8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): July 20, 2005

AMBAC FINANCIAL GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	1-10777	13-3621676
(State of incorporation)	(Commission file number)	(I.R.S. employer identification no.)

One State Street Plaza, New York, New York 10004

(Address of principal executive offices) (Zip Code)

(212) 668-0340

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On July 20, 2005, Ambac Financial Group, Inc. (the “Registrant”) issued a press release containing unaudited interim financial information and accompanying discussion for the 2005 second quarter and six month earnings. Exhibit 99.05 is a copy of such press release and is incorporated by reference.

The information furnished under Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.05, shall be deemed to be “filed” for purposes of the Securities and Exchange Act of 1934, as amended.

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits.

Exhibit Number	Item
99.05	Press Release dated July 20, 2005

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Ambac Financial Group, Inc.
	(Registrant)
Dated: July 20, 2005
	By:	/s/ Sean T. Leonard
		Sean T. Leonard
		Senior Vice President and
		Chief Financial Officer

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
99.05	Unaudited interim financial statements and accompanying discussion for the three and six months ended June 30, 2005 contained in the press release issued by the Registrant on July 20, 2005.

EX-99.05

EXHIBIT 99.05

Ambac Financial Group, Inc.

One State Street Plaza

New York, NY 10004

212.668.0340

News Release

For Immediate Release

Investor/Media Contact: Peter R. Poillon

(212) 208-3333

ppoillon@ambac.com

Web site: www.ambac.com

	AMBAC FINANCIAL GROUP, INC. ANNOUNCES SECOND QUARTER NET INCOME OF $186.1 MILLION, UP 3%
	Second Quarter Net Income Per Diluted Share of $1.69, up 4%,

Second Quarter Credit Enhancement Production⁽¹⁾ $397.9 million, down 3%

NEW YORK, July 20, 2005—Ambac Financial Group, Inc. (NYSE: ABK) (Ambac) today announced second quarter 2005 net income of $186.1 million, or $1.69 per diluted share. This represents a 3% increase from second quarter 2004 net income of $180.7 million, and a 4% increase in net income per diluted share from $1.63 in the second quarter of 2004.

Net Income Per Diluted Share

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

Earnings measures reported by research analysts typically exclude the net income impact of net gains and losses from sales of investment securities and mark-to-market gains and losses on credit, total return and non-trading derivative contracts (“net security gains and losses”) and certain non-recurring and other items. Certain research analysts and investors further exclude the net income impact of accelerated premiums earned on guaranteed obligations that have been refunded and other accelerated earnings (“accelerated earnings”). During the second quarter 2005, net security gains and losses had the effect of increasing net income by $14.9 million, $0.14 on a per diluted share basis. Accelerated earnings had the effect of increasing net income by $14.0 million, or $0.12 per diluted share for the second quarter 2005. Table I, below, provides second quarter and six-month comparisons for the years 2005 and 2004.

Ambac Second Quarter 2005 Earnings/ 2

Table I

	Second Quarter								Six Months
	2005			2004			% Change		2005			2004			% Change
Net income per diluted share	$	1.69		$	1.63		+4	%	$	3.35		$	3.18		+5	%
Effect of net security gains	$	(0.14	)	$	(0.04	)	n.a.		$	(0.19	)	$	(0.11	)	n.a.
Non-recurring and other(a)	$	0.00		$	(0.02	)	n.a.		$	0.00		$	(0.02	)	n.a.
Sub-total excluding effect of net security gains/losses and non-recurring items(b)	$	1.55		$	1.57		-1	%	$	3.16		$	3.05		+4	%
Effect of Accelerated earnings	$	(0.12	)	$	(0.16	)	n.a.		$	(0.29	)	$	(0.23	)	n.a.
Total excluding items	$	1.43		$	1.41		+1	%	$	2.87		$	2.82		+2	%

(a) 2004 second quarter and six months results have been adjusted by $2.2 million 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 Chief Executive Officer, Robert J. Genader, noted, “Ambac’s top line production results for the quarter are very gratifying considering the market conditions. While spreads remain tight in many asset classes, we continue to see significant opportunities to put our capital to use at attractive returns. Being a diversified, global guarantor with size and scale, Ambac is active in many different markets around the world. We continue to judiciously seek transactions in markets where we bring the most value. That is a strategy that has been prominent in driving our returns to be the best in the industry.” Mr. Genader added, “Our overall results were impacted by market conditions in our financial services segment and do not reflect the reasonable quarter achieved within our primary business of financial guaranty.”

Revenues

Highlights

• Credit enhancement production⁽¹⁾ in the second quarter of 2005 was $397.9 million, down 3% from the second quarter of 2004 which came in at $411.2 million. Growth in U.S. structured finance and international was more than offset by a decline in production in U.S. public finance.

Credit enhancement production for the six months of 2005 of $596.9 million was 11% lower than credit enhancement production of $670.0 million in the same period of 2004 due primarily to lower production in the U.S. public finance and international segments.

Table II, below, provides the second quarter and six-month comparisons of credit enhancement production by market sector, for 2005 and 2004.

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Ambac Second Quarter 2005 Earnings/ 3

Table II

Credit Enhancement Production⁽¹⁾

	Second Quarter						Six Months
$-millions	2005		2004		% Change		2005		2004		% Change
Public Finance	$	170.0	$	237.7	-28	%	$	279.0	$	334.6	-17	%
Structured Finance		141.6		89.6	+58	%		218.6		166.8	+31	%
International		86.3		83.9	+3	%		99.3		168.6	-41	%
Total	$	397.9	$	411.2	-3	%	$	596.9	$	670.0	-11	%

• In Public Finance, municipal market issuance, as reported by third party sources, was 8% higher in the second quarter of 2005 than in the comparable prior period while insured market penetration was at 61%, relatively unchanged quarter on quarter. However, Ambac’s production in this sector was impacted by increased competition from other financial guarantors, fewer health care transactions written during the period, and the fact that few large, highly structured transactions came to market during the quarter. Additionally, the second quarter 2004 included one very large transportation deal. U.S. structured finance was significantly higher as increased activity in auto securitizations and investor owned utilities was partially offset by lower mortgage-backed and other home equity related securitizations. Competition from the market in the form of senior/subordination execution and from other financial guarantors remains very strong in the MBS sector. International writings were slightly higher as increased activity in utility deals was largely offset by slower MBS and transportation activity. The international segment remains very lumpy primarily due to long transaction closing cycles typically caused by the size and complexity of the deals.

• Net premiums written in the second quarter of 2005 of $268.6 million were 29% lower than net premiums written of $379.1 million in the same period of 2004. Gross premiums written in the second quarter of 2005 and 2004 were (offset)/credited by ($54.0) million and $15.9 million, respectively, in ceded premiums. Ceded premiums written in the second quarter of 2004 included the collection of $64.8 million in return premiums from the cancellation of certain reinsurance contracts. Excluding the return premiums in the comparable prior quarter, ceded premiums in the second quarter of 2005 increased by 10% from $48.9 million. Ceded premiums as a percentage of gross premiums written were 16.7% and 13.5% for the second quarter of 2005 and 2004 (exclusive of the return premiums), respectively. The mix of business underwritten and greater treaty participation during the quarter drove the increase.

Net premiums written for the six months of 2005 of $524.4 million were 8% lower than net premiums written of $571.7 million in the same period of 2004. Excluding the impact of return premiums in each of the periods ($55.8 million in the first quarter of 2005 and $64.8 million in the second quarter of 2004), net premiums written are down 8%, period on period primarily due to less U.S. public finance business written during 2005.

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Ambac Second Quarter 2005 Earnings/ 4

A breakdown of gross premiums written by market sector and ceded premiums for the second quarter and six-month periods of 2005 and 2004 are included below in Table III.

Table III

Premiums Written

	Second Quarter							Six Months
$-millions	2005			2004		% Change		2005			2004			% Change
Public Finance	$	174.2		$	237.5	-27	%	$	281.4		$	338.7		-17	%
Structured Finance		79.0			68.5	+15	%		153.1			141.6		+8	%
International		69.4			57.2	+21	%		117.3			109.3		+7	%
Total Gross Premiums Written		322.6			363.2	-11	%		551.8			589.6		-6	%
Ceded Premiums Written		(54.0	)		15.9	—			(27.4	)		(17.9	)	+53	%
Net Premiums Written	$	268.6		$	379.1	-29	%	$	524.4		$	571.7		-8	%

• Net premiums earned and other credit enhancement fees for the second quarter of 2005 were $205.8 million, which represented a 2% increase from the $201.4 million earned in the second quarter of 2004. Net premiums earned increased for all market sectors.

Net premiums earned include accelerated premiums, which result from refundings, calls and other accelerations (such as reinsurance cancellations) recognized during the quarter. Accelerated premiums were $24.5 million in the second quarter of 2005 (which had a net income per diluted share effect of $0.12), down 26% from $33.1 million ($0.16 per diluted share) in accelerated premiums in the second quarter of 2004. Accelerated premiums in the second quarter of 2004 include $10.4 million from the cancellation of reinsurance with certain reinsurers. Long-term interest rates have remained relatively low during 2005 and we continue to see strong refunding activity in our public finance segment. However, as interest rates rise, the level of accelerated premiums should decline.

Net premiums earned and other credit enhancement fees for the first half of 2005 were $417.5 million, which represented a 10% increase from the $378.3 million earned in the first half of 2004. Accelerated premiums were $59.0 million for the first half 2005 ($0.29 per diluted share), up 22% from $48.3 million ($0.23 per diluted share) in accelerated premiums for the first half of 2004. Accelerated premiums in the first half of 2005 includes the impact of a reinsurance cancellation in the first quarter of 2005 amounting to $4.5 million. Accelerated premiums in the comparable period of 2004 include the impact of reinsurance cancellations in the second quarter of 2004, as discussed above.

A breakdown of net premiums earned and other credit enhancement fees by market sector are included below in Table IV. Normal net premiums earned exclude accelerated premiums that result from refundings, calls and other accelerations.

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Ambac Second Quarter 2005 Earnings/ 5

Table IV

Net Premiums Earned and Other Credit Enhancement Fees

	Second Quarter						Six Months
$-millions	2005		2004		% Change		2005		2004		% Change
Public Finance	$	54.6	$	50.7	+8	%	$	109.8	$	99.8	+10	%
Structured Finance		71.7		67.6	+6	%		140.3		133.2	+5	%
International		55.0		50.0	+10	%		108.4		97.0	+12	%
Total Normal Premiums/Fees		181.3		168.3	+8	%		358.5		330.0	+9	%
Accelerated Premiums		24.5		33.1	-26	%		59.0		48.3	+22	%
Total	$	205.8	$	201.4	+2	%	$	417.5	$	378.3	+10	%

Public finance earned premiums, before accelerations, grew 8%. Ambac’s focus on higher value-added structured municipal transactions, combined with diligent management of risk limit capacity has resulted in attractive returns and good earned premiums growth in public finance, our most mature sector.

Structured finance earned premiums and other credit enhancement fees grew 6%. The rate of growth in structured finance has slowed over the past year, adversely impacted by lower premium production in mortgage-backed and home equity securitizations. This relatively short-term asset class had experienced significant growth in years prior to 2004, fueled by heavy issuance and strong demand for insurance. However, increased competition from both the industry and the market in the form of senior/subordination structures, has led to significantly lower writings in this segment. The lower business writings combined with the high level of principal pay downs has reduced the size of the portfolio, resulting in lower earnings from this asset class.

International earned premiums and other credit enhancement fees grew 10%. The rate of growth remains healthy, however it is lower than recent prior years. The decline is driven primarily by maturities and calls of our pooled debt obligations outstanding. Additionally, new business generation in this asset class has slowed significantly as credit spreads have generally narrowed, reducing the need for financial guarantee protection.

• Net investment income for the second quarter of 2005 was $104.5 million, representing an increase of 18% from $88.9 million in the comparable period of 2004. Net investment income excluding net investment income from Variable Interest Entities (“VIEs”) for the second quarter of 2005 was $92.2 million, representing an increase of 5% from $88.1 million in the second quarter of 2004. This increase was due primarily to the growth in the investment portfolio driven by ongoing collection of financial guarantee premiums and fees, partially offset by a lower reinvestment rate and the repurchase of Ambac stock totaling approximately $134 million. Net investment income from VIEs for the second quarter of 2005 was $12.3 million, up from $0.8 million in the second quarter of 2004. Investment income from VIEs result from the consolidation of certain trusts that Ambac has insured and consolidated under accounting pronouncement FIN 46. The increase in interest income from VIEs reflects the consolidation of two transactions executed in the fourth quarter of 2004. Investment income from VIEs is offset by interest expense on VIEs, shown separately in the Consolidated Statements of Operations.

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Ambac Second Quarter 2005 Earnings/ 6

Net investment income (including net investment income from VIEs) for the six months of 2005 was $206.5 million, representing an increase of 17% from $176.6 million in the comparable period of 2004, primarily as a result of the reasons provided above.

Financial services. The financial services segment is comprised of the investment agreement business and derivative products business. The investment agreement business is managed with the goal of approximately matching the cash flows of the investment agreement liabilities with the cash flows of the related investment portfolio. To achieve this goal in the investment agreement business, derivative contracts (“non-trading derivative contracts”) are used for hedging purposes. The primary activities in the derivative products business are intermediation of interest rate and currency swap transactions and taking total return swap positions on certain fixed income obligations. Most of the swap intermediation is done on a fully hedged basis with the exception of certain municipal interest rate swaps that are not hedged for the basis difference between taxable and tax-exempt interest rates. As such, changes in the relationship between taxable and tax-exempt interest rates will result in mark to market gains or losses in this business line. Gross interest income less gross interest expense from investment and payment agreements plus results from the derivative products business, excluding net realized investment gains and losses and unrealized gains and losses on total return swaps and non-trading derivative contracts, were $0.2 million in the second quarter of 2005, compared to $12.5 million for the second quarter of 2004. The decrease was driven by the derivative products business. Revenues in that segment were ($3.7) million in the second quarter of 2005, down from $7.4 million in the second quarter of 2004. Net revenue included mark-to-market (losses)/gains primarily resulting from the (increase)/decrease in the ratio of tax-exempt interest rates to taxable interest rates amounting to ($6.0) million and $4.6 million in the second quarter of 2005 and 2004, respectively.

Financial services revenues were $15.2 million in the first half of 2005, down 45% from the $27.8 million of revenues in the first half of 2004 primarily due to the reasons provided above.

Expenses

Highlights

• Financial guarantee expenses of $62.2 million for the second quarter of 2005 increased by 31% over the $47.4 million of expenses for the same quarter of 2004. Financial guarantee expenses excluding interest expense on VIE notes grew 8% from $46.8 million in the second quarter of 2004 to $50.3 million in the second quarter of 2005, primarily due to higher compensation expense and increased loss provisioning. The second quarter 2004 expenses include $3.5 million of additional reinsurance commissions related to the cancellation of reinsurance during that quarter. The loss provision of $21.7 million for the second quarter of 2005 was 24% higher than the $17.5 million recorded in the second quarter of 2004 primarily due to increased active credit reserves and a small increase in case reserves for one credit, as described below in “Loss

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Ambac Second Quarter 2005 Earnings/ 7

Reserve Activity.” Interest expense on VIE notes for the second quarter of 2005 was $11.8 million, up from $0.7 million in the second quarter of 2004. Interest expense on VIE notes result from the consolidation of certain trusts that Ambac has insured and consolidated under accounting pronouncement FIN 46.

Financial guarantee expenses of $130.6 million for the first six months of 2005 increased by 43% over the $91.5 million of expenses for the same period of 2004. Expenses excluding interest expense on VIE notes grew 19% primarily as a result of the reasons provided above.

• Financial services other expenses, which represent the operating expenses for the segment, amounted to $3.4 million for the second quarter of 2005, flat to the comparable prior period.

Financial services expenses for the first half of 2005 of $7.3 million were flat to the comparable prior period.

• Corporate operating expenses amounted to $5.5 million in the second quarter of 2005 compared to $2.6 million incurred in the second quarter of 2004 due to expenses related to Ambac’s contingent capital facility for the first half of 2005. Prior period amounts were recorded directly in shareholders’ equity in the Consolidated Balance Sheet rather than in corporate operating expenses. Historically, the cost of our contingent capital facility has ranged from $0.9 million to $1.7 million per quarter.

Loss Reserve Activity

• The case basis loss reserve (loss reserves for exposures that have defaulted) decreased $44.1 million during the second quarter of 2005 from $130.7 at March 31, 2005 to $86.6 million at June 30, 2005. The decrease resulted primarily from payments made during the quarter to fully settle all claims on the defaulted enhanced equipment trust certificate transaction that was reported in prior quarters. No other loss reserve activity was recorded relating to that transaction during the period. The payments made were partially offset by a $5.1 million addition to an existing case reserve for a stressed health care exposure.

• The net active credit reserve (“ACR”) increased by $15.6 million during the quarter, primarily as a result of deterioration in credit quality of certain structured finance transactions. Ambac’s ACR is established for probable and estimable losses due to credit deterioration on insured transactions that are considered adversely classified. Ambac continuously monitors its insured portfolio actively seeking to mitigate claims.

Other Items

• Total net securities gains/(losses) for the second quarter of 2005 were $29.6 million on a pre-tax basis, or $0.14 per diluted share; consisting of net realized losses on investment securities of ($0.6) million, net mark-to-market losses on credit and total return derivatives of ($17.0) million and net mark-to-market gains on non-trading derivative contracts of $47.2 million. The net mark-to-market loss on credit and total return derivatives was primarily due to market conditions resulting in extension of the weighted average life of certain transactions within our pooled debt obligations portfolio and spread widening on certain credits within our total return

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Ambac Second Quarter 2005 Earnings/ 8

portfolio. The mark-to-market gains on non-trading derivative contracts relate almost entirely to interest rate hedge contracts related to long-term fixed rate liabilities in Ambac’s investment agreement business. Although these hedges were highly effective economically, they did not meet the strict technical requirements for hedge accounting under FAS 133. Of the $47.2 million net mark-to-market gain on these non-trading derivatives recorded in the quarter, $27.3 million relates to mark-to-market gains in the current quarter primarily resulting from declining long-term interest rates during the period. These hedges have been redesignated to meet the technical requirements of FAS 133 as of July 1, 2005. It is expected that the mark-to-market of the hedge and hedged item will substantially offset each other in the income statement prospectively. For the second quarter of 2004, net securities gains/(losses) were $6.7 million on a pre-tax basis, or $0.04 per diluted share; consisting of net realized gains on investment securities of $3.2 million, and net mark-to-market gains on credit and total return derivatives of $3.5 million.

Total net securities gains/(losses) for the first half of 2005 were $38.8 million, consisting of net realized gains on investment securities of $1.3 million, net mark-to-market losses on credit and total return derivatives of ($10.9) million and net mark-to-market gains on non-trading derivative contracts of $48.4 million. For the first half of 2004 net securities gains were $19.2 million, consisting of net realized gains on investment securities of $21.0 million, mark-to-market gains on credit derivatives and total return swaps of $12.2 million and net mark-to-market losses on non-trading derivative contracts of ($14.0) million. The losses on non-trading derivative contracts relate almost entirely to a mark-to-market adjustment on interest rate hedge contracts in Ambac’s medium-term note funding conduit recorded in the first quarter of 2004. The results from the medium-term note funding conduit are included in “Other (loss)/income” in the Consolidated Statements of Operations.

Balance Sheet

Highlights

• Total assets as of June 30, 2005 were $19.5 billion, up 4% from total assets of $18.7 billion at December 31, 2004. The increase was driven by cash generated from business written during the period and an increase in the unrealized gains in the investment portfolio driven by lower long-term interest rates during the period. As of June 30, 2005, stockholders’ equity was $5.29 billion, a 5% increase from year-end 2004 stockholders’ equity of $5.02 billion. The increase was primarily the result of net income during the period, and increased “Accumulated Other Comprehensive Income,” driven by lower long-term interest rates during the period, partially offset by stock buybacks during the period.

Increased Cash Dividend Declared

At its July 2005 Board meeting, the Board of Directors of Ambac Financial Group Inc. approved a 20% increase in the regular quarterly cash dividend from $0.125 to $0.15 per share of common stock. The dividend is payable on September 7, 2005 to stockholders of record on August 10, 2005. Ambac has declared an increased cash dividend in every year since going public in 1991.

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Ambac Second Quarter 2005 Earnings/ 9

Forward-Looking Statements

This release, in particular the President and Chief Executive Officer’s remarks, contains statements about our future results that may be considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment. We caution you that these statements are not guarantees of future performance. They involve a number of risks and uncertainties that are difficult to predict. Our actual results could differ materially from those expressed or implied in the forward-looking statements. Among the factors that could cause actual results to differ materially are (1) changes in the economic, credit, or interest rate environment in the United States and abroad; (2) the level of activity within the national and worldwide debt markets; (3) competitive conditions and pricing levels; (4) legislative and regulatory developments; (5) changes in tax laws; (6) the policies and actions of the United States and other governments; (7) changes in capital requirement or other criteria of rating agencies; (8) changes in accounting principles or practices that may impact the Company’s reported financial results; (9) inadequacy of reserves established for losses and loss adjustment expenses; (10) default of one or more of the Company’s reinsurers; (11) market spreads and pricing on insured pooled debt obligations and other derivative products insured or issued by the Company; (12) prepayment speeds on insured asset-backed securities and other factors that may influence the amount of installment premiums paid to the Company; and (13) other risks and uncertainties that have not been identified at this time. We undertake no obligation to publicly correct or update any forward-looking statement if we later become aware that it is not likely to be achieved, except as required by law.

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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 leading guarantor of public finance and structured finance obligations, has earned triple-A ratings, the highest ratings available from Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services, Fitch, Inc. and Rating and Investment Information, Inc. Ambac Financial Group, Inc. common stock is listed on the New York Stock Exchange (ticker symbol ABK).

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Ambac Second Quarter 2005 Earnings/ 10

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:

	Second Quarter						Six Months
$-millions	2005			2004			2005			2004
Credit enhancement production	$	398		$	411		$	597		$	670
Present value of estimated installment premiums written on insurance policies and structured credit derivatives issued in the period		(208	)		(175	)		(302	)		(314	)
Gross up-front premiums written	$	190		$	236		$	295		$	356
Gross installment premiums written on insurance policies		133			127			257			234
Gross premiums written	$	323		$	363		$	552		$	590

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Ambac Financial Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

For the Three and Six Months Ended June 30, 2005 and 2004

(Dollars in Thousands Except Share Data)

	Three Months Ended June 30,						Six Months ended June 30,
	2005			2004			2005			2004
Revenues:
Financial Guarantee:
Gross premiums written	$	322,628		$	363,196		$	551,754		$	589,630
Ceded premiums written		(54,038	)		15,949			(27,411	)		(17,937	)
Net premiums written	$	268,590		$	379,145		$	524,343		$	571,693
Net premiums earned	$	193,242		$	189,593		$	392,876		$	355,028
Other credit enhancement fees		12,536			11,809			24,603			23,245
Net premiums earned and other credit enhancement fees		205,778			201,402			417,479			378,273
Net investment income		104,450			88,919			206,458			176,634
Net realized investment (losses) gains		(1,030	)		3,294			991			15,165
Net mark-to-market (losses) gains on credit derivative contracts		(11,606	)		3,256			(6,340	)		10,218
Other income (loss)		906			1,356			3,291			(10,813	)
Financial Services:
Interest from investment and payment agreements		64,861			45,740			122,542			98,090
Derivative products		(9,109	)		7,698			(296	)		15,118
Net realized investment gains (losses)		443			(108	)		288			5,843
Net mark-to-market gains on non-trading derivatives		51,268			41			51,959			104
Corporate:
Net investment income		396			386			805			756
Net realized investment gains		—			42			—			18
Total revenues		406,357			352,026			797,177			689,406
Expenses:
Financial Guarantee:
Loss and loss expenses		21,657			17,500			45,129			35,000
Underwriting and operating expenses		28,692			29,277			62,095			55,113
Interest expense on variable interest entity notes		11,816			670			23,395			1,392
Financial Services:
Interest from investment and payment agreements		60,877			40,678			111,657			83,370
Other expenses		3,431			3,381			7,250			7,076
Interest		13,513			13,461			27,026			27,086
Corporate		5,461			2,601			7,743			4,790
Total expenses		145,447			107,568			284,295			213,827
Income before income taxes		260,910			244,458			512,882			475,579
Provision for income taxes		74,812			63,562			141,241			122,928
Income from continuing operations		186,098			180,896			371,641			352,651
Discontinued operations:
Loss from discontinued operations		—			(310	)		—			(550	)
Income tax benefit		—			(124	)		—			(220	)
Net loss from discontinued operations		—			(186	)		—			(330	)
Net income	$	186,098		$	180,710		$	371,641		$	352,321
Earnings per share:
Income from continuing operations	$	1.71		$	1.65		$	3.39		$	3.22
Discontinued operations	$	0.00		$	(0.00	)	$	0.00		$	(0.00	)
Net income	$	1.71		$	1.65		$	3.39		$	3.22
Earnings per diluted share:
Income from continuing operations	$	1.69		$	1.63		$	3.35		$	3.18
Discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00
Net income	$	1.69		$	1.63		$	3.35		$	3.18
Weighted average number of common shares outstanding:
Basic		109,098,498			109,634,527			109,641,520			109,313,146
Diluted		110,327,148			110,924,314			110,990,318			110,673,431

Ambac Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets

June 30, 2005 and December 31, 2004

(Dollars in Thousands Except Share Data)

	June 30, 2005			December 31, 2004
	(unaudited)
Assets
Investments:
Fixed income securities, at fair value (amortized cost of $14,698,314 in 2005 and $13,425,475 in 2004)	$	15,260,922		$	13,901,218
Fixed income securities pledged as collateral, at fair value (amortized cost of $413,824 in 2005 and $345,195 in 2004)		409,004			341,742
Short-term investments, at cost (approximates fair value)		232,882			521,226
Other (cost of $3,767 in 2005 and $3,731 in 2004)		4,198			4,234
Total investments		15,907,006			14,768,420
Cash		36,560			19,957
Securities purchased under agreements to resell		25,000			353,000
Receivable for securities sold		49,491			1,319
Investment income due and accrued		159,483			162,506
Reinsurance recoverable on paid and unpaid losses		1,806			16,765
Prepaid reinsurance		280,579			297,330
Deferred acquisition costs		198,805			184,766
Loans		1,352,328			1,405,700
Derivative assets		1,379,604			1,455,609
Other assets		139,262			77,523
Total assets	$	19,529,924		$	18,742,895
Liabilities and Stockholders’ Equity
Liabilities:
Unearned premiums	$	2,892,168		$	2,778,893
Loss and loss expense reserve		213,542			254,055
Ceded reinsurance balances payable		31,496			18,248
Obligations under investment and payment agreements		7,093,061			6,813,914
Obligations under investment repurchase agreements		229,466			266,806
Securities sold under agreement to repurchase		42,000			—
Deferred income taxes		295,617			217,373
Current income taxes		11,939			16,406
Long-term debt		1,836,277			1,866,207
Accrued interest payable		68,522			71,058
Derivative liabilities		1,187,863			1,206,740
Other liabilities		204,209			208,732
Payable for securities purchased		130,690			6
Total liabilities		14,236,850			13,718,438
Stockholders’ equity:
Preferred stock		—			—
Common stock		1,091			1,089
Additional paid-in capital		711,294			694,465
Accumulated other comprehensive income		338,521			296,814
Retained earnings		4,368,225			4,032,089
Common stock held in treasury at cost		(126,057	)		—
Total stockholders’ equity		5,293,074			5,024,457
Total liabilities and stockholders’ equity	$	19,529,924		$	18,742,895
Number of shares outstanding (net of treasury shares)		107,346,500			108,915,944
Book value per share	$	49.31		$	46.13

Ambac Assurance Corporation and Subsidiaries

Capitalization Table - GAAP

June 30, 2005 and December 31, 2004

(Dollars in Millions)

The following table sets forth Ambac Assurance’s consolidated capitalization as of June 30, 2005 and December 31, 2004, respectively, on the basis of accounting principles generally accepted in the United States of America.

	June 30, 2005		December 31, 2004
	(unaudited)
Unearned premiums	$	2,897	$	2,783
Long-term debt		1,044		1,074
Other liabilities		2,375		2,192
Total liabilities		6,316		6,049
Stockholder’s equity:
Common stock		82		82
Additional paid-in capital		1,248		1,233
Accumulated other comprehensive income		250		238
Retained earnings		4,222		4,094
Total stockholder’s equity		5,802		5,647
Total liabilities and stockholder’s equity	$	12,118	$	11,696