Ambac Responds to Article Related to Its Second Lien RMBS Exposure

By Daniel | May 22, 2008

NEW YORK, May 22, 2008 (BUSINESS WIRE) — Ambac Financial Group, Inc. (ABK)
(Ambac) today responded to a Credit Sights article published on May 21, 2008 that
calls into question the current level of Ambac’s loss reserves on its second lien
RMBS exposure. In the article Credit Sights opines that Ambac will see continued
deterioration within its second lien portfolio and resultant losses could be
massive given the nature of second lien risk. The article refers to the Moody’s
Special Report on Subprime Second Lien RMBS dated May 12, 2008. In that report
Moody’s presented its estimates of minimum, average and maximum cumulative loss
assumptions for the asset class for vintage years 2005, 2006 and 2007. The Credit
Sights article offers little independent analysis, fails to consider the basic
structural arrangements of individual transactions (one cannot simply multiply a
cumulative loss assumption by net par outstanding to determine ultimate loss) and
does not attempt to reconcile to Moody’s previously reported RMBS losses for
Ambac.

In response to the article, Ambac has posted a presentation on its second lien
exposures on its web site at http://www.ambac.com and points out the following:

– In estimating its reserves, Ambac analyzes its closed end second lien (”CES”)
and home equity line of credit (HELOC”) exposures on a transaction by transaction
basis using the most recent actual performance data and projecting future
performance using “roll rate” analysis.

– Ambac’s assumptions in these asset classes are conservative and include the
following (see above referenced presentation for further details):

– No burnout from peak levels of roll rate (transition rate from 30-day
delinquent to 60-day delinquent and so on) for 18 months;

– Conditional Prepayment Rate (”CPR”) of 6% versus industry-wide assumptions of
approximately 10%;

– 100% severity (loss given default).

– Both the CES and HELOC asset classes demonstrate clear segmentation within our
portfolios based on vintages and originators, particularly earlier versus later
vintages and bank versus non-bank originators. Ambac discloses all of its poorly
performing transactions in the above referenced presentation. The remaining
portfolio is performing within expectations. To assume the worst performance on
the entire portfolio lacks an appropriate level of professional analytics and is,
therefore, irresponsible.

– Ambac has not factored in any potential recovery related to its aggressive
remediation plan regarding these portfolios despite that fact that we have begun
the process of putting back loans that we believe do not fit the various criteria
represented by the originators.

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