Financial Guarantee Loss Reserves

Total net loss and loss expenses were $165.4 million in the third quarter of 2010, compared to $459.2 million in the third quarter of 2009. Losses and loss expenses in the third quarter of 2010 primarily relate to credit deterioration in certain first-lien RMBS and student loan transactions and increased loss expense estimates related to loss mitigation and remediation strategies of the RMBS portfolio, partially offset by increased estimates in remediation recoveries on certain RMBS transactions. Third quarter of 2009 loss and loss expenses were driven by credit deterioration in non-RMBS transactions.

Loss and loss expenses paid during the third quarter 2010, net of recoveries from all policies (allocated and not allocated to the Segregated Account), amounted to $63.9 million and include a commutation payment on a non-RMBS structured finance transaction, partially offset by RMBS recoveries. Total insurance claims presented for payment during the quarter but not paid as a result of the moratorium imposed in March 2010 by the OCI on all policies allocated to the Segregated Account amounted to $428.3 million, largely related to RMBS policies. Total net claims paid in the third quarter of 2009 were $315.1 million, primarily related to RMBS transactions.

Loss and loss expense reserves for all RMBS insurance exposures as of September 30, 2010, were $2,746.0 million (including $1,074.2 million representing claims presented but not paid since March 24, 2010 due to the claims moratorium). RMBS reserves as of September 30, 2010, are net of $2,395.5 million of estimated net remediation recoveries. The estimate of net remediation recoveries related to material representation and warranty breaches increased from $2,227.2 million as of June 30, 2010, primarily as a result of additional breaches identified during the re-underwriting of additional loan files within transactions identified in previous periods and increased credit deterioration in certain transactions thereby increasing the remediation recovery estimated for same. Ambac has initiated and may continue to initiate lawsuits seeking compliance with the repurchase obligations in the securitization documents with respect to sponsors who disregard their obligations to repurchase. Additionally, Ambac is in the process of re-underwriting additional transactions that have drastically underperformed expectations and the forensic results of those transactions are expected to be available over the next few quarters.