Ambac Financial Group, Inc. Announces Fourth Quarter Net Income of $204.3 Million, up 8%; Fourth Quarter Net Income Per Diluted Share of $1.90, up 12%

Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announcedfourth quarter 2005 net income of $204.3 million, or $1.90 per dilutedshare. This represents an 8% increase from fourth quarter 2004 netincome of $188.8 million, and a 12% increase in net income per dilutedshare from $1.69 in the fourth quarter of 2004.

Net Income Per Diluted Share

Net income and net income per diluted share are computed inconformity with U.S. generally accepted accounting principles (GAAP).However, many research analysts and investors do not limit theiranalysis of our earnings to a strictly GAAP basis. In order to assistinvestors in their understanding of quarterly results, Ambac providesother information.

Earnings measures reported by research analysts exclude the netincome impact of net gains and losses from sales of investmentsecurities and mark-to-market gains and losses on credit, total returnand non-trading derivative contracts (collectively "net security gainsand losses") and certain non-recurring and other items. Certainresearch analysts and investors further exclude the net income impactof accelerated premiums earned on guaranteed obligations that havebeen refunded and other accelerated earnings ("accelerated earnings").During the fourth quarter 2005, net security gains and losses had theeffect of increasing net income by $13.2 million, $0.12 on a perdiluted share basis. Accelerated earnings had the effect of increasingnet income by $20.3 million, or $0.19 per diluted share for the fourthquarter 2005. Table I, below, provides fourth quarter and full yearcomparisons of earnings for 2005 and 2004.
Table I

Fourth Quarter Full Year
% %
2005 2004 Change 2005 2004 Change
--------------------------------------------
Net income per diluted
share $1.90 $1.69 + 12% $6.87 $6.53 + 5%
Effect of net security
gains ($0.12)($0.09) n.a. ($0.40)($0.27) n.a.
Non-recurring and
other(a) $0.00 ($0.01) n.a. $0.00 ($0.03) n.a.
-------------- --------------
Sub-total excluding effect
of net security
gains/losses and non-
recurring items(b) $1.78 $1.59 + 12% $6.47 $6.23 + 4%
Effect of Accelerated
earnings ($0.19)($0.07) n.a. ($0.74)($0.40) n.a.
-------------- --------------
Total excluding items $1.59 $1.52 + 5% $5.73 $5.83 - 2%
============== ==============

(a) 2004 fourth quarter and full year results have been adjusted by
$1.2 million and $4.7 million, respectively, for expenses related
to Ambac's contingent capital facility to be comparable with 2005
reporting.

(b) Consensus earnings that are reported by earnings estimate
services, such as First Call, are on this basis, which excludes
net security gains and losses and non-recurring items.

Commenting on the overall results, Ambac President and ChiefExecutive Officer, Robert J. Genader, noted, "Our top-line creditenhancement production results are encouraging as we successfullyclosed a wide array of transactions during the quarter, including afew deals of significant size. Overall, market conditions remainchallenging, yet our experienced professionals continue to identifynew and attractive opportunities across a broad spectrum of assetclasses and geographic locations. I remain cautiously optimistic goinginto 2006 as demand for our core financial guaranty product seems tobe on the rise."

Revenues

Highlights

Credit enhancement production(1) in the fourth quarter of 2005 was$395.8 million, up 15% from the fourth quarter of 2004 which came inat $344.2 million. Strong growth in U.S. public finance and U.S.structured finance were partially offset by a decline ininternational.

Credit enhancement production for the full year 2005 of $1,249.4million was 3% lower than credit enhancement production of $1,287.8million in 2004, driven by tighter credit spreads across many of themarkets Ambac serves and a slow down in transactions in theinternational market, primarily Europe.

Table II, below, provides the fourth quarter and full yearcomparisons of credit enhancement production by market sector for 2005and 2004.
Table II
Credit Enhancement Production(1)

$-millions Fourth Quarter Full Year
% %
2005 2004 Change 2005 2004 Change
------------------------------------------------
U.S. Public Finance $153.5 $101.5 + 51% $550.8 $542.0 + 2%
U.S. Structured
Finance 143.4 88.5 + 62% 479.0 378.8 + 26%
International 98.9 154.2 - 36% 219.6 367.0 - 40%
-------------- ------------------
Total $395.8 $344.2 + 15% $1,249.4 $1,287.8 - 3%
============== ==================

In Public Finance, municipal market issuance, as reported by thirdparty sources, was 6% higher in the fourth quarter of 2005 than in thecomparable prior period while insured market penetration atapproximately 51% was slightly lower than fourth quarter of 2004.Transactions guaranteed during the quarter included strong writings inthe health care and tax revenue sectors. Spreads in U.S. publicfinance are steady and fairly attractive, however, pricing has beenimpacted by increased competition from other financial guarantors.U.S. structured finance production during the quarter was strong assignificant commercial asset-backed securitization activity and alarge auto rental securitization was partially offset by lowermortgage-backed securities writings. Current year production was verystrong including transactions across diverse asset classes despitestrong competition from the market in the form of senior/subordinationexecution in many sectors. International production was good butsignificantly lower than the comparable prior period's strongproduction. Current year production included attractive business indiverse geographic regions and asset classes including investor ownedutilities, structured finance and future flow deals. The internationalsegment production remains volatile primarily due to long transactionclosing cycles typically caused by the size and complexity of thedeals.

Net premiums written in the fourth quarter of 2005 of $268.1million were 26% higher than net premiums written of $213.2 million inthe same period of 2004. Gross premiums written in the fourth quarterof 2005 and 2004 were offset by $37.9 million and $34.4 million,respectively, in ceded premiums. Ceded premiums as a percentage ofgross premiums written were 12% and 14% for the fourth quarter of 2005and 2004, respectively.

Net premiums written for the full year 2005 of $996.0 million were2% higher than net premiums written of $976.9 million in 2004.Excluding the impact of return premiums from reinsurance cancellationsin each of 2005 and 2004 ($55.8 million in the first quarter of 2005and $64.8 million in the second quarter of 2004), net premiums writtenwere up 3%, period on period. Ceded premiums as a percentage of grosspremiums written, excluding the impact of return premiums, were 14%and 13% for the full year 2005 and 2004, respectively.

A breakdown of gross premiums written by market sector and cededpremiums for the fourth quarter and full year 2005 and 2004 areincluded below in Table III.
Table III
Premiums Written

$-millions Fourth Quarter Full Year
% %
2005 2004 Change 2005 2004 Change
----------------------------------------------
U.S. Public Finance $159.1 $105.7 + 51% $552.2 $537.6 + 3%
U.S. Structured Finance 83.3 70.6 + 18% 314.5 281.7 + 12%
International 63.6 71.3 - 11% 229.0 228.5 0%
-------------- ----------------
Total Gross Premiums
Written 306.0 247.6 + 24% 1,095.7 1,047.8 + 5%
Ceded Premiums Written (37.9) (34.4) + 10% (99.7) (70.9) + 41%
-------------- ----------------
Net Premiums Written $268.1 $213.2 + 26% $996.0 $976.9 + 2%
============== ================

Net premiums earned and other credit enhancement fees for thefourth quarter of 2005 were $217.5 million, which represented a 14%increase from the $190.4 million earned in the fourth quarter of 2004.Increases in net premiums earned in U.S. public finance and U.S.structured finance were partially offset by decreased net premiumsearned in international.

Net premiums earned include accelerated premiums, which resultfrom refundings, calls and other accelerations recognized during thequarter. Accelerated premiums were $35.4 million in the fourth quarterof 2005 (which had a net income per diluted share effect of $0.19), up179% from $12.7 million ($0.07 per diluted share) in acceleratedpremiums in the fourth quarter of 2004. The majority of theaccelerated premiums relate to the U.S. public finance segment. Thecurrent quarter was once again impacted by one large public financerefunded transaction, representing 41% of the total acceleratedamount. Long-term interest rates remained relatively low during theyear and we experienced extremely high refunding activity in ourpublic finance segment. However, as interest rates rise, the level ofaccelerated premiums should decline.

Net premiums earned and other credit enhancement fees for the fullyear 2005 were $866.1 million, which represented a 13% increase from$764.0 million earned in 2004. Accelerated premiums were $143.3million for the full year 2005 ($0.74 per diluted share), up 75% from$81.9 million ($0.40 per diluted share) in accelerated premiums in2004. Accelerated premiums in 2005 include the impact of a reinsurancecancellation in the first quarter of 2005 amounting to $4.5 million.Accelerated premiums in 2004 include the impact of reinsurancecancellations in the second quarter of 2004 amounting to $10.4million.

A breakdown of net premiums earned and other credit enhancementfees by market sector for the fourth quarter and full year 2005 and2004 are included below in Table IV. Normal net premiums earnedexclude accelerated premiums that result from refundings, calls andother accelerations.
Table IV
Net Premiums Earned and Other Credit Enhancement Fees

$-millions Fourth Quarter Full Year
% %
2005 2004 Change 2005 2004 Change
--------------------------------------------
U.S. Public Finance $56.9 $54.1 + 5% $223.6 $207.4 + 8%
U.S. Structured Finance 76.8 70.0 + 10% 288.5 273.3 + 6%
International 48.4 53.6 - 10% 210.7 201.4 + 5%
-------------- --------------
Total Normal Premiums/Fees 182.1 177.7 + 2% 722.8 682.1 + 6%
Accelerated Premiums/Fees 35.4 12.7 + 179% 143.3 81.9 + 75%
-------------- --------------
Total $217.5 $190.4 + 14% $866.1 $764.0 + 13%
============== ==============

Public finance earned premiums, before accelerations, grew 5%quarter on quarter. Earned premium growth in this segment has beennegatively impacted by the high level of refunding activity in Ambac'spublic finance book. The high refunding level combined with a mix ofissuance in 2005 with less structured municipal transactions thatAmbac typically focuses on, has negatively impacted the growth inearnings in this segment.

Structured finance earned premiums and other credit enhancementfees grew 10%. The rate of growth in structured finance has slowedover the past two years, adversely impacted by lower premiumproduction in mortgage-backed and home equity securitizations andpooled debt obligations. These short-term asset classes hadexperienced significant growth in years prior to 2004. Narrow creditspreads and increased competitive factors have recently led to lowerwritings in these segments, which combined with the high level ofprincipal pay downs (mortgage-backed securities) and deal terminations(CDOs) has reduced the size of the respective portfolios, resulting inlower earnings from these specific asset classes. The reduced earningsfrom MBS and CDOs has been offset recently by increased production andrelated earnings in other asset classes such as commercialasset-backed and auto securitizations where Ambac finds attractiverisk/return dynamics.

International earned premiums and other credit enhancement feesdecreased by 10%. The decline was driven primarily by three factors:(i) recent calls of international transactions; (ii) a generalslow-down in new business generation in this segment as credit spreadshave narrowed, reducing the need for financial guarantee protection;and (iii) the business mix has trended towards long-tailedinfrastructure transactions as opposed to the shorter-tenorasset-backed securities such as MBS and CDOs.

Net investment income for the fourth quarter of 2005 was $109.0million, representing an increase of 16% from $94.0 million in thecomparable period of 2004. Net investment income excluding netinvestment income from Variable Interest Entities ("VIEs") for thefourth quarter of 2005 was $96.7 million, representing an increase of6% from $90.9 million in the fourth quarter of 2004. This increase wasdue primarily to the growth in the investment portfolio driven byongoing collection of financial guarantee premiums and fees, partiallyoffset by a lower reinvestment rate and use of cash for repurchases ofAmbac stock during the second and third quarters of 2005 totalingapproximately $300 million. Net investment income from VIEs for thefourth quarter of 2005 was $12.3 million, up from $3.1 million in thefourth quarter of 2004. Investment income from VIEs results from theconsolidation of certain trusts that Ambac has insured andconsolidated under accounting pronouncement FIN 46. The increase ininterest income from VIEs reflects the consolidation of twotransactions executed in the fourth quarter of 2004. Investment incomefrom VIEs is offset by interest expense on VIEs, shown separately inthe Consolidated Statements of Operations.

Net investment income (including net investment income from VIEs)for the full year 2005 was $426.1 million, representing an increase of18% from $361.1 million in the comparable period of 2004, primarily asa result of the reasons provided above.

Financial services. The financial services segment is comprised ofthe investment agreement business and derivative products business.The investment agreement business is managed with the goal ofapproximately matching the cash flows of the investment agreementliabilities with the cash flows of the related investment portfolio.The primary activities in the derivative products business areintermediation of interest rate and currency swap transactions andtaking total return swap positions on certain fixed incomeobligations. Gross interest income less gross interest expense frominvestment and payment agreements plus results from the derivativeproducts business, excluding net realized investment gains and lossesand unrealized gains and losses on total return swaps and non-tradingderivative contracts, were $11.4 million in the fourth quarter of2005, down 21% from $14.6 million in the fourth quarter of 2004. Thedecrease was driven by lower inception revenues on new business in thederivative products business, partially offset by spread improvementin the investment agreement business.

Financial services revenues, as defined above, were $46.8 millionin the full year 2005, down 16% from $56.3 million in 2004, primarilydue to lower inception revenues in the derivative products business.

Expenses

Highlights

Financial guarantee expenses of $55.9 million for the fourthquarter of 2005 increased by 24% over the $45.2 million of expensesfor the same quarter of 2004. Financial guarantee loss and lossexpenses were $15.6 million in the fourth quarter of 2005 down 8% from$16.9 million in the fourth quarter of 2004. Net underwriting andoperating expenses of the financial guarantee segment totaled $27.9million in the fourth quarter of 2005, up 10% from $25.3 in the fourthquarter of 2004. Interest expense on VIE notes amounting to $12.4million and $3.0 million in the fourth quarter of 2005 and 2004,respectively, result from the consolidation of certain trusts thatAmbac has insured and consolidated under accounting pronouncement FIN46.

Financial guarantee expenses of $315.1 million for the full year2005 increased by 74% over $181.3 million in 2004. Financial guaranteeloss and loss expenses of $149.9 million in 2005 increased 115% from$69.6 million in 2004 primarily due to the third quarter 2005 $92million reserve provisioning related to Hurricane Katrina. Netunderwriting and operating expenses of the financial guarantee segmentfor the full year 2005 were $117.8 million, up 11% from $106.6 in thecomparable period of 2004, primarily due to higher compensation costs.

Financial services other expenses, which represent the operatingexpenses for the segment, amounted to $3.5 million for the fourthquarter of 2005, down 17% from $4.2 million in the comparable priorperiod.

Financial services other expenses for the full year 2005 of $13.7million decreased 7% from $14.7 million in 2004.

Loss Reserve Activity

Case basis loss reserves (loss reserves for exposures that havedefaulted) increased $20.2 million during the fourth quarter of 2005from $82.9 million at September 30, 2005 to $103.1 million at December31, 2005. The increase was primarily related to a new case reserveestablished during the quarter for a public finance infrastructuretransaction and an addition to an existing case reserve for a stressedhealth care transaction.

Active credit reserves ("ACR") are established for probable andestimable losses due to credit deterioration on adversely classifiedinsured transactions. Ambac continuously monitors its insuredportfolio actively seeking to mitigate claims. The ACR decreased by$7.2 million during the quarter, primarily as a result of netimprovement in the classified portfolio and a transfer of ACR reservesto case reserves related to the public finance infrastructuretransaction discussed above. At December 31, 2005, the specificHurricane Katrina-related provision amounted to $91.5 million, downslightly from $92.0 million at September 30 due to amortization andpay downs on effected credits. Approximately $1.1 billion ofKatrina-impacted credits are included in Ambac's adversely classifiedcredit portfolio. Ambac did not pay any Katrina-related claims duringthe quarter and has fully recovered the amounts paid in the thirdquarter. Ambac's estimate of losses related to the hurricane does notconsider any potential, federal, state or local government assistanceto individual municipalities or institutions as such assistance stillhas not been determined. The credit loss estimation process involvesthe exercise of considerable judgment. Ambac will continue to assessthe impact of Hurricane Katrina on subsequent periods as moreinformation becomes available to us and the ultimate actual lossassociated with the hurricane may be materially different than thecurrent estimate and thereby may affect future operating results.

Other Items

Total net securities gains/(losses) for the fourth quarter of 2005were $20.0 million, or $0.12 per diluted share; consisting of netrealized losses on investment securities of ($2.2) million, netmark-to-market gains on credit and total return derivatives of $22.0million and net mark-to-market gains on non-trading derivativecontracts of $0.2 million. For the fourth quarter of 2004, netsecurities gains/(losses) were $16.5 million, or $0.09 per dilutedshare; consisting of net realized gains on investment securities of$7.5 million, net mark-to-market gains on credit and total returnderivatives of $11.9 million and net mark-to-market losses onnon-trading derivative contracts of ($2.9) million.

Total net securities gains/(losses) for the full year 2005 were$73.1 million, or $0.40 per diluted share, consisting of net realizedgains on investment securities of $8.6 million, net mark-to-marketgains on credit and total return derivatives of $15.0 million and netmark-to-market gains on non-trading derivative contracts of $49.5million. As discussed in the previous quarters, the mark-to-marketgains on non-trading derivative contracts related almost entirely tointerest rate hedge contracts related to long-term fixed rateliabilities in Ambac's investment agreement business that were highlyeffective from an economic perspective but did not meet the technicalrequirements of FAS 133. The hedges have been redesignated to meet thetechnical requirements and it is expected that the mark-to-market ofthe hedge and hedged item will substantially offset each other in theincome statement prospectively. For the full year 2004 net securitiesgains were $45.8 million, or $0.27 per diluted share, consisting ofnet realized gains on investment securities of $35.1 million, netmark-to-market gains on credit and total return derivatives of $27.1million and net mark-to-market losses on non-trading derivativecontracts of ($16.4) million.

Balance Sheet

Highlights

Total assets as of December 31, 2005 were $19.77 billion, up 5%from total assets of $18.75 billion at December 31, 2004. The increasewas driven by cash generated from business written during the periodand the proceeds of the $400 debt issuance in December 2005 (discussedbelow), offset by stock repurchases during the period and the decreasein the unrealized gains in the investment portfolio driven by higherlong-term interest rates. As of December 31, 2005, stockholders'equity was $5.40 billion, a 7% increase from year-end 2004stockholders' equity of $5.02 billion. The increase was primarily theresult of net income during the year, offset by stock repurchases andlower "Accumulated Other Comprehensive Income" driven by slightlyhigher long-term interest rates.

As previously announced, in December Ambac issued $400 million of5.95% Debentures due December 2035. The Company intends to use aportion of the proceeds to redeem all or portion of the 7.00%Debentures due in 2051 on or after their first call date in October2006. The use of proceeds to redeem the outstanding Debentures inOctober 2006 will result in subsequent net interest savings to thecompany of approximately $2 million per year. The remaining proceedsfrom the offering will provide additional funds for general corporatepurposes.

Cash Dividend Declared

At its January 2006 Board meeting, the Board of Directors of AmbacFinancial Group, Inc. approved the regular quarterly cash dividend of$0.15 per share of common stock. The dividend is payable on March 1,2006 to stockholders of record on February 10, 2006.

Annual Meeting of Stockholders

The Board of Directors also set the 2006 Annual Meeting ofStockholders for Tuesday, May 2, 2006, at 11:30 a.m. in New York City.The record date for determining stockholders entitled to notice of,and to vote at, the annual meeting will be the close of business,March 6, 2006.

Forward-Looking Statements

This release, in particular the President and Chief ExecutiveOfficer's remarks, contains statements about our future results thatmay be considered "forward-looking statements" under the PrivateSecurities Litigation Reform Act of 1995. These statements are basedon current expectations and the current economic environment. Wecaution you that these statements are not guarantees of futureperformance. They involve a number of risks and uncertainties that aredifficult to predict. Our actual results could differ materially fromthose expressed or implied in the forward-looking statements. Amongthe factors that could cause actual results to differ materially are(1) changes in the economic, credit, or interest rate environment inthe United States and abroad; (2) the level of activity within thenational and worldwide debt markets; (3) competitive conditions andpricing levels; (4) legislative and regulatory developments; (5)changes in tax laws; (6) the policies and actions of the United Statesand other governments; (7) changes in capital requirement or othercriteria of rating agencies; (8) changes in accounting principles orpractices that may impact the Company's reported financial results;(9) inadequacy of reserves established for losses and loss adjustmentexpenses; (10) default of one or more of the Company's reinsurers;(11) market spreads and pricing on insured pooled debt obligations andother derivative products insured or issued by the Company; (12)prepayment speeds on insured asset-backed securities and other factorsthat may influence the amount of installment premiums paid to theCompany; and (13) other risks and uncertainties that have not beenidentified at this time. We undertake no obligation to publiclycorrect or update any forward-looking statement if we later becomeaware that it is not likely to be achieved, except as required by law.

Ambac Financial Group, Inc., headquartered in New York City, is aholding company whose affiliates provide financial guarantees andfinancial services to clients in both the public and private sectorsaround the world. Ambac's principal operating subsidiary, AmbacAssurance Corporation, a leading guarantor of public finance andstructured finance obligations, has earned triple-A ratings, thehighest ratings available from Moody's Investors Service, Inc.,Standard & Poor's Ratings Services, Fitch, Inc. and Rating andInvestment Information, Inc. Ambac Financial Group, Inc. common stockis listed on the New York Stock Exchange (ticker symbol ABK).

Footnotes

(1) Credit enhancement production, which is not promulgated under
GAAP, is used by management, equity analysts and investors as an
indication of new business production in the period. Credit
enhancement production, which Ambac reports as analytical data, is
defined as gross (direct and assumed) up-front premiums plus the
present value of estimated installment premiums on insurance
policies and structured credit derivatives issued in the period.
The definition of credit enhancement production used by Ambac may
differ from definitions of credit enhancement production used by
other public holding companies of financial guarantors. The
following table reconciles credit enhancement production to gross
premiums written calculated in accordance with GAAP:

$-millions Fourth Quarter Full Year

2005 2004 2005 2004
------------------------------------
Credit enhancement production $396 $344 $1,249 $1,288
Present value of estimated
installment premiums written on
insurance policies and structured
credit derivatives issued in the
period (229) (219) (673) (713)
------------------------------------

Gross up-front premiums written $ 167 $ 125 $576 $575

Gross installment premiums written
on insurance policies 139 122 520 473
------------------------------------
Gross premiums written $306 $247 $1,096 $1,048
====================================
Ambac Financial Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three Months and Years Ended December 31, 2005 and 2004
(Dollars in Thousands Except Share Data)

Three Months Ended Years Ended
December 31, December 31,
------------------------- -------------------------
2005 2004 2005 2004
------------------------- -------------------------
Revenues:
Financial Guarantee:
Gross premiums
written $306,022 $247,594 $1,095,719 $1,047,811
Ceded premiums
written (37,966) (34,360) (99,673) (70,946)
------------ ------------ ------------ ------------
Net premiums
written $268,056 $213,234 $996,046 $976,865
============ ============ ============ ============

Net premiums
earned $205,046 $178,132 $816,020 $716,659
Other credit
enhancement fees 12,474 12,242 50,091 47,326
------------ ------------ ------------ ------------
Net premiums
earned and
other credit
enhancement
fees 217,520 190,374 866,111 763,985
Net investment
income 109,010 93,998 426,114 361,086
Net realized
investment gains 303 7,481 6,307 30,004
Net mark-to-
market gains on
credit derivative
contracts 18,403 7,846 13,618 17,734
Other income
(loss) 6,161 5,912 12,311 (4,102)
Financial Services:
Interest from
investment and
payment
agreements 77,348 52,258 270,299 198,800
Derivative
products 2,555 6,130 15,757 26,399
Net realized
investment
(losses) gains (2,494) 86 2,314 5,099
Net mark-to-
market gains on
total return swap
contracts 3,585 4,075 1,330 9,376
Net mark-to-
market (losses)
gains on non-
trading
derivatives (4,668) (3,455) 44,201 (3,329)
Corporate:
Net investment
income 2,025 502 3,345 1,674
Net realized
investment
losses - (36) - (18)
------------ ------------ ------------ ------------

Total revenues 429,748 365,171 1,661,707 1,406,708
------------ ------------ ------------ ------------

Expenses:
Financial Guarantee:
Loss and loss
expenses 15,601 16,900 149,856 69,600
Underwriting
and operating
expenses 27,870 25,264 117,809 106,563
Interest expense
on variable
interest
entity notes 12,432 3,042 47,450 5,144
Financial Services:
Interest from
investment and
payment
agreements 68,474 43,837 239,255 168,943
Other expenses 3,521 4,246 13,683 14,671
Interest 15,243 13,514 55,896 54,322
Corporate 3,703 3,215 14,994 10,683
------------ ------------ ------------ ------------

Total expenses 146,844 110,018 638,943 429,926
------------ ------------ ------------ ------------

Income before
income taxes 282,904 255,153 1,022,764 976,782
Provision for
income taxes 78,652 66,382 271,754 250,942
------------ ------------ ------------ ------------

Income from
continuing
operations 204,252 188,771 751,010 725,840
------------ ------------ ------------ ------------

Discontinued
operations:
Loss from
discontinued
operations - - - (1,349)
Income tax
benefit - - - (60)
------------ ------------ ------------ ------------
Net loss from
discontinued
operations - - - (1,289)
------------ ------------ ------------ ------------

Net income $204,252 $188,771 $751,010 $724,551
============ ============ ============ ============

Earnings per share:
Income from
continuing
operations $1.92 $1.72 $6.94 $6.62

Discontinued
operations $0.00 $0.00 $0.00 ($0.01)
------------ ------------ ------------ ------------

Net income $1.92 $1.72 $6.94 $6.61
============ ============ ============ ============

Earnings per
diluted share:

Income from
continuing
operations $1.90 $1.69 $6.87 $6.54

Discontinued
operations $0.00 $0.00 $0.00 ($0.01)
------------ ------------ ------------ ------------

Net income $1.90 $1.69 $6.87 $6.53
============ ============ ============ ============

Weighted average
number of common
shares outstanding:

Basic 106,445,909 110,022,089 108,280,281 109,602,601
============ ============ ============ ============

Diluted 107,534,753 111,459,460 109,394,985 110,898,854
============ ============ ============ ============



Ambac Financial Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2005 and December 31, 2004
(Dollars in Thousands Except Share Data)

December 31, December 31,
2005 2004
------------ ------------
(unaudited)
Assets
------
Investments:
Fixed income securities, at fair value
(amortized cost of $14,781,028 in 2005
and $13,425,475 in 2004) $15,124,016 $13,901,218
Fixed income securities pledged as
collateral, at fair value (amortized
cost of $378,480 in 2005 and $345,195
in 2004) 371,160 341,742
Short-term investments, at cost
(approximates fair value) 472,034 521,226
Other (cost of $13,537 in 2005 and $3,731
in 2004) 14,173 4,234
------------ ------------
Total investments 15,981,383 14,768,420

Cash 28,295 19,957
Securities purchased under agreements to
resell 419,000 353,000
Receivable for securities sold 2,161 1,319
Investment income due and accrued 178,779 162,506
Reinsurance recoverable on paid and unpaid
losses 3,730 16,765
Prepaid reinsurance 303,383 297,330
Deferred acquisition costs 202,195 184,766
Loans 1,344,140 1,405,700
Derivative assets 1,101,948 1,462,320
Other assets 204,096 77,523
------------ ------------
Total assets $19,769,110 $18,749,606
============ ============

Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Unearned premiums $2,954,718 $2,778,893
Loss and loss expense reserve 304,139 254,055
Ceded reinsurance balances payable 23,746 18,248
Obligations under investment and payment
agreements 7,056,222 6,813,914
Obligations under investment repurchase
agreements 196,568 266,806
Deferred income taxes 277,422 217,373
Current income taxes 16,726 16,406
Long-term debt 2,233,582 1,866,207
Accrued interest payable 108,195 71,058
Derivative liabilities 935,440 1,213,451
Other liabilities 253,969 208,732
Payable for securities purchased 11,641 6
------------ ------------
Total liabilities 14,372,368 13,725,149
------------ ------------

Stockholders' equity:
Preferred stock - -
Common stock 1,092 1,089
Additional paid-in capital 723,680 694,465
Accumulated other comprehensive income 226,847 296,814
Retained earnings 4,692,701 4,032,089
Common stock held in treasury at cost (247,578) -
------------ ------------
Total stockholders' equity 5,396,742 5,024,457
------------ ------------
Total liabilities and
stockholders' equity $19,769,110 $18,749,606
============ ============

Number of shares outstanding (net of
treasury shares) 105,639,446 108,915,944
============ ============
Book value per share $51.09 $46.13
============ ============



Ambac Assurance Corporation and Subsidiaries
Capitalization Table - GAAP
December 31, 2005 and December 31, 2004
(Dollars in Millions)

The following table sets forth Ambac Assurance's consolidated
capitalization as of December 31, 2005 and December 31, 2004,
respectively, on the basis of accounting principles generally accepted
in the United States of America.

December 31, December 31,
2005 2004
------------ ------------
(unaudited)

Unearned premiums $2,966 $2,783
Long-term debt 1,042 1,074
Other liabilities 1,996 2,199
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Total liabilities 6,004 6,056
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Stockholder's equity:
Common stock 82 82
Additional paid-in capital 1,453 1,233
Accumulated other comprehensive income 137 238
Retained earnings 4,499 4,094
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Total stockholder's equity 6,171 5,647
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Total liabilities and stockholder's equity $12,175 $11,703
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