Assured Guaranty Ltd (AGO) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2008 Assured Guaranty earnings conference call. My name is Akia and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Ms. Sabra Purtill, Managing Director of Investor Relations. Please proceed, ma'am.

Thank you, Akia, and thank you all for joining us for Assured Guaranty's first-quarter 2008 earnings conference call. Our earnings press release and financial supplement were released yesterday evening after the market closed. These materials and other information on Assured are posted in the investor information section of our website.

I would note that this call is being webcast and is also available for replay on our website or by telephone dial in. The details for the telephone replay are available in our earnings press release.

Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Ltd., and Bob Mills, Chief Financial Officer, will provide a brief overview of Assured's first quarter on the call today, after which the operator will ask the audience to poll for questions. Our call is not Web-enabled for Q&A, so please dial in to the telephone connection of this call if you would like to ask a question.

Also, please note that this call is being held for the benefit of analysts and investors in Assured Guaranty. Members of the media are welcome to listen, but are kindly requested to contact Ashweeta Durani of Assured Guaranty at 212-408-6042 or Dawn Dover at Kekst and Company at 212-521-4187 to confirm any quotations or to request clarifications on comments made in this call, prior to publishing details from this call in the media.

I would also like to remind listeners on this call that management's comments or responses to questions may contain forward-looking statements, such as statements related to our business outlook, growth prospects, market conditions, credit spreads, credit performance, pricing, and other items where our outlook is subject to change. Our future results may differ materially from these statements.

For those listening to the webcast, please keep in mind that more recent information on Assured may be available in future webcasts, press releases, or SEC filings. We ask you to refer to the investor information section of our website for the most current financial information on Assured. You can also refer to our most recent SEC filings for more information on factors that could affect our forward-looking statements.

Thank you. I would now like to turn the call over to Dominic for his commentary.

Thank you, Sabra, and thanks to all of you on the call and webcast for your interest in Assured. First-quarter 2008 was a very strong quarter for new business at Assured, as we continue to build our Financial Guaranty Direct franchise, particularly in the public finance sector. However, mortgage markets continue to be troubled, with losses experienced at levels beyond anyone's expectations.

Our operating results this quarter were heavily impacted by our decision to lower our internal ratings for our Direct HELOCs and by some additional loss reserves established on select closed-end seconds and reinsured HELOC exposures. Of the $52.9 million in loss expenses associated with our US RMBS portfolio, $44 million was for HELOCs.

As we have previously stated, we have been concerned about the performance of residential assets for quite some time. Consequently, we were very cautious in the US RMBS market in the 2005-2007 timeframe, underwriting only AAA deals in the prime and subprime first-lien markets.

However, we did underwrite some BBB-rated HELOCs, the largest of which were the two Countrywide transactions in the Direct segment, which comprise 90% of our Direct HELOC exposure.

HELOC experience today is an uncharted territory. The credit performance of these deals has never been worse, and several of the seller/servicers, including Countrywide, are under significant financial stress as well. The extraordinarily high default rates on these deals, far above any prior year, was well known and was the principal factor behind our downgrade of those two transactions last quarter.

This quarter's downgrade of the two Countrywide HELOCs transactions is not because of revised assumptions on delinquencies or loss severities, but results from our growing concern about the availability of undrawn lines to HELOC borrowers; the rate at which these lines are drawn down; and the ability of the servicers to execute their contractual responsibilities.

Available lines for drawdown have not changed, but recent draw rates have declined. Because the drawdown credits in our deals are a major factor in evaluating the performance of a transaction, once the rapid amortization trigger has been breached, the potential outcomes due to the uncertainty of performance for this variable has a wide variability than the originally-projected loss figures. Therefore, we elected to internally lower our ratings on these deals.

This resulting downgrade of our internal ratings for our HELOC exposures resulted in additional portfolio reserves this quarter under our portfolio loss reserving methodology.

With respect to the two Countrywide deals, we stated in our 10-K filed a little more than two months ago that we think the range of potential after-tax loss on those two transactions is between zero and $100 million. Based on current available information, we continue to believe that range is still reasonable.

The estimate incorporates many factors, including our roll rate assumptions, future principal payments, excess spread, draws, and future foreclosures. Lastly, the financial viability of the seller/servicer is also considered.

These factors are subject to change as well, and if significant would impact our current evaluations. We will continue to update our analysis of these two exposures as new transaction performance statistics and market information become available.

It is interesting to note, however, that the April report for the 2005-J transaction, delinquencies actually decreased for the first time. It is too soon to draw any conclusions, but this could be the first indication that the loss curve is flattening.

Aside from our HELOC exposures and a very modest exposure to closed-end second-lien transactions, we still remain very comfortable with our US and UK RMBS exposure. Most of that exposure has been underwritten in the last 12 months, utilizing significantly stressed underwriting assumptions; and was also underwritten at AAA and super-AAA attachment points, providing us with ample overcollateralization and credit enhancement to protect against losses.

Turning to our business pipeline and outlook, we continue to be very pleased with the progress that we are making in building our Financial Guaranty franchise during very difficult market conditions.

Demand by investors for credit protection from insurers has remained very strong, which we think is driven by our strict underwriting standards, our AAA financial strength ratings, and our continued commitment to the highest standards of disclosure and transparency.

We are being offered a wide variety of business opportunities, resulting in a very strong pipeline, multiple of the deals and potential PVP‚ of our pipeline a year ago. But that was before we were rated AAA staple -- we got a third AAA stable rating.

We expect the public finance business to remain very strong compared to last year. Our US public finance team generated a record new business production this quarter, attaining about a 30% market share on new issue transactions.

We continue to see a very strong demand for our name on new issue and secondary market transactions, as we estimate that our April 2008 new issue market share in US public finance was up to about 37%.

Our PVP in the first quarter of 2008 was 2 times the total amount that we wrote for the full-year 2007, a very impressive statistic.

The structured finance and asset-backed security markets which have been the most affected by the market turmoil remain very difficult to predict. We underwrote a broad range of transactions in this quarter, including commercial ABS; US and UK RMBS; CLOs; and structured credit deals. Most of the deals, however, were secondary market deals, which totaled $4.3 billion in the quarter.

We had only three new issue transactions in the quarter, of which two were public deals -- a $250 million Brazilian future flow transaction and a $215 million CLO deal.

In the secondary markets, we underwrote $2.2 billion of seasoned Alt-A deals, and also did $1.7 billion of CLOs, along with $123 million of commercial ABS deals. Our secondary market activity was all done at the AAA or super-AAA level.

In the international market, we did several UK RMBS deals that were for prime mortgages at AAA attachment points where we were able to opportunistically take advantage of a short-term widening in spreads.

We also did a handful of transactions that had been previously wrapped by other bond insurance companies, about $2.6 billion in total, including deals in both the US public finance and the structured finance market. We underwrite these transactions to meet our underwriting criteria on the underlying assets and do not base our underwriting decision on the other bond insurers' guarantee.

I think it's important to note that in April we started to see some spread compression in certain asset-backed security markets, which will hopefully bring some liquidity back to the market and lead to better new issue market conditions by year end.

Our reinsurance business had a quiet first quarter from a new business standpoint, which we had anticipated due to the lack of new business activity at many of our reinsurance clients.

As many of you are aware, our Financial Guaranty Reinsurance business has always been focused on reinsuring AAA-rated primary financial guaranty companies. So the recent downgrades have restricted the number of companies that are able to write business and therefore require reinsurance.

Many of the companies in our industry are in the process of various strategic or capital alternative evaluations, and we're actively providing pricing quotes or underwriting requirements for both portfolio transactions, to the extent those companies are interested.

I would like to touch base on our closely monitored credit list, given its large increase this quarter. We've been very focused on credit quality since our IPO, and you should be confident that we will continue to do so. Our Direct portfolio has grown rapidly over the last four years and, as a young portfolio, did not generate much in new closely monitored credits, although we expected that to increase as those exposures became more varied by asset class and more seasoned.

The increase this quarter was due to a few specific transactions, most of which resulted either directly or indirectly from the deterioration in the mortgage market and its spillover to the auction rate market due to the absence of liquidity.

Our CMC list increased to $4 billion or 1.9% of net par insured, up from $2.1 billion or 1.1% of net par insured at December 31, 2007. We have $1.4 billion at the CMC-1 level which we characterize as fundamentally sound with a low probability of loss.

We added almost $1 billion in par insured to the CMC-1 list this quarter due to downgrades by the rating agencies of two transactions related to life reinsurance deals where subprime RMBS collateral that had been included in the assets supporting the reserves and capital requirements.

The ultimate risk of loss to Assured on these deals is principally the performance of the life insurance liabilities, not the market value of the RMBS securities. But the resultant impact of the mark on surplus and available cash reserves in these deals warrants their being placed on our CMC list.

The second-largest increase was in our CMC-2 category, which we categorize as having a weakening credit profile and may result in a loss. That now totals $2.3 billion. We moved the 2007-D Countrywide HELOC from CMC-1 to CMC-2 this quarter and also added $540 million of our exposure to the Jefferson County, Alabama Sewer Enterprise, which is in technical default.

We expect that Jefferson County situation to be resolved without meaningful ultimate debt loss. But given the current rating and the uncertainty in how the situation will be resolved, we believe that CMC-2 is the appropriate category.

We also added about $200 million of HELOCs from our Financial Guaranty Reinsurance segment to the CMC-3 category, which is the level where case reserves are established, due to the receipt of claims advices from our reinsurance clients on those HELOC exposures.

Bob is going to cover financial results in more detail in a minute, but I did want to touch on an item in our financial supplement.

As you know, we estimate our future installment premiums and credit derivative revenues and unearned premiums netted back to calculate adjusted book value. At March 31, 2007, these totaled $832.7 million after-tax. Today, a year later, that amount is up 70% to $1.4 billion, an almost doubling of our deferred earnings. I think that is an important statistic when evaluating the potential earning power of the franchise that we have built since we went public four years ago.

Last but not least, I would like to invite all of you to attend our first investor day to be held in New York City on June 11, 2008, to learn more about Assured, our operations, business prospects, credit profile, and outlook.

We will be sending out formal invitations next week, although many of you should have received a save the date e-mail. If you're interested in attending, please do not hesitate to contact our investor relations department for further detail.

Now I would like to turn the call over to our CFO, Bob Mills, who will discuss the financial results of the quarter in more detail.

Thanks, Dominic, and good morning to everyone. We understand that another company's conference call starts at 8.30; so in order to allow enough time for questions I'm going to shorten my comments to just cover a few items of high interest. Please feel free to ask questions on any items I don't touch on.

As always, I want to remind everyone to refer to our press release and financial supplement for segment-level details and further explanations of our financial position and results of operations.

As we previously announced, we adopted a new accounting presentation for the quarter, consistent with a new industrywide approach. Although this presentation caused some changes in total assets, liabilities, revenues, and expenses, it did not change net income, operating income, invested assets, or shareholder equity.

In our April 22 press release, we tried to provide you with a roadmap to evaluate these changes and also have provided the various components of the change in this quarter's financial supplement, so that you can compare the old presentation to the new presentation.

Operating income -- which we calculate as net income excluding after-tax realized gains and losses on investment, and after-tax unrealized gains and losses on credit derivatives -- for the first-quarter 2008 was $6.2 million or $0.08 per diluted share, compared to $46.1 million or $0.67 per diluted share in the first-quarter 2007.

The principal reason for the decline in operating income and also for the shortfall in earnings compared to analysts' estimates, was that we established $53.8 million or $0.55 after-tax per diluted share in loss and loss adjustment expenses incurred for US RMBS exposures written either in insurance or credit derivative form.

In addition to loss and loss adjustment expenses in this quarter, we also had higher operating expenses due to an increase in total headcount and an increase in the number of retirement-eligible employees. Stock-based and other deferred incentive compensation for retirement-eligible employees is expensed when awarded. This amount increased by $5.8 million or $0.06 per diluted share versus the first quarter of 2007.

Furthermore, first-quarter 2007 net income and operating income included two benefits. The first was a $4.1 million or $0.06 per diluted share onetime tax benefit related to the Company's tax treatment of transactions that occurred prior to our 2004 Initial Public Offering.

The second was a $4 million or $0.02 per diluted share net loss and loss adjustment recovery that related principally to aircraft transactions.

Our PVP or present value of gross written premiums for insurance and credit derivatives totaled $276.6 million for the quarter, up 159% compared to $106.7 million for the first quarter of 2007. The principal driver of growth compared to the prior year was in the US public finance market. But we also posted strong growth in US structured finance and international.

Reinsurance was down, although only by 7%, reflecting the lack of new business activity at many facultative reinsurance clients. We also did not have any significant facultative transactions or portfolio transactions in the quarter.

Net earned premiums and earned revenues on credit derivatives for the quarter totaled $74.4 million, up 35% from the first-quarter 2007, with growth in both Direct and Reinsurance.

The increase was in line with our projections at year-end 2007 that were in our financial supplement. For the full year of 2008, we expect to be able to maintain this current growth rate.

Consolidated loss and loss adjustment expenses incurred, including losses incurred on credit derivatives, and consistent with our previous accounting for loss reserves, totaled $58.3 million for the quarter, compared to recoveries of $4.7 million for the first-quarter 2007. The increase was largely due to reserves for our US RMBS exposures, principally HELOCs, which has been previously discussed.

Quarterly operating expenses increased by 38% over the prior year, higher than some analysts' expectations. The principal reason was the growth in headcount over the past year. We've added about 28 new people since the end of the first quarter of 2007.

It also reflects an increase in incentive and stock-based compensation expense for additional retirement-eligible employees, which is largely a first-quarter expense; and therefore this expense should not be annualized for full-year 2008.

For full-year 2008 I expect operating expenses to increase by approximately 7% as we continue to increase resources to meet stronger than anticipated market demand, particularly in US public finance.

Our tax rate for the quarter was distorted by the US RMBS loss expenses. For the balance of 2008, I expect the rate to be approximately 13%.

Finally, about 40% of the after-tax unrealized losses on credit derivatives was from pooled corporate securities; and the balance was spread out among US and UK RMBS and US CMBS. As we have stated in the past, these mark-to-market losses will reduce to zero as the contracts approach maturity without credit losses.

Ironically, if credit spreads tighten beyond where we wrote the original contracts, we would also have unrealized gains in the future.

As of March 31, 2008, we had net losses on credit derivatives of about $7.77 a share, which means our book value per share excluding this amount was about $26.40 a share at March 31, 2008, an increase of 7% over the last 12 months.

Please note that we plan on filing our 10-K by the close of business today.

Before turning the call over to the operator, I would also like to just remind everyone that we did close on the sale of $250 million in common equity to investment funds controlled by WL Ross & Co on April 8, 2008. Those shares were issued at $23.47 and hence will modestly be accretive to book value per share, but mildly dilutive to book value per share excluding unrealized losses on credit derivatives.

With that, I would like to turn the call over to the operator to poll for questions.

(OPERATOR INSTRUCTIONS) Andrew Wessel, JPMorgan.

Good morning. I just had two -- one quick one on the Alt-A portfolio. It looks like you definitely -- as Dominic, you say, grew that portfolio pretty decently in the quarter. But overall subordination was still down.

So could you talk about the opportunity you saw there and maybe what average subordination was on those deals you put on during the quarter?

Sure, in general terms we've been getting substantially more subordination. We've revised, as you can imagine, based on experience in the market, our stress loss scenarios and now have a requirement.

To give you an idea what that means, we would take default rates up to 60-plus-% for everything in California, Nevada, Florida, Michigan, condos, everything else at 40%. We would use a very strict roll rate assumption as well as default a substantial amount of current loans.

As we go through our modeling, we would require a 2-times coverage before we would consider writing any of those deals. In a lot of cases, we have been able to get substantially in excess of that.

More importantly, some of the subordination engineered into these deals are what we call fixed dollar, so they never decline. So as the pool would typically have its natural paydown, we find ourselves basically getting taking out of the risk in a reasonably short period of time. So that is kind of where we have found ourselves.

If you look at the experience relative to those deals in terms of delinquencies and projected, or even current, losses chart today it is extremely low. So by and large, we thought we saw opportunities to get into that market, at very, very well-protected attachments, and as I said using a hard dollar as part of our support or subordination package.

We think that there is a great chance they've got -- also, very low LTVs, and as I said we got the kind of fixed rate collateral.

Great, thanks. Then, if you could comment at all about business this quarter. Is it as brisk as it was last quarter?

Are you seeing the same opportunities across munis and unstructured finance, namely in the secondary market in unstructured finance? Or has anything changed at all from the first quarter so far?

Well, you know, the big question mark, obviously, we're still seeing tremendous demand in the public finance sector. We talked about our market share now increasing again.

It's been increasing basically every month as we go through 2008. We estimate April to be 37%, which would be our highest ever. We see more activity starting to come into that market relative to issue.

The big question mark always is in the structured finance area. We were fortunate in the first quarter to be able to execute so many secondary deals, obviously because new public issuance is not very high.

We still think that transaction is still going to have a lot of flavor going through a good part of 2008, as without liquidity banks have to deal with these risks that are on their balance sheet and will look to buy further protection.

Okay, great. Thanks a lot.

Mark Lane, William Blair & Company.

Morning. Regarding the HELOC deals, can you just remind us what the cumulative reserve there is associated with those two transactions?

What sort of assumptions or what is your thought process on establishing the high end of your worst-case scenario?

Mark, I'm glad you asked, since this seems to be the most interest. So let's think about it.

Today, we're currently carrying about $42 million of reserves in the '05-J and '07-D transactions. I really want you to appreciate that this was very, very detailed discussed in the Company because it is a portfolio reserve, and that is important to note. It is not a case reserve.

Why? Because there is still significant uncertainty over the probability of a loss.

How do we look at that? So, I mean, we take a very clinical approach. We run it through our ratings model.

And the rating model says, based on the uncertainty and specifically around two critical features -- the draw rate and then the second thing is the servicer responsibility relative to the draw rate and other things like wraps and warranties.

What does that mean in terms of the probability of a loss? Remember, ratings are based on probable outcomes. This is a lower rate of rating.

Do we change our mind in terms of where we see this ultimate risk? We can always be wrong, and there are a thousand balls in the air relative to how these things are affected.

But if you step back -- and let's use the '05-J deal as the example. The '05-J deal has today 5.1% of charge losses. Okay? If we basically default one 100% of all the delinquencies that currently exist -- so we say we know we had bad guys in the pool; they've already hit us, because this is a 20-month-old transaction. They are gone; they're 5.1%.

We have got a buildup, maybe a potential wave of bad guys. And if I take all of them out of the deal, that is another 5.9%. That gets me to 11%.

I've now got a fairly seasoned HELOC deal. So somebody that has been paying their bills for two-plus years, you tend to have a better feeling about whether they will further default.

Now, they could, based on economic conditions, based on continued drop in market values of the properties for which they are paying these balances on. So there is still some miss out there.

But in total then, I have got 11% of losses based on original pool balance. Remember, these are always based on original pool balance.

Based on excess spread today and the slowdown in prepayments, or in effect paying off your lines of credit, we now believe we can contain somewhere in the 18% range in terms of charge losses against the original pool balance.

That means I would still need to get 7% more to hit that total where I breakeven. Remember, at that point, I still do not have a loss.

And you say to yourself, okay, I'm two years out; I've got a seasoned pool; the pool factor is 42% today. That means the amount of loans still outstanding relative to the original pool balance is 42%. That does include the delinquencies.

Once a delinquency is out, you now have 30% remaining, and we have already taken full chargeoffs for the delinquencies. That means I've got to get 7% off of only 30%. So you triple -- more than 7%. You would have to default one out of every four loans remaining in the pool just to get to a breakeven level.

Which means for us, you've got to get the second pig through the python. And based on the April report, where we see for the first time a drop in delinquencies, we have to say to ourself -- in order for us to get to where we would be breakeven, I would have to have almost as much market disruption as I've had to date.

Which means I have got to have a whole nother huge block of bad loans out there, either because of bad borrower or bad servicing, bad underwriting. Would still have to be out there today that have paid balances for roughly two years for me to get to even a breakeven number.

So, it is hard for me to say this is a real loss. It's hard for me to say we're going to move off our view that by and large, because we think we have engineered the proper protection into these structures, that we should be able to survive even a very, very damaged case relative to the mortgage experience.

And remember, all of that analysis I just gave you totally ignores the draw feature of the rapid amortization trigger, as well as the takeout of the principal balances now based on all cash flows being diverted to insured securities. And that is just for the '05-J, which we thought was the worst deal that we have out there.

Okay, okay.

Does that kind of help?

Yes, that's very helpful. Okay. The second question is, Bob, I kind of misunderstood your comment about operating expense guidance. Could you repeat that?

Yes, sure. In the first quarter you have a blip because for any retirement-eligible employee, any grant at that point in time all gets slammed through the first quarter. So your first-quarter operating expenses are higher than you will see in the remaining three quarters.

(multiple speakers) what we expect. But so on a year-on-year basis, I think we can contain the expense growth to 7%, 8%, somewhere in that.

Oh, 7% 8% for the balance of the year?

No, on a year-to-year basis.

Oh, for the whole year? Okay.

Remember, the accounting works against us. Let's be honest, it's myself, Jim Michener, and Bob Mills, the three old guys. Any award we get now, instead of being amortized over the vesting period or the period to which you earn the compensation, is now recognized immediately. You get no deferral whatsoever.

In the quarter.

Right. So anything granted at the end of -- or in February for year-end performance gets all slammed through in the quarter, which is horrible. But then you say, well, now we don't have to worry about a four-year vesting for restricted, a three-year vesting for options. It is all slammed through in the current quarter.

Yes. Okay. The last question is regarding the Reinsurance business. You talked about portfolio transactions and providing some quotes. How many opportunities are you looking at? I understand it is lumpy business, etc., but given the number of opportunities, do you expect to at least complete one transaction? What is your thought process there?

I would say, Mark -- and it's hard for us to predict, because remember these are very, very unique and we're not the only people quoting them, so there is competition.

If you look at the market, save for about a few, you can assume everyone is out looking for a portfolio of reinsurance. So of the direct market, go right through the number of companies and maybe save for one there is a submission out on everyone of them.

In the reinsurance market, you know who the current third-party players are. They are all looking to relieve capital through some sort of a cession.

So we've got a lot of irons in the fire. There is competition. We're going to be very restrictive in terms of our underwriting and return requirements on those.

So we will continue to quote them, continue to review them, and hopefully we will be successful. But there is substantial activity.

Well, when do you think those decisions will be made?

I think it is a factor of both and as well as their needs, right? I think some companies are going to look to respond to potential additional capital requirements through reinsurance. Therefore, as they have to take further loss recognitions, and therefore pull down there in effect rating agency capital balances, it obviously increases the urgency of getting the transaction done on the reinsurance side.

Of course, you know there are some that have to be clawed back by some primary companies based on downgrades of reinsurers. Obviously, we're talking to those guys that are clawing those things back in terms of reinsurance.

So there is activity coming out of the companies themselves. There are activities coming out of other companies that have to claw back. And there is activity coming out of the reinsurance companies.

But as I said, typically it's going to be led by the rating agencies or regulators. Because as you are obviously aware there has been a lot of attention being paid to certain companies from the New York Insurance Department and the requirement that they come up with solutions on a more stringent time frame, of which reinsurance could be part of the ultimate way that they would relieve capital requirements.

Okay, good enough. Appreciate it. Thanks.

No problem.

Mike Grasher, Piper Jaffray.

Good morning, everyone. A quick follow-up to Mark's question regarding sort of the combinations and sensitivities on the exposures and the HELOCs and I hear you mention -- and talk about the bad borrowers, the bad underwriting and all that. Where does the bad economy or the weak economy play into your thoughts on how you think this might ultimately roll out?

Mike, great comment and the most amazing thing as we all sit back and look at this real estate kind of disaster is the fact that, in most cases, if you asked anyone two years ago, you would say the only way you get a real meltdown in real estate assets is what? The economy or interest rates, right? Big spike in unemployment, huge spike in interest rates. Geez, we don't have either of those. You might argue the economy is not vibrant, but we don't have the unemployment issue, which is typically what leads us to large defaults in real estate.

Now, you do have this market value decline. You have an overheated market, so negative equity might be balancing out or creating a new kind of condition for default. We have not had that, right? So if you look at the principal causes, they are not there, so the concern obviously is well, geez, what happens if that happens? Right? And that is when we typically go back and look at those historical displacements that have happened in the past where it was really based on economies.

So we think we have got the bad guys maybe, maybe not, identified and out of the pools. We still have the exposure to the economy or to normal delinquencies relative to economic conditions and interest rates, but it seems like the government is extremely focused on that and therefore, I think their position to make sure they are putting in programs to address that, so we think that could take some of the bite ultimately out of that type of impact.

So we are still concerned; that is why we have these things on CMC. It tries to add in all factors. It is not really, for us, predictive of what we believe is the ultimate net loss. Like I said, in the absence of our portfolio reserving process, which I hope you guys take great comfort in how it is mechanical, that we are not here trying to manage reserves or results that I would have made the argument that I don't need reserves in this case if I go through my argument on 2005-J.

Even if you look at the 2005-J, that is 7% of original pool or 25% of existing loans would be well above anything that would have ever been experienced in a normal economic downturn as well. Remember, go back on the HELOCs and the worst ever in the history of mankind is somewhere in the 2% to 4% ultimate net loss range. The losses that we would have to have have to exceed 18%, which is 4.5 times the worst ever and it goes through that fully defaulting everybody that is delinquent today and still taking a very large charge of future delinquencies. So I think we have got it built in there, but you are exactly right. This has not been achieved based on the normal terms and conditions of a mortgage meltdown and we still have that risk out there.

Okay. With that, what sort of unemployment rate would you be factoring in or what are you thinking about in terms of unemployment?

We all expect a modest growth in unemployment and under that level, we don't think it adds significantly to our already very heavy stress case of loss projections. So we think that -- as we look at our -- we have a thing called constant default rate, right? So it takes -- after you default everybody that is in the delinquency pool, you are still defaulting anywhere between 1.5% and 5% of the loans still outstanding.

And these are for seasoned borrowers, they have been paying their bills for a long time, so we think that is in excess of what a normal economic impact would have and we are all basing that on worsening unemployment, which is built into our statistics as we look at things like market value declines, right? That, in effect, tells you that there is not a lot of people out there able to buy homes, but although you look at national projections of housing declines of say 7% to 10% and we are looking at 65% in our models. So I think we have got that baked in there in a fairly decent regard.

Okay. Fair enough. And then moving on, just you did speak about the quality of the business that you have written thus far and it sounds like your pipeline is extremely full. How do you sit in terms of capital? Do expect that you will need to tap the shelf that you have or -- that is what I am calling it for lack of a better term -- with WL Ross & Co. or where do you feel like you stand on capital versus your opportunities?

Good question. We just had our Board meeting and that is obviously one of the things that we always present to the Board is the capital view. And at this point in time, even with the high level of writings, we believe we are fine from a capital point of view and why is that? Because of such high concentrations of public finance.

Remember in the rating agency models for capital, public finance is a very positive factor relative to both Fitch and Moody's calculations. S&P a little bit different relative to how they do public finance as part of their model. S&P is typically where we have the largest amount of our capital cushion. So the areas where we would be the tightest are getting the benefit of the most because of that huge mix of public finance that we are doing in the first quarter and obviously how we see future quarters rolling out.

Premiums have been higher also, as well as the attachment points, which also help the consumption of capital.

Great point. Remember, the capital consumption is driven off of basically two -- or the capital need is driven off of two things, or three -- mix of business, par written, because it keys off of par and then premium rates because the premium rates in effect create capital via the unearned premium reserve for the public finance and the present value of the future installments for the structured credit. Because premium rates are up significantly, if you look at that volume of business a year ago, it would have a different capital need ultimately because of the credit you get on the asset side from the business being written.

Okay, well thank you.

Darin Arita, Deutsche Bank.

Good morning. Can you talk a little bit about the pricing environment? How has pricing changed here in the first quarter relative to what you are seeing in '07 across your business segments and what the incremental returns are on the new business that you are writing?

Sure, Darin. Pricing, it is hard to make generalities, but to give you the easiest way of looking at it, as we look across the board and remember, we try to go back and now we have added a new feature in our underwriting memo or submissions. We do now require the submitter to the credit committee to go back and look at historic pricing to give us an indication of where pricing would have been and we look for similar transactions or actually the same issuer type of thing going back. So you can do that for a lot of the structured credit, as well as some of the public finance.

And in general, I would say, reading through all those memos, kind of a minimum increase is probably in the 50% range and the maximum, especially when you look at some of the structured credit areas and especially in some of the residential asset areas, you are looking at 300% and 400% increases. And that is really related to spread, so let's understand each other, as well as the availability of insurance in some cases.

So we monitor that pretty closely and if I try to grab an average, which is never worth anything because it means nothing, but on each of the deals, that is kind of a level of increase that we are seeing, in the 50% to kind of 300% range. Now understand, we have different stress requirements against that, so as we evaluate it, with loss costs we engineer into the ultimate return, we have had to move them up in recognition of where we think the market is today in terms of volatility and we also think in terms of, for us, we are holding more capital today because we want to make sure that we are insulated from any potential disruption, vis-a-vis rating agencies' change of requirements by asset class, etc.

So it is a moving kind of calculation. If you said, gee, 50% to 300%, God, your returns must be off the charts. We would say not a bad idea, but we are taking a stronger look relative to the volatility and therefore pricing that in our return models and we are looking at additional capital as part of the return model.

Okay, that's helpful. And if we can just turn back to the insured portfolio, you gave a lot of helpful detail there with respect to the HELOCs. Can you give a sense of -- are you feeling any greater concern about other parts of the portfolio, whether your RMBS-related -- other RMBS-related exposures are outside of the housing-sensitive areas?

Great, good question. On terms of the other RMBS, the only area we think we have got some issues is the closed-ended seconds. They are displayed on our disclosure and obviously we have got smaller exposures relative to the reinsurance portfolio and you noticed that we put up some case reserves based on case reserves advised to us. But thank God, they are not significant in terms of real large dollar value and they will be absorbed in our normal kind of reserving process.

One interesting point I want to make to give you a further indication of our internal view, what our portfolio model generates, specifically in the last quarter, we had got advised to our reinsurance division of case reserves being established by one of our clients on a residential asset-exposed deal. As a matter of fact, there were a few of them. We looked at the reserve that they were advising us to post. We ran it through the exact same model that we run our deals through. a.k.a. the two HELOCs, and the reserve we posted was double the amount of the reserve that was advised to us. So the reserve advised to us in round numbers was about $4 million plus. We posted $8 million plus. And we posted that $8 million off of our modeling, the exact same model that is embedded in the two Countrywide deals.

So A, it gave us a further view that yes, I think we are being pretty conservative. We are really stressing these things to a very, very high level, but based on the uncertainty, I think that is justified. Right? I think you would be disappointed if we were trying to go this one little baby step at a time and ultimately drag you through a thousand miles of coals to ultimately get to the reserve answer.

And looking at someone else's view that we are not sure of how they model, we obviously don't sit inside those companies, but as our responsibility in taking reinsurance is we have to give it our view of what we think the ultimate outcome of the loss is. We posted in the current quarter double the reserve that we were advised.

And I think also when you look at -- you asked about the rest of the portfolio. I think we do feel quite comfortable that the pooled corporate obligations are performing very well. The rest of the subprime portfolio, as you can see from looking at the subordination, looks very good. The CMBS book is performing quite strongly. So when you look at the rest of the book, I think we feel good about it.

Yes, I am sorry. I didn't get to the end of the question and I appreciate Bob stepping in. We feel incredibly comfortable with the rest of the book. If you look at the continued subordination that we have built up in the other residential exposures other than HELOC and closed-end seconds, that number continues to go up. In the pooled corporates, if you look at the subordination against current defaults and delinquencies, it is immaterial to the defaults and the delinquencies relative to the subordination.

So although everybody expects another shoe to drop and maybe it does, because of the level of protection in the current programs that we have, it is hard for us to view that shoe to be really anything meaningful to us.

Great. Thank you very much.

Tamara Kravec, Banc of America Securities.

Thank you, good morning. I wanted to ask a question about the CMC list, and you have moved some things down into category 2 and when I look at the definition of category three, being high priority, claim default probable, I guess why is it more of your HELOC exposure in category 3? Because you can ultimately assume you are going to have some losses on this. The HELOCs and the closed-end seconds seem to be the worst-performing asset classes. So what would it take to get it to category 3 or 4?

Right. So you nailed it right on the head, that probable. Category 3 for us represents a claim reserve. That means we have probable and estimatable facts and conditions relative to the claim. As we've talked about 2005-J, Countrywide, I can make a strong argument that we do not have a loss. Yet, if I look at the true probability around these other factors that would have an indication or have impact on our ultimate exposure, we had to -- not we -- the surveillance department of our Company felt strongly that they had to downgrade those transactions. And although we are a democracy, the surveillance department does have say over the ultimate rating of the transaction.

So we don't get to category 3 until we put up the case reserve. We are not putting up case reserves at this point in time. Now, I told you about the April report for 2005-J. If the May report delinquencies spike up, draws go down to zero, then we have maybe a different set of facts that we would say now becomes probable and therefore, we are going to use our estimating process to put up a real case reserve and we would then re-class portfolio to case.

Okay, that makes sense.

CMC too for us is that it is weakening. We think it has the probability of going to a reserve. One, we say it is still fairly fundamentally sound. The two life reinsurance deals that are in one, as we said, the performance of the deal is really related to the life -- the mortality outcome. Although they have a mark-to-market problem on their balance sheet, which is putting their surplus in jeopardy relative to the ability to pay dividends or the interest in short securities, that is a short-term problem.

At the end of the day, we don't see any spike in mortality that is going to cause us an issue relative to the true performance of the transaction. So you might have some cash flow interrupted, but at the end of the day, it is a good transaction and as we look at say the ABX spreads coming in a bit, we hope that the market [size] on those securities start to recover a bit because they are typically fairly highly rated securities. So at the end of the day, they are getting more punished by the market than they are from true economic loss.

Okay, and a question on the assumptions about -- you talked about the draws and the reps and warranties, but on the draw rate, have you made any assumptions about actual changes in the credit lines aside from the draws? In other words, credit lines being reduced permanently or sort of margin calls on some of these accounts?

Yes, absolutely. That is why we vary the draw rate from zero to five. Historic has been seven say on the 2005-J deal. So we take it all the way down. Now the funny thing is, and it is a good question to ask, we monitor available draw, right, what is the use of [fines] and that has been averaging almost from inception 15% as of the March report, which was the last report that we had that data for. It was still 15% from both deals. So we truly expect, and we have been told by other companies that have already hit rapid am triggers before we hit rapid am triggers that they do see a pullback in available draw balances and they do see a dropping in draw rates and that is why we are sitting here with a downgrade on our two HELOC exposures, exactly for that specific situation. So not only do we factor it in and obviously let our surveillance department to downgrade the transactions internally because of exactly that point.

Okay. And a question on the marks that you've taken so far. You are kind of around I think $700 million. What would be your thought, if any, on when those might start to come back into earnings, net income?

Tamara, I think if I really knew the answer to that question, I would be a whole lot -- have a whole lot more money and be richer and --.

Yes.

During April, we did see some spreads start to come in and naturally the next time it is really meaningful is the June market. Heaven knows what is going to happen this month or next month, but if you looked at the market at the end of April, it would actually improve slightly over what it was at the end of March.

Some of the spreads are incredibly wide and they will come in, but I couldn't give you anything that would be -- that I would tell you that you could rely on at all as far as when I think spreads will come in. I have been consistently wrong over the last year as far as what I thought spreads would do. [There] was some help at the end of April and I think it will be slow and gradual.

You are seeing transactions now in the market where people are selling portfolios of some of these troubled assets. And if that starts to establish benchmark pricing, then you take a little of the volatility out of the spread or the emotionality out of it and therefore, that starts to come in. We saw that on ABX over the last few weeks, so fingers crossed. If that continues, that would be great. It would be silly for us to start patting our backs with look at the great net income. That doesn't really mean anything. We have always tried to tell you ignore the spread. If we have issues relative to the performance, we are going to talk to you about the issues relative to the performance regardless of how the accounting treatment wants to classify these things on our balance sheet or income statement. We would rather deal in real economic terms in terms of where our exposure is and what it cost the Company ultimately.

Okay, and one broad question for you, Dominic. I know that you guys talked about the operating expense growth of 7% to 8%, but when you look at the business generally and you have had such rapid growth, when you look around the organization, is there -- what do you think needs to be done in terms of infrastructure just to support the growth that you have had assuming that that is going to continue?

In terms of the infrastructure, thank God, as you may have listened on earlier calls, we went out two years ago and built our online system relative to public finance, which is obviously the area today that has the most transactional activity. Had we not done that, I would probably be having a different conversation with you.

Today, we are really trying to put our money in our surveillance and credit areas. Obviously, as we build the portfolio up, it is going to require a lot more people than surveillance and also different skill levels than we had in the past. Remember, we wrote a portfolio, go back two years ago, of principally swaps, principally at the AAA level where we just took the little top slice because that was all we could really compete for. In the healthcare, we did 5, 10, 11 transactions a quarter, principally in private, higher ed and healthcare. Now, you are looking at hundreds of transactions.

So we have added roughly, in the last say month and a half, two months, six people to surveillance. We are bringing in higher or more experienced people. We are looking at a remediation department or program as we continue to get more sophisticated in that approach. So the infrastructure today is really being stressed and of course, Sabra is going to give me a kick under the table if I don't talk about the side of investor relations as we now are seeing more investors both on the fixed income side and the equity side. So those are the areas that I think we are looking at today.

The business production, on the structured credit side, it is a manageable transaction flow. Public finance, a lot more, but we have built the systems, we have brought in a lot more people. I think the public finance staff has probably increased 50% over the last year and we still have further increases that we are adding to that staff as we go through the year.

But if you look at the body of staff of -- say we have 130 people now, if we add 15 to 20 more throughout the year, the impact on expenses is muted because you're only paying say on average a half a year salary for those folks. So we watch that very closely. It is a concern. You don't want to grow too fast where you kind of fall over. It's like the kid that sprouts up eight inches in the summer and he can't walk when he gets to school the next fall. So we are trying to make sure we keep that in reasonable managed position.

All right, great. Thank you.

[Ryan Zacharia], [JM Partners].

Good morning, everyone. A couple of questions. So on a month-by-month basis, does AGO have to fund the HELOC shortfall on the Countrywide deal?

Yes, they do. And that is how we get to the rapid am trigger because we have to fund a certain level of losses. On the '07 deal, it was $9 million and we are currently at $14.2 million. In the '05 deal, it is $27.5 million and we're at $23 million today. So we fund those losses.

And do you expect at some point to be reimbursed from those? When you say like that you are not going to lose money on the '05-J deal, do you mean that you are not going to lose more than the highest estimate or you're not going to lose like period?

Well, if I knew the exact answer there, we'd actually have been finished this, right? We are saying based on our view of the current performance statistics out there, we do a modeling estimate and we have internal downgrade that creates a portfolio reserve. By definition, on the portfolio reserve is a reserve. It is an expectation of a potential outcome. We can make arguments all over the board about what the ultimate real outcome is.

Now when you say do you expect to get reimbursed, well, if we are going to have no loss, we have to absolutely get reimbursed. If we are going to have a loss that is embedded in our portfolio estimate, then some of that is going to actually stick to our ribs.

How do we get reimbursed? If you look at the simplest of terms, if you say for the '05 deal, we are getting about 300 basis points of excess spread and even if the draw rate drops down to say 3%, that would give you in effect a 6% coverage. And as long as -- and if we look at say a constant default rate going forward of 2.5%, which would still be reasonably high for a seasoned deal, you are in effect grabbing back then 3.5% every year off of those two statistics and that is how you ultimately get paid back the losses that you advanced.

Right. And so I guess going back to the draws, it would seem that Countrywide is kind of economically incented to stop draws on these HELOCs. If they could, it would seem that they would just stop draws on their entire pool of loans as soon as possible. And you kind of alluded to the trend, it is down substantially in both of the deals. So is your kind of worst-case scenario for these two deals, does that have draws at 0%, this $100 million after-tax loss? Does that incorporate zero draws kind of ramping down from the current level?

We incorporate zero draws in some of our modeled outcomes, but remember, although that is incredibly significant, because you can understand the value of having someone pay you back your losses off of funding those draws, you have to look at what is the constant default rate that we are using. You have got to look at what is the prepayment rate that we are using and you have got to look at the excess spread. So never one variable. Although we do say draws are probably the most significant or has the greatest variability of outcome. We can create cases, but our expected case would incorporate in some of the modeled outcomes a zero draw rate.

So we have got that modeled in there. It is part of our expectation potential, it is why we have got the internal downgrades. But it has other factors included because I can go zero draw rate and yet, if I don't have a huge constant default rate, it doesn't really matter because it is really -- what are you charging off that costs you money? How do you get the money back is through the excess spread in the draw rate. If I keep my constant default rate below my excess spread, I have got a win and I ultimately recover the current money I funded. So it is not as simple as saying, geez, guys, if you take that down to zero, but then I have got to fill in the other blanks.

But if everything was held constant, it does have the power to kind of greatly increase possibly sustained losses? If you started with a set of variables, keep them all the same except for draws and you take that down from -- I guess I am just trying to quantify how big a percentage point move in draws is, not with the dollar value, but how substantial it is if you go from where the current levels are, let's say 7%, down to 3% or 2%, how meaningful is that holding all else constant?

It is funny, the 3%, 2% is not bad. It is only if we get to zero and then if I remember looking at all the modeled outcomes, if you go to zero, that could impact your ultimate outcome by somewhere in the 50% range, right? And if you look at [in-text], you can kind of play around with the numbers. We will tell you how we look at it and I think we have been pretty open about that.

You look at those four factors and start changing your numbers around and obviously you have got to look at what your roll rate is, but if you look at draw rate, if you look at constant default rate, if you look at repayment and excess spread, they are the four variables and anyone can kind of play with us at home with the numbers and see what information draw.

The one nice thing is, because you are bringing down the pool balance, your ultimate kind of big number outcome is getting smaller and smaller. Regardless of the draw rate, remember the rapid am trigger does require that every dollar of cash flow pays down insured securities. And to give you a number to make this even more fun for us that like to play games -- our surveillance department's print is so small, either I am getting to old, but it is hard for me to read some of the spreadsheets -- but to give you an idea on 2005-J, total all-in payments to date -- Jesus -- no, that is not total -- I want to give you a good number here. I'm talking about repayments, total principal payments. Give me a second here.

No problem.

Once I find the number on the spread -- oh, yes, it is $1.1 billion. In the '05-J, we have not hit rapid am, right? Remember, it was a $1.5 billion deal to start. There were already principal payments of $1.1 billion. The problem is you had draws out -- back on those things of roughly -- if I got the right number, Andrew -- 637? Okay. And we had $300 million of draws, right?

So if you got rid of the ability to take that $300 million out, which the rapid am trigger does, now all payments go against the principal value outstanding, that 1.5 would have been down to roughly $400 million today instead of $700 million. It has a huge impact on getting you out of Armageddon.

Right. And then just two quick questions. You said that the [07 D] deal was downgraded. Do you mean on the closely monitored credit list or your internal rating? Because when I look at the supplement, they both say BB from Q4 and this quarter.

No, no. One is single B, if you look on the page -- 05 is single B on page 28 of the supplement.

But the '07 deal hasn't been downgraded.

Yes, but we moved it to the CMC2, which does stress it more from a portfolio reserving process. So you are correct; it has not been downgraded by its rating category. We moved it down a category in the CMC list. So it went from the fundamentally sound area to now potentially resulting in the loss. And because of that, it does kick off a higher reserve.

And '05J was down graded to single B. It was previously on CMC2, but was downgraded to single B, which also kicks up incremental portfolio reserves.

And remember, the downgrade for those is related to exactly the point you are raising, which deals with that draw rate. And whether it goes down to zero, stays at seven, settles in at three. And obviously, it behooves the servicer -- in this case Countrywide -- to get rid of those lines as fast as they can. But they have to follow a process to do that. It is just not that they can send out letters and cut off the draws.

Right. And is there any traction with kind of investigation into reps and warranties or is that kind of a much longer process?

Well, as you are well aware, everyone in the industry has got a real concern relative to the quality of the loans that were put into some of these portfolios. We're no different than anybody else. Everyone is doing the audits, typically starting with charged-off loans. We are in that process the same as the other companies and banks that are involved in this asset class.

Okay, great. Thanks a lot, guys.

And just as an aside, we take no credit for that in any of our analysis. So all of the reserve numbers, the downgrades, totally ignore whether there is ultimately an issue relative to reps and warranties in terms of the quality of the loans in the portfolios.

Great. Thanks.

Adam Starr, Gulfside Asset Management.

You just answered my question, thank you.

Ken Zuckerberg, Fontana Capital.

Yes, good morning. Dominic, forgive me if you mentioned this already, but I wondered if you could help us better understand the growth opportunity in the reinsurance segment. It would seem that, going forward, there would be some explosive growth potential given some of the capital challenges for some of your direct peers. I wondered if you could elaborate on it.

I think you hit the nail right on the head. A, if I look at excluding portfolios '08 to '07, obviously we are doing business principally with one ceding company because we don't include the business we see cede ourselves to the reinsurance company. On a GAAP basis, you don't see that number. On the stat down here, a stat basis, it does have a significant impact. But we are getting sessions right now from FSA. FSA is having a phenomenal year as we are. So we expect that those sessions will somewhat compensate for the lack of the business that we used to get from what was principally our other two main reinsurance clients, FGIC and SCA.

So if I looked at year-on-year, it is going to be reasonable comparison between the two. The portfolios, as we tried to indicate without trying to get too specific, because it is not an easy area for us to give you real hard numbers, there is significant portfolio activity. If I had to guess, we have probably got six in-house today and some of them are smaller because they deal with smaller companies. Obviously, some of them are huge and that would have a dramatic impact on the reinsurance results much like the Ambac session at the end of last year did on the reinsurance company.

And keep in mind, what is the value of that? It is building our earnings model. I appreciate the market has gone through disruption. I obviously understand it relative to our competitors, and even now to our first-quarter financial statements, we had to book based on our internal process reserves and although that is not fun and it is not really things that you like to see, you have to understand there is cause and effect here.

I gave you a statistic -- I am going to go a little further. If we look our at our unearned premium reserve and our present value of installment premiums, brought about by some of this market disruption today and these are not net of tax or net of DAC, but those two numbers today total -- round numbers -- $1.19 billion. A year ago, that number was $1 billion. Okay?

So let me take the rounding out. So it's an $800 million increase to our deferred earnings. And yes, we recognized the $50 million loss this quarter on portfolio, but I think we have managed to explain hopefully reasonably well that you understand our kind of view of it and where the potential outcome still could be very different, including a zero number, but you don't get the benefit of an $800 million buildup in reserves without some eggs being cracked.

At the end of the day, we think we have weathered the storm pretty well. We are in pretty good shape for the entire rest of the portfolio as we steer through this and we see these other opportunities that could even make that number jump up even further. Remember, that number has principally been created off of fourth quarter and first quarter because the last two quarters of the comparison of 3/31/07 to 3/31/08, so the 6/30 to 9/30 quarter of last year were not that significant.

So there is a tremendous benefit that I don't think anyone is appreciating and these other opportunities that you are pointing out would have a dramatic impact once again much like the Ambac transaction as of the end of the fourth quarter. So I can't help but feel good about our situation opportunity and what it means to the earnings of this Company going forward.

Very helpful, Dominic, thank you. A follow-up question unrelated. Interestingly on pricing, I think Darin hit on an area I wanted to ask you about. Years ago, I guess Orange County and that bankruptcy was a cause and effect for a little bit of a cycle turn if you will in bond insurance pricing. Here, you mentioned the Jefferson County, there was a small municipality in California earlier this week that I guess is threatening bankruptcy and it seems like there are a few others.

In those situations, do we have any visibility on what a similar structured municipality might need to pay for an Assured Guaranty-like product and I guess what I am saying is how great of a pricing uptick could we see for the smaller municipalities that are coming upon hard times?

I think it is two things you have got to think about, right? A, spreads are wide already and the amount of premium that is engineered into the deal in terms of the spread difference is high, is getting higher. The Jefferson County and the California Municipality City Council voted the other day to go into bankruptcy, which I thought was just magic that they are just throwing in the towel at the same time where we are getting a lot of talk from the large states that they don't need insurance. Yet, it seems like one of their cities obviously does.

Where I think that helps us the most is driving back up penetration rates. So spreads are where spreads are. Will this have an impact on spreads? Yes, potentially, but more importantly, it has got to drive up penetration, it has got to drive up the demand for reinsurance on the product, which, remember, historically, we have had a 50% penetration in terms of insured versus uninsured deals. That has been dropping down now because of market disruption into the high 20s. This hopefully would benefit that, right?

For us, penetration is as good as excess spread because they are both driving good business into the Company at good underwriting levels of far insured. So I would hope that this would have more of an impact on penetration to be very honest with you.

Thanks very much.

William James, Lazard.

Good morning. My question is a simple one. I missed early on in the call where you had spoken about Jefferson County and your exposure and I just wondered if you could either reiterate or expand upon it.

Good question. We really didn't talk about Jefferson County. We have got roughly $540 million. It is related to the sewer system. It is all in our reinsurance portfolio, so we have to file the fortunes of the direct writers. We try to get more actively involved because we obviously think some of the direct writers are not capable of providing a reasonable value to a new guarantee going forward in terms of restructuring.

Remember, it is a sewer. Typically, we always look at the sewer systems as being at the safe end because it has got an absolute dedicated revenue stream. In this case, we have got a problem with rates. There is a covenant in our deal that would force them to raise rates. They got into this problem because of their derivative contracts, the swaps they put on top of it. They financed I think it was $3 billion. They swapped $5 billion, caused a little bit of an additional expense hit. That really is outside the performance of the sewer obligation. So our expectation is that this has to get restructured.

Remember, we have rights to the revenue -- it is a net revenue calculation -- until we are paid off. We additionally have rights in the contract to force a raising of rates. So although there is going to be a lot of noise and I think this becomes very political, we have got some corruption charges as well in Jefferson County, which always stirs the pot even faster, but at the end of the day, we think this gets resolved, it gets restructured. We hope to be part of the solution on the restructure because it will be -- our view of a typical sewer systems are they are money good because you have the defined revenue stream that you will be able to grab ad infinitum until you are paid back.

Thanks for expanding on that. I appreciate it.

Alex Goldman, CastleRock Management.

Yes, hi. Thank you for taking the call. Kind of a simplistic question. Can you give us some sort of color about your expectations for credit provisions on your income statement for the rest of the year? So clearly, this quarter, you had some downgrades to securities that drew $55 million of credit costs. With everything taken into account to what you just said about the '05 deal, the HELOC and everything else, what is sort of expense level to you guys expect for the rest of the year?

I have got about 15 people in the room that are going to punch me if I try to answer the question, but I would rather be more open than anything else. So if you look at -- you can't bet on anything, but if you're thinking about what standard loss provisions would be in the normal life circumstances, which is not what we are in, but if you get there, because of the mix of business we write, you would expect a normalized loss provision of somewhere in say a 5% to 12% range of earned premium, right? Heavy public financed content. Although those default, they typically don't create huge ultimate net loss liabilities. It's typically a kind of missed cash flow and a restructuring type of thing.

Corporates obviously tend to take a more severe default. But on average, if you said what would be our budgeted loss provision? If we were trying to do the year 2006, it would be in that range based on mix of business. So that is normalized. We are not in a normalized situation. So to that extent, that is about as good as I can get. Nobody kicked me, so I guess he's okay with my answer.

Let me ask that question slightly differently if I may.

A-ha, here we go.

What kind of scenario would it have to be for the rest of the year in order for you to see quarterly loss -- quarterly credit costs to be in that $55 million range for the rest of the year?

Oh, wow, we would have to have a continued meltdown. I think you would have to see the residential housing get a hell of a lot worse.

And just a final though.

Think of our $55 million. I already told you we take, using '05 as the example, I hate to repeat, but we take everything that is delinquent and take full charge for it, right? I don't think that is a reasonable guesstimate. We reduce the value of the rapid am trigger. We reduced the value of the prepayments fees and we take a fairly tough view of it. So I can't take another tougher view next quarter unless something really strange happens.

For the sake of argument and just throwing this out there, which is probably going to create another thousand questions is, if Countrywide doesn't close the deal with Banc of America and files bankruptcy. Now we already take our draw rate down to zero, which is typically the net impact of something like that happening, but we could have disruption in the servicer capability, which then would cause some of the loans that wouldn't have gone delinquent had they been serviced correctly to go delinquent. So we would have to factor that in.

But it's those type of impacts that would really make us go back to the drawing board, but we really believe the number we took today reflects our concern over all of those things inclusive and therefore, I would not expect that to happen on a regular basis.

Just a final follow-up if I may, out of that $55 million, how much was the result of a step change in your assumption and the draw rates and just downgrading of securities, something that once you take that drastic of a view on those securities probably will not recur. So out of that $55 million, how much was that?

I would say the majority of it. Remember, to give you the example, we use the same assumptions to those ceded case reserves that we got from another client and it caused us to double the reserve advised to us. They advised us four, we put up eight and it is the same basic assumption that led us to the $40 million odd that we are holding on the HELOCs of the two Countrywide deals. So that is already baked in across our portfolio.

That sort of changed. Once you take that kind of a view, it doesn't sound like that is something that can continue. Once you assume a 0% draw and you bake that into your loss assumptions or take the reserve accordingly, that is not something that can recur next quarter or am I missing something?

No, you are exactly right. But remember, let's use the proper language because we are starting to put words out there that have different meanings. Once we bring in the possibility of a zero draw, that required us to downgrade those securities and to move to CMC 2 to 2007 deal. That creates a higher portfolio reserve. So it is all based on -- if the portfolio reserve spot, it is based on our internal rating and then how we model losses off of that rating through the standard calculation of our portfolio, which I think is explained in pretty good detail to get comfortable with. So it is that potential expectation of now bringing that into play that forced us to lower the rating.

Now would an incremental downgrade to like a CMC 3 have an incremental provision associated with it or is it just that the probability of the loss increases?

CMC 3 is only the fact that we put up a case reserve. Hopefully, if we have kept our model view of the transaction and typically it is not dollar for dollar and we gave a good example. I forget -- it was in fourth quarter of '06 or '05, we did the Northwest transaction. We showed you, if you go back through that explanation, how the portfolio built up, but because the default was so quick behind it, we were still short of the case reserve that we had to put up off the portfolio.

Here, we have a little bit longer leadtime, we get monthly statistics. So it is not in the same kind of dramatic default the next day. Here is your payment. And remember, off of that Northwest reserve, we have recovered probably 80% of it or not 100% of it. So even at the time, the number that we put up seemed to be right. You ultimately got recovery because you own the asset.

Will there be recoveries out of this? Well, in some certain cases, yes, because you own the assets. Remember, even if the guy defaults and the second lien or the HELOC does not buy out the first lean and therefore, default the property, you still have a claim on that property forever until it sells. Then if it ever sells for a value greater than the primary, you get the recovery. So those things still exist. We don't count them for anything in our modeling and hopefully, you would say that the portfolio reserve would transition to a case if it ever became that and hopefully, it doesn't become that, but that is kind of the fear.

But that transition from one type of reserve to -- I'm sorry?

Just please note there are other callers in the queue.

Okay, I will get back in line. Thank you.

[Zev Najinson], [Pine Cobble Capital].

Yes, hi. This is [Dmitry] actually. The question is around the CDS booking and there is really two parts to the question. First, just to be clear, given that spreads are much tighter than they have been probably at any point since the beginning of '08, could you give us a real sense for are we going to see a gain -- if you had to report numbers today, would there be a gain on the CDS book?

And then secondly, as far as losses on the CDS, is there anything in the statutory requirements and the accounting that when you take the mark-to-market CDS hit, you have to reserve for it or it hits your statutory capital and you sort of -- assuming internally you still believe the risk is okay?

There is no impact on statutory capital for the mark-to-market, number one. Number two, you asked about what would happen if we marked the book today. We didn't do a full mark at the end of April. We did a summary mark and there was a slight improvement in the market at that point in time. So as spreads come in, the mark will improve and the other thing that improves the mark is as the individual exposures approach maturity, the mark will dissipate also. So yes, it has improved. At this point through the end of April, it is not significant, but if spreads come in, it will improve.

How do we think about the process by which you mark? How much of it is sort of mark-to-model and how much of it is mark-to-market and how do you think about the market for some of the things that you hold, which are not sort of potentially widely traded?

We have talked quite a bit about this in the past. These are not positions that are traded. They are nonstandard terms. These do not require posting of collateral. They are pay-as-you-go contracts. So looking to an active market is not something that you do as part of the mark-to-market.

So hence, if you follow the new accounting guidance, one would say that it is all level three marked, which include the use of models. We generally use like transactions or exactly similar transactions, but in many cases, it is a market based upon indices and it is a very mechanical marking process. We will mark the cash flow CDOs to the JPMorgan high-yield cash flow benchmark, which, during the quarter, widened I guess just over 50%.

We will mark the CMBS deals to the CMBX CMBS index, which widened 18% during the quarter. We marked the RMBS deals to the ABX index and that widened in all of the different classifications there that are applicable relative to the AAA deals. So it is a long and complicated process. Substantially it is marked to indices.

So if you follow those three indices, you will get a good idea of where the mark is at any point in time in terms of open to change. So just follow those three indices is probably a good surrogate.

And I would note, on page 26 of our financial supplement, we do a pretty detailed listing of the exposures in credit derivative swap form, including the asset class and the average rating. So you can get a pretty good sense of what the numbers are correlated with the different indices.

Sahul Sharma, PilotRock Capital.

Good morning. Thanks for taking the question. I was wondering if you could talk about the excess spread in the two Countrywide deals that you are seeing today. And then also what is your average expectancy on the life of these two deals?

The excess spread, if you remember when we talked about them last year, it was in the 200, 240 range. Now we are in the 340, 360 range for both the '05 and '07 deals. So excess spread has gone up significantly. So that is a big help in terms of ultimately paying down losses or reimbursing those losses once again -- (technical difficulty).

In terms of the life of the deal, typically these things go out five to seven except that we do have a slowdown in prepayment fees and whether that continues or not, we will have the ultimate impact on what the further expectancy is, but typically it is in that five to seven range. Obviously the '05 deal is roughly two plus years, '07 is only one. We think you hit a maturity in around that third year in terms of expected -- in terms of experience at that point in time. So we are seeing whether that happens on the '05, but there are the round numbers if I can give you those.

And I would note that on page 28 of the financial supplement, we actually do a listing of the top 10 noninvestment-grade exposures in our portfolio and we give you there the average rating in that part, as well as our current estimate of the weighted average life remaining, which obviously on an asset-backed or mortgage-backed security is subject to change, but you can also see the maturities on any of the other top 10 --.

Is it the right way to think about this, if we use about five years and say sort of the average excess spread that you see is around 3% on these deals, and you going to have a 15% subordination built into this and then whatever the cumulative life assumptions are -- cumulative loss assumptions are on the ABX side and maybe it is 15%, maybe it is 20% and we can use our own math and then kind of figure out that, okay, this is sort of the worst-case loss that you guys should see on these deals and then any help that you get on the draws is a one-to-one charge against that.

Yes, no, because remember, you are getting the excess spread on the remaining transfer of the balance. So you have got to look at pool factor to get what it means relative to the overall pool losses. We try to always quote things specifically on original pool balance. So if you are saying I am getting 300 plus basis points and the pool factor is 50%, you are really getting 1.5% against the original pool balance.

Understood. Thank you so much for that.

There are no more questions at this time. I would like to turn the presentation back over to Ms. Sabra Purtill for closing remarks.

Thank you and thank you all for your attention here today. I just want to thank you for your time and if you have any follow-up questions on Assured Guaranty, our quarterly earnings or want to request information about our upcoming Investor Day, please do not hesitate to contact me at 212-408-6044. Thank you and have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.