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Announcement:

Moody's confirms Ambac at Caa2, changes rating outlooks

23 Nov 2010

New York, November 23, 2010 -- Moody's Investors Service confirmed the Caa2 ratings of Ambac Assurance Corporation (AAC) and Ambac Assurance UK Limited (AUK), and changed the outlook for AAC to developing and that for AUK to stable. The C rating for Ambac Financial Group (AFG) was affirmed. Because of the outlook changes resulting from the rating action, ratings appearing on this website may not yet reflect current information. For current information, please visit <A href="http://www.moodys.com/guarantors">http://www.moodys.com/guarantors</A>.

Today's rating action may have implications for certain transactions wrapped by AAC and AUK, as discussed below.

RATIONALE FOR RATINGS AND OUTLOOKS

Today's rating action on AAC was prompted by the uncertainty resulting from a recent request for information from the IRS and the subsequent actions by Ambac and its regulator. On October 28, the IRS issued an Information Document Request (IDR) in connection with $700 million in tax refunds previously paid to Ambac. The IDR and its potential consequences may have prompted AFG, AAC's parent, to accelerate its Chapter 11 filing on 8 November, to seek bankruptcy protection. As consolidated tax filers, AFG and AAC are jointly and severally liable for taxes due. On the same day, AAC's regulator, the Wisconsin Office of the Commissioner of Insurance (OCI), petitioned to the court to subordinate claims, including those from IRS and AFG creditors, to all policyholders' claims, and requested a temporary injunctive relief to freeze those claims. The court ordered a 45-day injunctive relief on 8 November.

Moody's notes that the effect of these latest developments on Ambac is unclear at this time, but that potential adverse consequences could possibly derail some positive effect on the general account policies from recent restructuring. It may also be some time before such issues are resolved.

AMBAC ASSURANCE CORPORATION

The developing outlook for the financial strength rating of AAC's general account reflects the credit uncertainty brought by the recent IRS inquiry and the possible lengthy resolution of any dispute. More visibility on credit issues such as the IRS claims, if any, and its effect on the liquidity and claims paying ability of AAC, should emerge over the next 3-12 months through various court rulings.

Depending on the outcome of various lawsuits, AAC's rating could either go up or down. Moody's financial strength rating on AAC speaks to general account policies. The general account's credit profile would improve if: a) tax liens are non-existent, immaterial, or junior to policyholders' claims, and b) general account policies are effectively senior to those of the segregated account, as petitioned by OCI. The potential for an upward rating movement is tempered, however, by AAC's limited capital resources relative to expected claims and expenses. Lack of clarity about OCI's intention to reallocate general account policies, especially those that could generate losses, to the segregated account could cloud the outlook for current general account policyholders.

AAC's financial strength may weaken should adverse outcomes related to tax liens materialize. This may derail the rehabilitation by draining AAC's capital and liquidity resources. As of end-Q3 2010, AAC's $5.6 billion investment portfolio had $918 million in short-term, Agency and Treasury securities, and $2.1 billion in municipal securities. AFG's liquid assets totaled about $63 million. To mitigate potential liquidity stress, OCI may choose to rehabilitate the whole AAC, not just the segregated account. While we think this scenario is somewhat unlikely, a full rehabilitation could cause severe collateral damage if it triggers the terminations of CDS at mark to market.

AMBAC ASSURANCE UK LIMITED

The Caa2 insurance financial strength rating of AUK reflects the firm's weak credit profile, in part resulting from potential losses in insured portfolio, and the credit deterioration and restructuring of AAC. The stable outlook reflects the company's meaningful future premium revenues and most likely back-loaded expected claims payments.

AUK recently commuted its reinsurance and net worth maintenance agreement with AAC, retaining future installment premiums but forgoing any reinsurance receivables from AAC. Pre-commutation, under the plan of rehabilitation, reinsurance claims were subordinated to policyholders' claims from the segregated account, and were payable in junior surplus notes.

The company is not permitted to write any new policies as requested by the FSA, its UK regulator, and has been in run-off since 2008. AUK is in breach of minimum regulatory capital requirements, but has meaningful claims paying resources, mainly from future installment premiums.

AMBAC FINANCIAL GROUP, INC

Ambac Financial Group's senior debt rating was affirmed at C, reflecting the recent missed senior debt interest payment on 1 November, and the Chapter 11 bankruptcy. We expect diminished recovery on AFG's debt, due to the holding company's modest cash position, stress at AAC, potential tax liens, and limited financial flexibility.

TREATMENT OF WRAPPED TRANSACTIONS

Moody's ratings of securities that are guaranteed or "wrapped" by a financial guarantor are generally maintained at a level equal to the higher of the following: a) the rating of the guarantor (if rated at the investment grade level); or b) the published underlying rating (and for structured securities, the published or unpublished underlying rating). Moody's approach to rating wrapped transactions is outlined in its special comment, "Assignment of Wrapped Ratings When Financial Guarantor Falls Below Investment Grade" (May, 2008); and its November 10, 2008 announcement, "Moody's Modifies Approach to Rating Structured Finance Securities Wrapped by Financial Guarantors."

In light of today's rating actions on Ambac, Moody's will position the ratings of wrapped transactions according to these criteria. For wrapped transactions whose ratings are withdrawn based on these criteria, if the rating of Ambac should subsequently move back into the investment grade range, or if Moody's should subsequently publish the underlying rating, Moody's would reinstate the rating to the wrapped instruments.

LIST OF RATING ACTIONS

The following ratings have been confirmed:

Ambac Assurance Corporation -- confirmed insurance financial strength at Caa2, outlook changed do developing;

Ambac Assurance UK Limited -- confirmed insurance financial strength at Caa2, outlook changed to stable;

Ambac Financial Group, Inc. -- affirmed senior unsecured debt at C, junior subordinated debt at C.

The last rating action related to Ambac was taken on March 26, 2010, when Moody's placed AAC's financial strength ratings on review for possible upgrade and downgraded Ambac Financials' ratings (senior debt to C).

The principal methodology used in rating Ambac is Moody's Rating Methodology for the Financial Guaranty Insurance Industry, which can be found at <A href="http://www.moodys.com">www.moodys.com</A> in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating Ambac can also be found in the Credit Policy & Methodologies directory.

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.

New York
Helen Remeza
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Stanislas Rouyer
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's confirms Ambac at Caa2, changes rating outlooks
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