable over the last couple of years, though it has increased slightly on both an absolute and percentage basis. The current BIG exposure as of June 30, 2006 was $5.6 billion or 1.1% of the total portfolio.

Ambac's heavy concentration of mortgage-backed securities (MBS) originated and serviced by GMAC-RFC, which Fitch had previously noted with caution, has declined significantly in the past few years. However, Ambac's exposure to MBS originated and serviced by Countrywide Home Loans (Countrywide) has increased significantly to $16.2 billion at June 30, 2006. While Fitch notes the concentration risk to single seller/servicers, comfort is taken by the high level of subordination present in these deals.

As of June 30, 2006, Ambac's insured portfolio totaled $508.1 billion of net par outstanding, supported by $6.0 billion of qualified statutory capital and $12.5 billion of claims-paying resources (CPR). Fitch believes Ambac maintains sufficient excess capital relative to the risk of its insured portfolio and to support its 'AAA' IFS rating. However, Ambac was particularly aggressive with share repurchase activity in 2005 and bought back 4,481,490 shares at a cost of approximately $309.7 million. Through the first half of 2006, Ambac repurchased an additional $43.8 million of its shares. Given the challenging business environment, Fitch expects that if Ambac is unable to efficiently deploy generated excess capital towards new business opportunities, it will continue to repurchase its common stock.

Ambac had $1.2 billion of long-term debt as of June 30, 2006, which translates into a long-term debt-to-total-capital ratio of 17.5%, which is higher than levels seen in the industry. Fitch expects that half of the $400 million 2005 debt issuance will be used to replace $200 million of higher cost debt that becomes redeemable in October 2006. This would lower their financial leverage to a level closer to the industry standard.

Fitch affirms the following insurer financial strength ratings at 'AAA' with a Stable Rating Outlook:

--Ambac Assurance Corp.

--Ambac Assurance UK Ltd.

--Connie Lee Insurance Co.

Fitch also affirms the following:

Ambac Financial Group, Inc.

--Long-term debt 'AA'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.