ABK : Ambac Financial Group

Ambac Financial Group, Inc., incorporated on April 29, 1991, is a primarily a holding company. The Company, through its subsidiaries, provides financial guarantees and financial services to clients in both the public and private sectors worldwide. Ambac’s activities are divided into two business segments: Financial Guarantee and Financial Services. The Financial Guarantee segment provides financial guarantees (including credit derivatives) for public finance, structured finance and other obligations. The Financial Services segment provided investment agreements, funding conduits, interest rate, total return and currency swaps, principally to clients of the financial guarantee business, which includes municipalities and other public entities, healthcare organizations, investor-owned utilities and asset-backed issuers. During the year ended December 31, 2008, the Company discontinued writing new investment agreements and derivative products in its Financial Services segment. Its existing investment agreement and derivative product portfolios are in active runoff, which may include transaction terminations, settlements, restructuring, transfers and natural attrition as contracts mature.

Ambac provides financial guarantee insurance for public and structured finance obligations through its principal operating subsidiary, Ambac Assurance Corporation (Ambac Assurance). Ambac Assurance has two financial guarantee insurance operating subsidiaries, Ambac Assurance UK Limited (Ambac UK) and Everspan Financial Guarantee Corp. (Everspan). Ambac UK insures an array of obligations in the international markets, including infrastructure financings, asset-securitizations, collateralized debt obligations (CDOs), utility obligations, whole business securitizations (securitizations of substantially all of the operating assets of a corporation) and other obligations, generally within Western Europe. Everspan is a financial guarantee insurance company and is placed into runoff.

Financial Guarantee Segment

The financial guarantee segment includes financial guarantee insurance and other credit enhancement products, such as credit derivatives. Financial guarantee insurance provides an unconditional and irrevocable guarantee that protects the holder of a fixed-income obligation against non-payment of principal and interest when due. Essentially, Ambac Assurance and its subsidiaries make payments if the obligor responsible for making payments fails to do so. Ambac Assurance and its subsidiaries serve the global capital markets by providing financial guarantee insurance for public finance and structured finance obligations. In certain floating-rate insured transactions, the issuer or ultimate obligor of insured securities is party to an interest rate swap that hedges its risk to interest rates, effectively creating a synthetic fixed-rate obligation. In such transactions, Ambac Assurance has, from time to time, insured the obligor’s payment obligations under the interest rate swap contract, including in some but not all cases the obligation to make a termination payment upon the occurrence of certain specified termination events.

Ambac Assurance and its subsidiaries guarantee or provide credit protection on obligations already carrying insurance from other financial guarantors, with Ambac Assurance obligated to pay only upon a default by both the underlying obligor and the original financial guarantor. At December 31, 2008, Ambac provided credit protection for $1.4 billion outstanding par on these obligations, primarily through the issuance of credit derivatives. Ambac Assurance has underwritten transactions, which expose the company to risks, which may not be correlated to credit risk, such as market risk, weather-related or other disasters, mortality or other property and casualty type risk characteristics.

As an alternative to financial guarantee insurance, credit protection was provided by Ambac Credit Products LLC (Ambac Credit Products), a subsidiary of Ambac Assurance, in credit derivative format. Ambac Assurance insures the obligations of Ambac Credit Products under these transactions. These credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event, such as a payment default or bankruptcy relating to an underlying obligation. Substantially all of Ambac Credit Product’s credit derivative contracts relate to structured finance transactions. As part of its refocused business strategy, Ambac decided to discontinue the execution of credit enhancement transactions in credit default swap format. However, Ambac may execute restructuring or hedging transactions in derivative format for purposes of mitigating losses and/or improving its position relative to existing credit exposures.

Financial guarantee products are sold in three principal markets: the United States public finance market, the United States structured finance and asset-backed market, and the international finance market. As of December 31, 2008, Ambac’s portfolio of United States public finance exposures was $238 billion, representing 55% of Ambac’s net par outstanding. This consists of the United States municipal issuance, including general obligations, lease and tax-backed obligations, healthcare, housing, public utilities, transportation and higher education, as well as certain infrastructure privatization transactions, such as toll road and bridge financings, public transportation financings, stadium financings, military housing and student housing. As of December 31, 2008, Ambac’s portfolio of United States structured finance exposures was $140 billion, representing 32% of Ambac’s net par outstanding. Sectors covered include securitizations of mortgage loans, home equity loans, auto loans, student loans, credit card debt, leases, operating assets and CDOs, where the majority of the underlying collateral risks are situated in the United States. As of December 31, 2008, the Company’s portfolio of international exposures was $56 billion, representing 13% of Ambac’s net par outstanding. Ambac’s existing international finance exposure includes an array of obligations in the international markets, including infrastructure financings, asset securitizations, CDOs, utility obligations, whole business securitizations and other obligations.

Financial Services Segment

Ambac’s Financial Services segment has provided financial and investment products, including investment agreements, derivative products (interest rate, currency and total return swaps) and funding conduits principally to clients of the financial guarantee business. The Financial Services portfolios obtained funding support from both Ambac Assurance and Ambac Financial Group during 2008, in the form of loans and purchases of invested assets. Ambac provided investment agreements, including repurchase agreements, primarily to issuers of asset-backed and structured finance debt, and to a lesser extent, to municipal issuers through its wholly owned subsidiary, Ambac Capital Funding. Investment agreements used in structured financings provide a guaranteed investment return customized to meet expected and potential cash flow requirements. Investment agreements are used by municipal bond issuers to invest bond proceeds until such proceeds can be used for their intended purpose, such as financing construction. The investment agreement provides for the guaranteed return of principal invested, as well as the payment of interest thereon at a guaranteed rate and carries the same ratings as Ambac Assurance.

Ambac Securities Inc.’s principal business is to serve as the placement agent and dealer for securities issued by Ambac Capital Funding in private placement transactions. Ambac Securities is a broker-dealer. The primary activities in the derivative products business are intermediation of interest rate and currency swap transactions (through Ambac Financial Services) and taking total return swap positions (through Ambac Capital Services) on certain fixed-income obligations. All derivatives provided by Ambac Financial Services and Ambac Capital Services are guaranteed by Ambac Assurance through policies that guarantee their obligations to the derivative counterparties.

As of December 31, 2008, the consolidated investments of Ambac had an aggregate fair value of approximately $10.3 billion and an aggregate amortized cost of approximately $12.8 billion. As of December 31, 2008, the Financial Guarantee investment portfolio had an aggregate fair value of approximately $7.7 billion and an aggregate amortized cost of approximately $9.4 billion. Ambac Assurance’s investment policy is designed to achieve diversification of its portfolio and only permits investment in fixed-income securities.

The Company competes with Financial Security Assurance Inc. (FSA Guarantee) and Assured Guaranty Corp. (Assured Guaranty).

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