Fitch Affirms Ambac's IFS 'AAA', LT 'AA' Debt 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 high quality of the company's insured portfolio, a significant base of capital support and claims-paying resources, stable earnings streams from earned premiums and investment income, industry-leading financial performance, and effective risk-management processes and procedures. Concerns center on increased competitive pressures within the financial guaranty sector, which may be felt more acutely by larger financial guarantors such as Ambac, and notable concentration to several high quality mortgage seller/servicers.

Ambac posted strong financial results for 2004, including $724.5 million of net income and a 15.6% return on equity. Ambac's insured portfolio also remained of a high credit quality (weighted average rating of 'A'), further supported by the current benign credit environment. However, current market conditions have also led to reduced demand for financial guaranty insurance, further exacerbated by significant competition among the financial guarantors. As a result, in the first quarter of 2005 Ambac publicly announced that earnings growth and new business production were expected to slow in 2005. Fitch will monitor any changes in Ambac's very conservative underwriting philosophy, which is due to the impact of the slowing new business production environment.

While Ambac's production has in fact slowed, the company continues to deliver strong and stable earnings, derived primarily from on-going earned premiums, investment income from its $8.5 billion (amortized cost as of March 31, 2005) investment portfolio, and low levels of incurred losses. Financial performance over the near- to medium-term is expected to be moderately affected by reduced business production and pricing, but Fitch does not envision this affecting the company's ratings.

Fitch has previously noted concern with respect to Ambac's significant insured exposure to mortgage-backed securities (MBS) originated and serviced by GMAC-RFC (RFC). While underlying collateral performance has met expectations, the size of Ambac's exposure poses concentration risk, in Fitch's opinion. Positively, Ambac's RFC exposure has declined significantly over the last year as result of significant run-off of Ambac's existing insured exposure, as well as RFC's utilization of senior/subordinated structures for its more recent securitizations. Ambac-insured U.S. and U.K. MBS originated by RFC totaled $14.5 billion and $8.4 billion of net par, respectively, as of Dec. 31, 2004. Fitch notes that U.K. mortgages, although originated by RFC, are serviced by an independent third-party servicer.

As of March 31, 2005, Ambac's insured portfolio totaled $462.8 billion of net par exposure, supported by $5.4 billion of qualified statutory capital and $11.4 billion of total claims-paying resources. Fitch continues to believe that Ambac maintains sufficient excess capital relative to the credit risk of its insured portfolio and in support of its 'AAA' IFS rating. Given the slowdown in new business production as well as continued internal capital generation from earned premiums and investment income, Ambac has redirected a portion of its excess capital toward significant share repurchase activity. In fact, within the first four months of 2005, Ambac had repurchased approximately 1.6 million shares at a cost of $86.7 million. Fitch expects that Ambac will continue to actively repurchase shares should the new business environment remain challenging.

As of March 31, 2005, Ambac had $791.8 million of long-term debt outstanding, which translated into a long-term debt-to-total-capital ratio of 13.4%, well in line with Fitch's guidelines for the holding company of a financial guaranty insurance company. Furthermore, 2005 regulatory-permitted dividend capacity to the holding company from the insurance subsidiary was 5.9 times 2004 interest expenses. Ambac currently has a $500 million shelf registration with the Securities and Exchange Commission in order to issue additional long-term debt, if necessary.

Fitch affirms the following insurer financial strength ratings at 'AAA':

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 are available on the agency's free of charge website, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the free site for seven days.