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.