Sean Leonard – Senior Vice President and Chief Financial Officer David Wallis – Chief Executive Officer Greg Raab – Chief Risk Officer

Andrew Wessel – JP Morgan Donna Halverstadt – Goldman Sachs Arun Kumar – JP Morgan Scott Frost – HSBC [Stephen Lessco] – Credit Suisse Patrick Dennis – DK Partners

Welcome to the Ambac Financial Group Inc. third quarter, 2009 earnings call. (Operator Instructions). It is now my pleasure to introduce your host, Mr. Sean Leonard, Senior Vice President and Chief Financial Officer for Ambac Financial Group Inc. Thank you Mister Leonard, you may begin.

Thank you, good morning everyone and welcome to Ambac's third quarter conference call. I'm Sean Leonard, Chief Financial Officer of Ambac. With me today are David Wallis, Chief Executive Officer, and Greg Raab, Ambac's Chief Risk Officer, both of whom will be available to answer questions later on when I open up the call for questions and answers. Our earnings press release and selected risk exposures for the third quarter are available on our website. Also note that this call is being broadcast on the Internet at www.ambac.com. During this conference call, we may make statements that would be regarded as forward-looking statements. These statements may relate to, among other things, management's current expectations of future performance, future results and cash flows and market outlook. You are cautioned not to place undue reliance on these forward-looking statements which reflect our current analysis of existing trends and information as of the date of this presentation. There is an inherent risk that actual results, performance or achievements could differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. These differences could arise from a number of factors. Information concerning factors that could actually cause results to differ materially from the information we will give you is available in our press release and on our most recent form 10-K for the fiscal year ended December 31, 2008, and also disclosed from time to time by Ambac in its subsequent reports on form 10-Q and form 8-K. You should review these materials for a complete discussion of these factors and other risks. Copies of these documents may be obtained from the SEC website. In my prepared remarks, I will provide an overview of the third quarter's GAAP financial results and the primary factors driving them, as well as a brief overview of the company's liquidity position. Please note, that as we have stated in prior quarters, we continue to work to reduce exposures through commutations which if completed prior to our filing, the statutory financial statements will have a collective impact on the statutory and financial results as of September 30th. Therefore, Ambac statutory filings are not yet finalized and I'm not able to answer any questions about our statutory financial results on this call. Statutory statements are scheduled to be filed no later than November 16th. When the statutory financial statements are complete, we will finalize our quarterly operating supplement and post it on our website. But before I get to the quarter's results I would like to remind you that as of January 1, 2009, Ambac implemented a new accounting standard for financial guarantee insurance contracts, now known s Accounting Standards Codification or ASC Topic 944. ASC Topic 944 was previously known as FAS 163. The most significant changes related to the implementation of ASC Topic 944 were through the recognition of premium revenues, recognition on the balance sheet of future installment premiums and reporting of losses. Due to the changes in accounting for these items, 2008 results and 2009 results are not comparable. Now I'll discuss the financial results for the quarter. Net income for the third quarter of 2009 was $2,188.3 billion or $7.58 per diluted share. That compares to a net loss of $2,431.2 billion or a loss of $8.45 per share in the third quarter of 2008. The third quarter 2009 net income was driven by significant unrealized mark-to-market gains in our credit derivatives portfolio. Additionally during the quarter, Ambac recorded income from cancellations of certain reinsurance agreements. These two income items were partially offset by insurance loss provisioning and losses in our interest rate swap portfolio. I will discuss each of these items in more detail later in my prepared remarks. Total net premiums earned in the third quarter of 2009 amounted to $238.4 million a decrease of 16% from the third quarter last year. The majority of the decrease is due to lower accelerated premiums which are a component of total net premiums earned. Accelerated premiums for the third quarter of 2009 amounted to $90.3 million during the quarter, down 29% from $127.3 million in the third quarter of 2008. Whereas the overwhelming majority of the accelerated premiums recorded in 2008 resulted from refunded municipal finance transactions, over half of the recent quarters' accelerated earnings resulted from the termination of one international transaction. Investment income amounted to $132.3 million. That's up 7% from the third quarter of 2008. The increase was driven by increasing yields on the portfolio after a recent initiative of shifting a greater percentage of the portfolio from tax exempt securities to taxable securities and seeking better relative value opportunities has begun to take effect. In addition, previous quarters' impairment charges have reset the book yield to a much higher market yield on certain mortgage-backed securities. That positive result was partially offset by the declining investment portfolio as cash payments for commutations and other losses since the third quarter of 2008 has outpaced cash flow's inflows from operations such as premiums collected and interest income and the 800 million of AAC preferred stock issuance in the fourth quarter of 2008 and the first quarter of 2009. During the third quarter, Ambac reported net mark-to-market gains related to its credit derivative portfolio amounting to $2,132.9 billion. That amount has two components. First, realized gains and losses which amounted to $732.9 million realized loss, and second, unrealized gains which amounted to $2,865.8 billion. The net realized loss of $732.9 million was driven by settlement and commutation payments of $746 million made in July as discussed in our last quarterly conference call, partially offset by CDO of ABS fees received. The unrealized gain of $2,865.8 billion was primarily driven by Ambac Assurance credit spread widening significantly during the quarter, as well as improved pricing of Radiant obligations other than CDOs of ABS. Negatively impacting the mark was internal downgrades within the CDO of ABS portfolio. During the third quarter, Ambac was able to negotiate the cancellation of reinsurance arrangements with three of our re-insurance counterparties, Radiant, Swiss Re and MBIA; the net impact of the three cancellations with Ambac recapturing a net amount of approximately $15.3 billion par exposure. The result on our net income was approximately $303 million, as settlement amounts exceeded the recaptured upfront unearned premium reserves and loss reserves recorded for such transactions. The gains were recorded in other income and as a reduction in underrating and operating expenses. Total incurred losses for the quarter were $459.2 million, primarily related to a handful of asset-backed securitization credits and a public finance transportation transaction. All the transactions had been previously reserved but had deteriorated over the past few months. The RMBS incurred losses were negative $259 million during the quarter, favorably impacted by increased estimates for remediation recoveries in the second lien portfolio, partially offset by additional deterioration noted in certain segments of portfolio. While initial delinquency rolls are steadying somewhat, large later stage buckets are driving continued poor performance especially in loss severities across both first and second lien transactions. Ambac increased its estimate of remediation recoveries on RMBS transactions due to breaches of representations and warranties by approximately $738 million during the third quarter. As of September 30th, RMBS reserves are net of approximately of $1.9 billion of estimated remediation recoveries. The increase in the estimate of remediation recoveries is a result of additional breaches discovered during the quarter, the addition of two more transactions to the scope of our review and an enhancement to our estimation process of certain transactions to include an extrapolation of breaches across the population that is based on a statistically significant sampling of loan files. Given the scale of the losses in the RMBS portfolio, the evidence of pervasive breaches noted to date and recent performance addressing these contractual breaches, Ambac believes limiting remediation credit to the loan amounts where actual breaches have been discovered under-staged the amount Ambac is expected to recover from institutional sponsors. As a result, the number of transactions where random samples were extrapolated to estimate the amount of subrogation recovery increased from one as of June 30, 2009 to seven as of September 2009. Correspondingly, the number of transactions where an adverse sample was used decreased from ten to six. We are actively working these transactions to resolve these breaches through litigation or otherwise and continue to believe our assumed recovery time of three years is appropriate. During the quarter, Ambac paid gross claims amounting to $406.6 million, almost all related to RMBS transactions. After the impact of the reinsurance buybacks, Ambac paid net $315.1 million during the quarter. During the quarter, the mix of RMBS claim payments shifted from predominately second- lien transactions to approximately 60% second-lien, with the balance coming from first-lien transactions. We expect this trend to continue as the claims we have been projecting on first-lien deals are realized. Within the financial services segment, the derivatives products business results declined by $205.3 million quarter-on-quarter due to valuation adjustments on the swap portfolio, losses resulting from interest rate movements during the quarter and losses realized on transactions that derivative counterparties terminated as a result of the downgrades of AAC as guarantor in the swaps. Now I'd like to discuss the company's liquidity, both at our holding and operating companies. Starting with our holding company, total cash short-term securities and bonds amounted to approximately $165 million at September 30. That amounts to approximately 1.9 times the holding company's annual debt service needs of approximately $89 million. Due to statutory operating losses recorded by Ambac Assurance in 2008, AAC is not able to declare and pay dividends to the holding company in 2009 without first receiving approval from OCI. Dividends from the operating company to the holding company in 2010 will depend on Ambac Assurance's ability to generate statutory income in 2009 which appears unlikely at this point. In terms of liquidity of the operating company, excluding variable interest entity investments, Ambac Assurance has an investment portfolio with a fair value and amortized costs of approximately $7.7 billion which includes over $1.2 billion of short-term investments. This portfolio is available to provide support for operating cash flow deficiencies and further risk reduction opportunities. Total claims paying resources amount to approximately $11.4 billion as of September 30th, down from approximately $11.9 billion at June 30th, primarily due to the CDO of ABS commutation and settlement payments in July and claim payments on insured RMBS transactions. Those reductions in claims paying resources were partially offset by the reinsurance recaptures. Looking forward, we expect to pay approximately $2.5 billion on insurance policy loss payments between the fourth quarter 2009 and the end of 2010. Offsetting these outflows for that period, we expect to receive principal on interest related to the investment portfolio amounting to approximately $921 million and $475 million of installment premiums. These amounts and our best estimates of cash flows for periods beyond 2010 will be provided in our quarterly operating supplement. That concludes my prepared remarks on the financial results. Now I would like to turn it over to the operator to start the question and answer session.

(Operator Instructions). Your first question comes from Andrew Wessel – JP Morgan. Andrew Wessel – JP Morgan: Just on the remediation efforts with the mortgage-backed security deals, you said it's 1.9 billion of accumulative expected claims you expect to get back from the seller servicers. Can you kind of update what you've actually gotten back cash into the firm on those claims?

Yes, up until this point and time we've collected approximately $60 million on loan put-backs, actual loan put-backs. We've obviously put back quite a bit to the various pools and sponsors of the pools, over 12,000 loans across a dozen or so transactions. But we've actually collected $60 [million] and we're also in active discussions relating to more of a global settlement relating to one of the transactions. Andrew Wessel – JP Morgan: And then that's going into the op co, not hold co?

No, Andrew, what happens there is it's really money's going into the trust itself so the securitization trust is the one collecting the funds. So what's effectively happening indirectly is our claim payments will go down. So money goes into the trust, say the $60 million that we collected in the transactions that it relates to, there's more cash in the trust to make its financial obligations to its note holders of the trust, and therefore what's been happening in those transactions is our claims have been going down. Indirectly it comes to us, but I just wanted to run you through those details. Andrew Wessel – JP Morgan: And then in terms of, you haven't filed any lawsuits or anything against any other seller services because we've seen one competitor in the industry who's pretty healthy who is getting cash back and then one competitor, one of your competitors in the industry who isn't that healthy who's just taking the legal route. Have you made any suits or are you trying to work this out out of court?

We're taking a variety of strategies. In certain cases, we have filed lawsuits. In the other case where we got the money back, we've been having face-to-face meetings and trying to resolve the issues. It doesn't preclude obviously some type of form of legal remedies, further legal remedies other than through the actually put-back process but it's kind of a combination of approaches where we think, based upon our view of what's in our best interests, we'll continue to consider various alternatives and we'll act accordingly. Andrew Wessel – JP Morgan: And then my other question has to do with the last statement you made about that you're expecting to pay at least $2.5 billion. I was trying to write down quickly, but will pay at least $2.5 billion of claims in the next five quarters and will have investment income of a little over $900 million and premium payments of about $475 million to offset that? Are those the right numbers?

Yes. Andrew Wessel – JP Morgan: That put $1.5 billion shortfall, so would that all kind of bleed out of the investment portfolio over the next five quarters?

Yes, largely that's right. And also too, Andrew, the 921 includes principal and interest so a piece of that is the roll down of the investment. It's not all on investment income, so just to clarify that. When we issue our operating supplement, we'll have splits, for the principal and interest splits, so you'll get a sense for what that looks like over the next five quarters. But yes, that's right. There's other potential things that could happen there, is the $2.5 billion of payments doesn't consider any impact for put-backs at all. So there's potential for some of that to, while our estimate includes a kind of a three -year bullet from the time that the process has gotten started for each individual transaction, when I disclosed that 2.5, that doesn't include any of that put-back. The other potential item which will be favorable is if there's a law change relating to net operating loss carry-backs which is being discussed and that could be helpful to us. Andres Wessel – JP Morgan: And on that topic, since tax asset isn't included in statutory – it's my understanding it's not included in your statutory capital for statutory purposes. Is there any kind of impact from a ruling on that to your statutory capital levels or is that just purely more of a GAAP issue?

On a potential NOL carry back extension? That would have, obviously, positive cash impact, but it would affect both statutory capital levels and gap income levels because we've largely reserved – we've taken a valuation allowance against the piece of the deferred tax asset related to the net operating loss.

Our next question is coming from Amanda Lynam – Goldman Sachs. Donna Halverstadt – Goldman Sachs: It's actually Donna Halverstadt. Our question had actually been on the NOL, so to the extent that the carry-back provision is extended, would you quantify for us what size of a refund you might expect to receive in 2010?

We think, if it goes through as drafted, or at least the draft we saw late last week, of the bill, we think the numbers will be approximately $400 million.

Our next question is coming from Arun Kumar – JP Morgan. Arun Kumar – JP Morgan: Good morning. A couple of questions, one a little more general and the other one a little more numbers-specific, the first one is your statutory filing that you plan to do on November 16 and the reason you didn't give the numbers today? Are there actions underway that's going to be commutations or otherwise that could favorably improve your capital position because, as of the end of the last quarter you had come relatively close to the line in terms of the minimum capital required. But commutations and other transactions could change that number somewhat. Could you give us any commentary on the status of those discussions you're having with counterparties at this point that may impact statutory capital?

I would prefer not to get into details of discussions, just for commercial reasons. The reason why we didn't provide stat numbers is just that they're simply not done yet. We've had a history in the past of doing is – there seems to be increased interest towards end of quarters, particularly in the month succeeding the end of the quarter. That's something that we have reflected in the numbers to make the best estimate of what we think potential claims would be. Nothing is better than an actual settlement or some type of agreement. That influences the estimate, so we're not done yet. So I really prefer not to comment on where that stands. It's not – we're not talking a long time. We're probably talking a week and a half before those numbers will be made available. Arun Kumar – JP Morgan: Just to follow up on the numbers question and also one of Donna's questions, in terms of the NOL, the $400 million that you alluded to, would that be a statutory gain or would that impact your statutory capital? Presumably it would.

Yes, it would. It would be a positive – we would get cash and that would be a pickup in our statutory capital. Arun Kumar – JP Morgan: And the timing for that – do you have any idea as to when that's likely to work its way through the system?

If things worked out well, we think that from enactment, perhaps six to eight weeks. Arun Kumar – JP Morgan: The other question on the numbers question – I'll just run a couple of numbers through you and you can comment one way or the other. In terms of the remediation recovery of the $750 million that had increased from $1.1 billion to $1.9 billion, based on past practices it appears that that amount would be a positive to statutory capital?

Yes, those that relate to transactions that have defaulted would be considered in the overall view an estimate of what we think the ultimate potential claims are on those defaulted items. That's right. Arun Kumar – JP Morgan: And the other one – the $732 million of realized losses due to settlements from credit derivative contracts, is that just a prior period item or that could impact statutory capital as well?

No, what that is, is that's the actual payment relating to the CDO of ABS commutations that were done in July minus the fees we collected so provided those numbers in my prepared remarks. But there was a [metric], so effectively what it was is we trued up our accrual for those payments as of June 30th. So that's just a payment to a liability that already existed as of June 30th. Arun Kumar – JP Morgan: In terms of the 459 for RMBS security the last and loss expenses that presumably could be a combination and GAAP and stat correct?

That's correct Arun Kumar – JP Morgan: But the split is obviously, you're not commented on that but I leave it to you if you want to comment it. And lastly the $300 million computations from your reinsurance cancellation, that would be a statutory gain, correct?

That's correct. The statutory numbers are just a modestly higher than that due to different bases for the unearned premium reserve accounts and the loss reserve accounts but they're modestly higher than that 303 that I provided. Just on the losses I prefer they kind of hold off on that as well but just highlight the fact that statutory just reflects defaulted items. And it's kind of a mix of both in there, default and non default. Arun Kumar – JP Morgan: Could you comment a little bit on your relationships with the Wisconsin regulator in terms of how they're looking at you? Obviously up to this point in time, they been fairly accommodating in terms of various transactions via the loan to their asset management company or other issues. Could you comment on the tenor – the tone of your conversations with them in terms of your statutory capital levels and what do you think they could do the future?

Our relationships with Wisconsin continue to be absolutely appropriate. We are in very frequent discussions and communication with them. I think that they're – we have a transparent relationship. They exactly what's happening here. And clearly consider all that's happening here in the context of our position in making any decisions that they might want to make. Obviously, I am not going to speak for them in any way but they are thoroughly apprised of our position and we are in constant communication and the relationship continues to be excellent. Arun Kumar – JP Morgan: So it appears based on your commentary that it appears very unlikely that on November 16 when you file your statutory statement that the Wisconsin commissioner is going to step in and say that he's going to place you under some kind of supervision.

Well obviously I can't speak for Wisconsin and I'm not going to, but all I can say is they – we communicate frequently and transparently and the relationship remains very amiable.

Your next question comes from Scott Frost – HSBC. Scott Frost – HSBC: Could you go over a couple of things just on the seller services with respect to your remediation recoveries, could you tell us who they are if you can, but I mean, are there any concentrations and what's their credit quality and things like that. Do you know any detail on that?

It covers four issuers. Scott Frost – HSBC: Four issuers?

Yes. Scott Frost – HSBC: Have you told – have you disclosed who they are?

No we haven't. Scott Frost – HSBC: Details or ratings?

Well you can – what we do disclose, which I think what might be helpful, is we do disclose our exposures for all of our transactions. And one can – all the RMBS transactions with the vintages that you would expect to be subject of these types of reviews. And you can sort by the variety of seller servicers that are involved with these transactions, so we prefer not to go that detail but one can look at that information and get a pretty good sense for who – what transactions are likely to be the targets here. Scott Frost – HSBC: Could you tell us, you referenced part of the gain you experienced from derivatives I guess with your own spreading widening, could you tell us how that was? Was that under – is that under disclosure somewhere that I missed?

Yes, I'm not sure I mentioned that but the total change due to just the credit spread widening, sort of discount rate change, if you will, is a little bit short of 2.7 billion. Scott Frost – HSBC: That's your spreads widening right?

That's correct.

Our next question is coming from [Stephen Lessco] – Credit Suisse. [Stephen Lessco] – Credit Suisse: I have a question about the $746 million cash payment from the July 2009 commutations. In your second quarter earnings you mentioned that that was from two transactions, one reduced significantly, and one that was fully commuted. Can you comment on which two and how much the one was reduced?

No, we prefer not to kind of get into the details of the transactions just for commercial and other reasons, but suffice it to say that they were both significant reductions of risk that were on the balance sheet at that particular point in time. [Stephen Lessco] – Credit Suisse: But when you said in the second quarter that it was 2.8 billion net notional, would that 2.8 billion notional reduction or are those two originally had 2.8 billion insured and one would –

No, that was the actual reduction in the par amounts that we were responsible for. One transaction was fully settled and the other one was I would consider modified but substantially modified.

(Operator Instructions). Our next question is coming from Patrick Dennis – DK Partners. Patrick Dennis – DK Partners: A quick follow-up question on the NOL carry-back they extended. You mentioned the $400 million number, what entity would that balance actually flow through? Would that be at AC or would that go through a hold co.

The process would be we file consolidated return. The money would come into the holding company and due to the tax sharing agreements that we have, it would send down to Ambac Assurance, the insurance company.

Seeing as how we have no further questions, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.

Thank you, everyone, for participating in the call. We are available to answer any additional questions and we would be happy to do so. Please call us at your convenience. Thank you.