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Ambac Financial Group, Inc.

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

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Ambac Financial Group, Inc.

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

  2. Current Finance Sector Holdings • Washington Mutual • Citigroup • Bank of America • Alliance Capital • Fannie Mae

  3. Investment Thesis • Low interest rates • Flat yield curve • Infrastructure deficit • Continued stress on State and Local Budgets • Lead to continued strength in debt markets

  4. Strategy for the Sector • Trade Fannie Mae for Ambac

  5. Why Buy Ambac Financial Group? • A history of solid performance • Double digit ROE and EPS growth • Good valuations • International growth opportunities

  6. Historical Performance

  7. Risk Return Comparison

  8. Ambac Financials Business • Financial Guaranty • Public finance • Structured finance • International finance • Financial Services • Interest rate swaps • Total return swaps • Funding conduits

  9. Financial Guaranty Business Net par in billions of dollars 12/2004

  10. Financial Guaranty Revenue Billions of dollars 2004

  11. 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

  12. 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

  13. Combined Expense Ratio

  14. Loss Ratio

  15. Income Projections by Business Historic CAGR = 19%

  16. Valuation Methods Used • Price to book value • Price to earnings value • Excess return dividend model • Current Price $72.39

  17. Recommendations • Purchase Ambac Financial Group • Sell Fannie Mae

  18. 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.

  19. 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

  20. 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.

  21. 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

  22. Suggested Trade

  23. Questions?

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