The financial guarantee non-VIE investment portfolio had a fair value of $5.3 billion (amortized cost of $5.0 billion) as of June 30, 2010. The portfolio consists of high quality municipal bonds, corporate bonds, Treasuries, U.S. Agencies and Agency MBS as well as mortgage and asset-backed securities.

Long-term debt increased during the quarter from $1,633.4 million at March 31, 2010 to $1,815.0 million due to the issuance of $2.0 billion of surplus notes related to the CDO of ABS commutation which have a carrying value of $200.1 million at June 30, 2010. The surplus notes will accrete to face value over the 10-year life of the bonds. This increase was partially offset by decreases in Ambac’s debt resulting from debt for equity exchanges transacted with certain holders of Ambac’s 9⅜% debentures due in August 2011. During the second quarter 2010, Ambac issued an aggregate of 13,638,482 shares of its common stock in exchange for $20.3 million in aggregate principal amount of its 9⅜% debentures and recognized a gain on the extinguishment of those debentures amounting to $10.7 million during the period.

Cash, short-term securities and bonds at the holding company amounted to $76.0 million as of June 30, 2010. Ambac’s annual debt service costs amount to approximately $87.0 million. As a result of the recent actions taken by OCI (as discussed in our press release dated March 25, 2010 and in our 10-K filed with Securities Exchange Commission on April 9, 2010), management believes that it is highly unlikely that AAC will be able to make dividend payments to Ambac for the foreseeable future.

Overview of AAC Statutory Results

As of June 30, 2010, AAC reported statutory capital and surplus of approximately $1.5 billion, up from $160 million as of March 31, 2010. AAC’s statutory financial statements include the results of AAC’s general account, the Segregated Account which was formed on March 24, 2010, Ambac Assurance UK Ltd. and Everspan Financial Guarantee Corporation. Statutory capital and surplus was positively impacted by the various credit derivative commutations during the period, primarily the June 7, 2010 CDO of ABS settlement. Consideration for these settlements included both cash and surplus notes of AAC. As prescribed by OCI, the surplus notes are included in AAC’s statutory surplus at their par value of $2.0 billion. At June 30, 2010 AAC has no remaining statutory impairments on its credit derivative portfolio.