Ambac Financial Group, Inc. Adding diversity to our financial sector holdings.

Ambac Financial Group, Inc.

Adding diversity to our financial sector holdings

Current Finance Sector Holdings

Washington Mutual Citigroup Bank of America Alliance Capital Fannie Mae

Investment Thesis

Low interest rates Flat yield curve Infrastructure deficit Continued stress on State and Local

Budgets

Lead to continued strength in debt markets

Strategy for the Sector

Trade Fannie Mae for Ambac

Why Buy Ambac Financial Group?

A history of solid performance Double digit ROE and EPS growth Good valuations International growth opportunities

Historical Performance

-100%

-50%

0%

50%

100%

150%

200%

May-00 May-01 May-02 May-03 May-04

ABK

^SPX

AC

BAC

C

FNM

WM

Risk Return Comparison

ABK AC BAC C FNM WM

Historical Beta 0.48 1.29 0.59 1.31 0.22 0.03

Return / STD Dev 0.21 0.10 0.25 0.08 0.05 0.19

Annualized Return 19% 10% 20% 7% 5% 27%

Ambac Financials Business

Financial Guaranty Public finance Structured finance International finance

Financial Services Interest rate swaps Total return swaps Funding conduits

Financial Guaranty Business

$240

$132

$87

Public Finance

Sturctured Finance

I nternationalFinanace

Net par in billions of dollars 12/2004

Financial Guaranty Revenue

$764

$361

$44

Premiums EarnedI nvestment GainsOther

Billions of dollars 2004

Competition for Ambac

Only three players globally High barriers to entry Ambac is a strong competitor

28% market share in 2003 Highest gross par written for 2004

History of consolidation if market crowds

Indicators of Success

Industry leading 15% ROE average over the last 10 years

Double digit earnings growth for 12 years running

Effective underwriting Efficient operations

Combined Expense Ratio

0%

10%

20%

30%

40%

50%

60%

70%

2001 2002 2003 2004

ABKMBI AI nd. Ave.

Loss Ratio

0%

5%

10%

15%

20%

25%

30%

35%

2001 2002 2003 2004

ABKMBI AI nd. Ave.

Income Projections by Business

0

200

400

600

800

1000

1200

2004 2007 2009 2011 2013

I nternationalFinanceStructuredFinancePublic Finance

Historic

CAGR = 19%

Valuation Methods Used Price to book value Price to earnings

value Excess return

dividend model

Current Price $72.39

$82

$99

$78 $83

P/ E P/ B DDM Target

Recommendations

Purchase Ambac Financial Group

Sell Fannie Mae

What’s Wrong With Fannie No audited financial statements Effect of regulatory changes on future

revenues is unknowable Currently running without CEO and CFO Too difficult to understand given high

manager turnover

And…

FNM does not meet our investment policy requirements.

Investment Objective 1

“Security selection is to be made on the basis of a supportive fundamental analysis of a stock.”

Impossible to be thorough without financial statements

Investment Objective 2

“Maintain a risk level comparable to the S&P 500”

Company specific risks are significantly greater than other members of the S&P 500.

Investment Objective 3

“The investment guidelines are based on an investment horizon generally greater than 1 year and consistent with a normal market cycle of approximately 5 to 7 years.”

Market cycle has shifted

Suggested Trade

  Ticker Quantity Price Total

Sell FNM 57 $ 59 $ 3,372

Buy ABK 50 $ 72 $ 3,620

Questions?