ABK Ambac Financial Grp. Common Stock

Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today released an update related to the current environment and the impact of a potential downgrade by Moody�s. The text of the update follows: As noted in our press release yesterday, we were surprised by Moody�s decision to place Ambac�s ratings on review for downgrade. We can find no justification for Moody�s actions based on our ongoing analysis of Ambac�s portfolio, our aggressive remediation efforts and progress toward commuting exposures with certain counterparties. As you know, after Moody�s released its decision with respect to Ambac, the United States government announced its intention to establish the Mortgage and Financial Institutions Trust that will be authorized to acquire up to $750 billion of impaired assets from various financial institutions. While the details of this act are not yet known we believe that an undertaking of this magnitude may change the financial landscape entirely. Moody�s updated mortgage loss assumptions are extreme in our view and appear to be based on limited additional data since their last review. We continue to be mystified by Moody�s methodology of applying additional stresses to the current incredibly stressed environment. Ambac has initiated discussions with Moody�s related to these factors and the impact of any potential Federal government policies and actions. The key reality, we believe, is that whatever assumptions Moody�s or other analysts may have employed yesterday are not valid today. It strikes us as rash that an Agency would take rating action in light of our portfolio management efforts and this major development. Ambac expects that the resolution of the �review for downgrade� action will be completed only if and when (1) Moody�s loss projections with respect to Ambac�s portfolio are substantiated; and (2) the extent and nature of the government program is fully understood and its implications on the mortgage market can be factored into the analysis. We expect that the near term impact of any downgrade by Moody�s would be to increase the pressure on our financial services business. As you will recall, the financial services business is comprised of our Guaranteed Investment Contracts (GICs) and our swap obligations. Almost all of the transactions entered into by our financial services businesses are guaranteed by Ambac Assurance Corporation (AAC). The book value of GIC liabilities at August 31, 2008, amounted to approximately $6.1 billion (down from approximately $6.7 billion at June 30, 2008). The market value of the investment agreement asset portfolio, including cash balances, amounted to $4.2 billion as of August 31, 2008. In addition, the market value of interest rate derivative contracts held by the GIC business is a positive $180 million. The recent bankruptcy filing of Lehman Brothers Holdings Inc. is expected to result in the early terminations of approximately $1.2 billion in GIC liabilities. Approximately $900 million is expected to terminate before the end of September and the remaining $300 million by the end of October. Management anticipates funding the terminations via a combination of GIC investment portfolio resources and affiliate transactions with AAC. Ambac believes that the $1.2 billion inter-company facility, approved by the Office of the Commissioner of Insurance of the State of Wisconsin (OCI), will be sufficient to cover all the current obligations resulting from Lehman�s bankruptcy. AAC�s investment portfolio is valued at approximately $11.1 billion with over $1.3 billion in cash and short-term securities at August 31, 2008. The following table illustrates the current projected excess or shortfall of GIC assets at market value over the estimated total collateral requirement and prospective cumulative cash to be returned at various AAC rating levels based on August 31, 2008 balances and incorporating the impact of the Lehman-related GICs: $ in billions � Current AA/Aa3 � A+/A1 � A/A2 � A-/A3 � BBB+/ Baa1 � BBB/ Baa2 � BBB-/ Baa3 Market Value of Assets � $4.2 � $4.2 � $4.2 � $4.2 � $4.2 � $4.2 � $4.2 Total Collateral and Cash � $3.4 � $5.2 � $6.1 � $6.1 � $6.3 � $6.3 � $6.3 Projected Excess/(Shortfall) � $0.8 � ($1.0) � ($1.9) � ($1.9) � ($2.1) � ($2.1) � ($2.1) Summary: � -- � Upon a downgrade below the current rating level, Ambac estimates that the GIC asset portfolio is insufficient to cover the projected cumulative collateral requirement and terminations. � -- Upon a downgrade to A+ or A1, the collateral posting and cash requirements shortfall is estimated to be $1.0 billion. � -- Upon a downgrade to A/A2 or A-/A3, we estimate that the collateral posting and cash requirement shortfall would increase to $1.9 billion. � -- Further downgrades below the A-/A3 level will have no material impact as the portfolio will essentially be fully collateralized or terminated. Another important consequence of a potential downgrade is a re-evaluation of the plans and the timeline for our Connie Lee effort. Despite Moody's action,�we�believe that�our�Connie Lee�initiative is still viable and, in fact,�needed more than ever.�We had hoped to launch this new financial guarantee subsidiary focused on the municipal sector in the fourth quarter and have been working tirelessly to do so. However, the recent market turmoil and Moody�s action cause us to decelerate our timeline so as to focus our resources on addressing the concerns raised by Moody�s. Ambac�s expects to continue to navigate through the current market turmoil, specifically: Ambac is in discussions with the OCI to review alternatives to meet a potential collateral shortfall in our GIC business in the event of a ratings downgrade. Ambac will suspend its previously announced authorization to repurchase up to $50 million in common shares. No shares have been purchased to date. This supports the Company�s goal of maintaining sufficient parent company liquidity. Ambac�s balance sheet continues to de-leverage via significant refunding and prepayments of exposures. A transaction maturity or prepayment, not only releases rating agency capital, it allows for the accelerated recognition of premium earnings. Current quarter accelerated premiums (through September 18, 2008) exceeded $85 million. Our gross outstanding par insured decreased approximately 5% as compared to June 30, 2008. This de-leveraging improves our excess capital position compared to the previous quarter end. At June 30, 2008, we estimated that we maintained approximately $3.0 billion in excess of required capital relative to Moody�s Aa3 rating. Ambac continues to pursue a number of loss remediation strategies in its direct RMBS portfolio. Those strategies allowed Ambac to reduce its expected ultimate loss by approximately $260 million in the second quarter of 2008, and we are working diligently to expand on those efforts. In addition, we are in active discussions with CDO of ABS counterparties. The successful resolution of these discussions would result in decreased uncertainty related to these exposures and likely would result in an improvement in our capital position. The $850 million capital contribution to Connie Lee has been postponed pending completion of Moody�s review. This capital will further strength our capital adequacy ratios at AAC. We are steadfast in our belief that we can withstand the stress imposed by the current credit environment on our portfolio. During this period, we continue to be committed to constant communication and the utmost transparency. Restoring market confidence in the strength of our balance sheet is our primary objective. Forward-Looking Statements This release contains statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any or all of management�s forward-looking statements here or in other publications may turn out to be wrong and are based on Ambac�s management current belief or opinions. Ambac�s actual results may vary materially, and there are no guarantees about the performance of Ambac�s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1)�changes in the economic, credit, foreign currency or interest rate environment in the United States and abroad; (2)�the level of activity within the national and worldwide credit markets; (3)�competitive conditions, pricing levels and reduction in demand for financial guarantee products; (4)�legislative and regulatory developments; (5)�changes in tax laws; (6) changes in our business plan, our decision to discontinue writing new business in the financial services area, to significantly reduce new underwriting of structured finance business and to discontinue all new underwritings of structured finance business for six months from March 6, 2008; (7)�the policies and actions of the United States and other governments; (8)�changes in capital requirements whether resulting from downgrades in our insured portfolio or changes in rating agencies� rating criteria or other reasons; (9)�changes in Ambac�s and/or Ambac Assurance�s credit or financial strength ratings; (10)�changes in accounting principles or practices relating to the financial guarantee industry or that may impact Ambac�s reported financial results; (11)�inadequacy of reserves established for losses and loss expenses; (12)�default by one or more of Ambac Assurance�s�portfolio investments, insured issuers, counterparties or reinsurers; (13)�credit risk throughout our business, including large single exposures to reinsurers; (14)�market spreads and pricing on insured collateralized debt obligations (�CDOs�) and other derivative products insured or issued by Ambac; (15)�credit risk related to residential mortgage securities and CDOs; (16)�the risk that holders of debt securities or counterparties on credit default swaps or other similar agreements seek to declare events of default or seek judicial relief or bring claims alleging violation or breach of covenants by Ambac or one of its subsidiaries; (17)�the risk that our underwriting and risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for loss as a result of unforeseen risks; (18)�the risk of volatility in income and earnings, including volatility due to the application of fair value accounting, or FAS 133, to the portion of our credit enhancement business which is executed in credit derivative form; (19)�operational risks, including with respect to internal processes, risk models, systems and employees; (20)�the risk of decline in market position; (21)�the risk that market risks impact assets in our investment portfolio; (22)�the risk of credit and liquidity risk due to unscheduled and unanticipated withdrawals on investment agreements; (23)�changes in prepayment speeds on insured asset-backed securities; (24) factors that may influence the amount of installment premiums paid to Ambac; (25)�the risk that we may be required to raise additional capital, which could have a dilutive effect on our outstanding equity capital and/or future earnings; (26)�our ability or inability to raise additional capital, including the risks that regulatory or other approvals for any plan to raise capital are not obtained, or that various conditions to such a plan, either imposed by third parties or imposed by Ambac or its Board of Directors, are not satisfied and thus potentially necessary capital raising transactions do not occur, or the risk that for other reasons the Company cannot accomplish any potentially necessary capital raising transactions; (27)�the risk that Ambac�s holding company structure and certain regulatory and other constraints, including adverse business performance, affect Ambac�s ability to pay dividends and make other payments; (28)�the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on our business, operations, financial position, profitability or cash flows; (29)�changes in expectations regarding future realization of gross deferred tax assets; (30) risks relating to the re-launch of Connie Lee; (31) other factors described in the Risk Factors section in Part I, 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008, and also disclosed from time to time by Ambac in its subsequent reports on Form 10-Q and Form 8-K, which are or will be available on the Ambac website at www.ambac.com and at the SEC�s website, www.sec.gov; and (32)�other risks and uncertainties that have not been identified at this time. Readers are cautioned that forward-looking statements speak only as of the date they are made and that Ambac does not undertake to update forward-looking statements to reflect circumstances or events that arise after the date the statements are made. You are therefore advised to consult any further disclosures we make on related subjects in Ambac�s reports to the SEC. Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac's principal operating subsidiary, Ambac Assurance Corporation, a guarantor of public finance and structured finance obligations, has earned a Aa3 rating (on review for downgrade) from Moody's Investors Service, Inc. and a AA rating (negative outlook) from Standard & Poor's Ratings Services. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange (ticker symbol ABK).