Ambac Financial Group Inc (AMBC) 2005 Q3 法說會逐字稿

Good morning and welcome to the Ambac Financial Group Incorporated third quarter earnings conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to introduce your host, Mr. Sean Leonard, Chief Financial Officer of Ambac Financial Group Incorporated. Thank you, Mr. Leonard, you may begin.

Thank you. Welcome to Ambac's third quarter conference call. I'm Sean Leonard, Chief Financial Officer of Ambac. With me today are Rob [Eisman], Controller, and Peter Poillon, Investor Relations. This call is also being broadcast on the web. Our earnings press release and quarterly supplement are on our website and will be mailed out to those who have requested it. Also note that we have included on our website this quarter a short slide presentation that summarizes our quarter's results. Fourth quarter 2005 earnings will be released on January 25, 2006 at 8.00 am with a conference call at 11.00 am.

During this conference call we may make statements that would be regarded as forward looking statements. These statements are based on management's current expectations. I'd refer you to our press release for factors that could change actual results.

Now, I'll turn to highlights for Ambac's third quarter. Net income was $175.1m, or $1.61 per diluted share, down 2% on a per diluted share basis from the third quarter 2004. Net income was impacted by the provisioning for estimated losses amounting to $92m before tax and $60m after tax, related to our exposure to Public Finance bonds in the region impacted by Hurricane Katrina, primarily in New Orleans and the gulf-front regions that saw the most severe damage from wind and flooding.

While Ambac reports net income in accordance with generally accepted accounting principles, or GAAP, research analysts make certain adjustments to net income to calculate their reported estimates. Therefore, to enhance investors' understanding of our financial results, we continue to provide information on the items that analysts adjust out of our GAAP net income to write as their current estimates. These items are as follows.

Net after tax gains and losses from sales and investment securities, and mark-to-market gains and losses on credit, total return and non-trading derivative contracts, which in the third quarter of 2005, were net after-tax gains of $8.8m, or $0.8 per diluted share. This compares to net gains of $6.5m or $0.6 per diluted share, impacting the third quarter of 2004.

Some analysts also back out the after-tax effect of accelerated premiums earned on obligations that have been refunded and other accelerated premiums such as reinsurance cancellations. Total after-tax accelerated premiums amounted to $28.5m, or $0.26 per diluted share in the third quarter of 2005, which compares to $12m, or $0.11 per diluted share in third quarter of '04.

Refundings in the Municipal Finance book continue to be very strong, but almost half of this quarter's accelerated earnings were related to one large refunding of a California transaction.

Turning to Credit Enhancement Production, Credit Enhancement Production, or CEP, which represents gross upfront premiums plus the present value of estimated instalment premiums on insurance policies, and structured credit derivatives, issued or assumed in that period came in at $256.6m, down 6% from $273.7m in the comparable prior period. Public Finance CEP was $118.3m, up 12% from the third quarter of 2004. Muni issuance, as reported by third party sources, was up 27% from $78b in the third quarter of '04 to approximately $99b in the third quarter of '05, and insured penetration remains very strong, at about 55%.

Ambac's market share in the quarter, based on par written, was approximately 21%, down slightly from about 22% in the third quarter of 2004. Structured finance CEP was $110.5m, down 11% from the comparable prior quarter. We closed deals across the wide array of sectors, including several attractive commercial asset-backed transactions. Student loans and investor-owned utilities also had strong quarters.

In the MBS market, spreads continue to be challenging but we did note some improvement late in the quarter, and guaranteed about $9b of par in the quarter, not as strong as in previous years but a significant improvement over the first two quarters of 2005, when we guaranteed about $4b combined.

International CEP in the third quarter came in at $27.8m, down 37% from the third quarter of '04. While the production numbers were not up to expectations, Ambac continues to be excited by the opportunities and the level of capital markets activity witnessed in the markets we serve globally.

Turning to premiums earned. Net premiums in other, product enhancement fees earned, excluding refundings, increased to $182.2m, up 5% from the third quarter of 2004. Public finance earned premium, before accelerations, grew 6%. Structured finance grew 2%, while international grew 7%. As discussed in previous quarters, we are facing difficult market conditions in terms of narrow credit spreads and strong competition in the form of senior subordinated execution and from other financial guarantors in the MBS and CDO markets, and to a lesser degree, in other structured finance markets.

As a result of the difficult conditions, several segments of our structured finance book have experienced net run-offs since the beginning of the year. For the first nine months of the year, we've written almost $91b of gross par across all business lines and yet our net book has increased by less than $11b.

Deferred earnings, representing future earnings on premiums already collected and installments, remained relatively flat at approximately $5.4b. These deferred earnings will be recognized as earned premiums and other enhancement fees in the future over the life of the related exposures.

Turning to investment income, investment income, excluding VIE income, was $98.5m, up 10%. Investment grew primarily due to the increase of the portfolio, driven by a positive operational cash-flow. We also had a $5m net positive adjustment related to the shortening of certain Municipal Securities contractual life due to pre-refundings.

Investment income was adversely impacted by the continued low interest rate environment, and our buyback of approximately 4.3m shares of stock, thus far during 2005, costing almost $300m.

Loss provisioning amounted to $89.1m, up $71m from the third quarter of 2004, driven by the provision for Hurricane Katrina. As most of you know, we have posted our exposure to the hurricane on our website. The provision results solely from our exposure to Public Finance bonds in the region most severely impacted by the hurricane, primarily Greater New Orleans and the surrounding area, but also a few other municipal credits on the Gulf front.

As a reminder, Ambac's total loss reserves include active credit reserves, called ACR, and case basis reserves. Ambac establishes active credit reserves for probable and estimable losses due to credit deterioration on insured obligations that have not yet defaulted or been reported. ACRs are established only for adversely classified credits based on Ambac's view of whether the issuer's financial condition has deteriorated.

Ambac establishes case basis reserves for losses on insured obligations that have defaulted. As discussed in our earnings release, we have classified 35 transactions in the region with total net par of $1.1b. In determining our loss estimate, our analysis considers the unprecedented nature of the disaster, including the displacement of the community's residents and the unique aspects of each insured bond, such as the nature of the revenue source, and the transaction protection such as net service reserves.

Note that our estimate of losses was made without regard to any potential federal, state or local government assistance to individual municipalities and institutions. This is obviously still a dynamic process, one that we have been updating right up through yesterday. Ambac will continue to assess the impact of Hurricane Katrina on the fourth quarter and subsequent periods, as more information becomes available to us.

In the future, at least for the next couple of quarters, we will keep you updated on loss activity related to Hurricane Katrina, by discussing it separately from the rest of our portfolio. Additionally, we plan to periodically update our website to keep you informed regarding Hurricane Katrina information. Total net losses at September 30, 2005 were $287.7m. Total loss reserves include case basis reserves of $82.9m, and ACR of $204.8m. Excluding the Hurricane Katrina activity, our remaining loss portfolio was slightly positive, mainly due to net positive ACR activity in our structured finance portfolio.

Ambac has been actively working with other industry participants in the Financial Accounting Standards Board during the quarter to address the industry's accounting for loss reserves. It remains a work in process. As our result, our accounting policies are subject to change in the future. I encourage all investors and other interested parties to read Ambac's accounting policies footnote, and MBNA discussion regarding our loss reserve policy, our loss reserve methodology, and the potential for future changes. These disclosures can be found in our 2004 Form 10-K that we filed with the SEC in March.

Turning to Financial Services, Financial Services net revenues, excluding realized and unrealized gains and losses, were $17.1m compared to $13.9m in the comparable prior period. Our Financial Services segment is comprised of the investment agreement business, and derivative products business. The increase in Financial Services net revenues was driven by increased spreads in the investment agreement business and net mark-to-market gains in the derivatives business.

Notably, the mark-to-market adjustment resulting from the change in the ratio of tax exempt interest rates, the taxable interest rate was positive, $3.6m during the quarter, partially reversing the $6m mark-to-market loss in the second quarter of '05.

Our return on equity was 13.4% for the quarter, and 14.3% for the nine months 2005. Our ROE was negatively impacted by the loss reserve provision for Katrina. Just a reminder on guidance, that earlier this year we announced that we would no longer be providing earnings guidance.

So in summary, Ambac had a decent quarter from a top-line production standpoint under continuing difficult market conditions. We continue to maintain our strict underwriting and return standards. Improving overall credit quality of our portfolio was undermined by the unfortunate impact of the hurricane, but we are happy to state that our balance sheet and capital position remain extremely strong.

That concludes my prepared remarks. I would now like to open it up for questions.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Geoff Dunn of KBW. Please proceed with your question.

Thanks, morning Sean.

Hi, Geoff, how are you?

On the Katrina loss, I know it's your first stab at the losses. Is it fair to say that you wouldn't have put out an estimate that you believe could change materially? Maybe there's a plus or minus variability here, but it's not like balancing a $60m reserve addition this quarter that could subsequently be followed by a $60m reserve addition next quarter?

Yes, Geoff, we've been working this ever since the hurricane, and we've been running it right up to date. There are a lot of variables that could impact our loss provisioning. We went through a detailed analysis. We had people on the ground toward the area, looking at the various provisions and security in the document, so we've come up with our best estimate as of the current information that stands to date.

I think the variables that one would look to on the positive side would be if there's any specific assistance regarding debt service to individual municipalities and institutions and also, just to emphasize, I think you mentioned $60m. That's the after-tax, or total -- the total number is $92m.

I think from the standpoint, after seeing how the recovery goes, and the length of time and dislocation of the residents and how quickly they can get back into the area, and how the rebuilding will impact various sources of revenue in the area, so there is a potential, I would say, as we go forward, to have adjustments to our results, and we'll have to -- we're going to be paying diligent attention to that, and we'll disclose that to give investors a sense for what's going on with that specific portfolio.

Okay, and on the Katrina issues, are you in touch with all of the issuers that you have exposure to down there, and is there any stand-out size in the reserve you took, any particular deals that you're most worried about that we could watch and potentially watch for recovery?

I won't give specific deals. I will tell you that we have contacted the issuers and we were able to narrow down from our original press release and information on our website regarding the team of designated counties announced on the list that we mentioned today, a list of 35 specific issuers and the exposure of $1.1b.

We won't talk specifically about individual credits, but I will say that we did look at the individual credits, the source of the revenues, any additional security, and we've informed the view, and of those list of 35, some we think will experience more stress than others. The things, for instance, that we considered were obviously the displacement of the residents, the impact of the housing stock, whether the schools were still operating, which would allow people to come back sooner, those types of things, but we did do a detailed analysis, were able to contact all the issuers and we also visited the area and that's -- I'll leave it at that.

And then last question, because it was nice to see a little more aggressive buyback in the quarter. Can you update us -- what is your remaining authorization and what is the free capital available for buyback at the holding company, or what's accessible from the operating company in the remainder of the year?

Yes, Geoff, I'll start with the remaining authorization. There's about 4.6m shares on our overall authorization of 18m. From the standpoint, we'll continue to look at opportunities to manage our capital with the view towards new business writings, with a view towards what potentially could happen from the rating agency standpoint regarding our Katrina book as well as other potential events in our financial guarantee book, to inform a view as to which, and we'll also consider the existing price, but I don't want to specifically comment on our specific actions in the fourth quarter, just because it's a dynamic process that we'll have to look at, and there are a lot of things that are surrounding that, that we'll have to consider going forward.

Okay, thank you.

You're welcome.

Our next question is coming from Ken Zerbe of Morgan Stanley. Please proceed with your question.

Hi, good morning.

Hi, good morning.

In the press release on the $60m Katrina loss mentioned, that was mostly related to municipal bonds, but I assume, or does that also include your losses to things like schools or hospitals or the non-normal municipal issues?

We've disclosed -- it's effectively the public finance sector, which would include broadly any exposures to healthcare. Thankfully we don't have healthcare exposures specific in New Orleans, but it's primarily municipal exposures and other types of public finance transactions that we have in that area.

Okay.

And just another point is that we don't have significant exposure to investor-owned utilities. We also looked at our exposure in our structured finance side, and we don't believe we have significant concentrations or significant concerns there.

Okay, great. The next question is, what exactly led to the favorable loss development in the quarter, and should we expect it again?

Our process, as you can see from our Katrina reserving, is net driven, and we consider both positive and negative events during the quarter as they occur, and influence our view as to our active credit reserves and our case reserves. The favorable development in the remaining book of business, excluding Katrina, was primarily from the structured finance sector, so that would include transportation type issues, mortgage backed securitizations and CDO.

We saw improvements along the wide range, either specific transactions, either emergence from bankruptcies, specific performance, events occurring relating to the closing of transactions in the future and other things that we could foresee and verify.

Okay. And then a final question, just on your taxes. Why -- what caused you guys to release the reserve, or your tax reserves in the quarter?

Yes, generally what happens there is we would file, as a normal course, we file our tax returns in September, and we filed our tax return for 2004 in September of 2005. Upon that event, those specific years fall off from a statute of limitation standpoint, and when we have reserves relating to those years, we would make adjustments accordingly.

Do you normally release, I guess, some amount of tax reserves each year in the third quarter, and should we build that into our models going forward as well?

It all depends on what happened in that specific year, and I don't want to get into too many details regarding this. We can perhaps do that offline if you'd like, but it would be influenced by bigger actions in the year that fell off, relating to the items that we believe we have substantial authority, a little bit greyer in the tax code. It's not black and white, but nonetheless we take an accounting position to reserve for those items.

Okay, great, thank you very much.

You're welcome.

The next question is coming from Mark Lane of William Blair and Company. Please proceed with your question.

Hi, good morning.

Hi, Mark, good morning.

Just a follow-up on the movement in the active credit reserve, can you be more specific in terms of how many transactions maybe impacted the positive variance, and the ACR? Is it three or four transactions? It would seem unusual that it was a broad migration of an improvement in credit just in this specific quarter.

Yes, I think this is more of a handful of transactions that we saw favorable developments across, while it goes across structured finance, so it will be more characterized as a handful. I will say that our methodology as particular credits become more and more stressed, and are classified downwards on our classified list, they would typically attract a higher reserve, if you will, a higher severity type chart, so there were some improvements there, but again, it was more related to specific type events that occurred during the quarter that informed that deal.

Okay, and within new business, within public finance, if you look at the market share numbers that you provide, there seemed to be quite a bit of gross par that you guaranteed away from what would be captured in the publicly available data, by about $2b in gross par. What exactly was the difference between those two numbers?

I'm not sure, Mark. Perhaps we can reconcile that with you, perhaps off the call, depending on --

Well, look at it this way, your gross par in public finance is up 49%, okay? Yet, insured issuance clearly wasn't up that much, and the market share numbers you provide show that your market share went down, so what would account for a 49% increase in gross par?

Just the gross par that we guaranteed?

Yes.

Well, I know that there are some large public finance and municipal issuances that we did guarantee during the quarter. I don't know if I have -- we can perhaps get you the specific details.

Okay.

As those are handy.

Were there any large international deals that you were unsuccessful on within the quarter?

We continue to work the international sector. We did have deals that we've been working on that have been pushed off. The competition, we will say, in international is tough, and then there are some transactions there that we did walk from, but we are -- we continue to work that market, and we are currently working on deals that did get pushed off.

Okay, then last question was on the MBS production in the quarter, the last couple of quarters you had given the run-off number in the MBS portfolio in each of the first two quarters. I would be interested in that number, and then a related question, the production, on a gross basis, was almost three times as much in the first half in what you would think is a seasonally weak quarter. Was it actually a change in new business conditions or just some large transactions or issuers that you have stronger relationships with? What really drove the improvement?

Yes, I think there were a couple of large deals and I think there is some relationship issue there. I'll just give you a sense for the run-off. We guaranteed, during the quarter, about $9b and the net run-off, as you see from our operating supplements, were up about $3b total, so the net run-off would be about $6b, so $9b minus $6b, in rough numbers, gets you to $3b.

Right, thank you.

You're welcome.

Our next question is coming from Mike Grasher of Piper Jaffray. Please proceed with your question.

Good morning, Sean. Could you give us some more detail around the one large transaction, I think you referred to, on the refundings, as part of half of it, I think is what you said, just in terms of what that transaction was? And then with regard to the remaining, or the remainder of the refundings, did those occur in the first part of the quarter, or can you give us more detail as to how things shook out along the way?

Yes, the one large transaction was approximately almost half related to a California tobacco securitization, so the California obligation that, I think was issued back in 2003, in that vintage, and it was refunded this year. So that's to give you a sense for the refundings, I think they - I don't recall anything remarkable as to the timing, but we could get back to you with specifics. My recollection was if you take out that one large event, it was evenly throughout the quarter.

Okay, is it a bit too early to speculate on how October may be shaping?

Yes, I think so. I think so. We can provide that information in our fourth quarter call.

Okay. And then I just wanted to turn quickly to your big exposures. It looks like you did increase, I guess, sequentially, and there was one deal in particular, transportation revenue, not one deal, but net par outstanding on transportation revenue, which came in there. Can you give us more color around what that is?

Yes, I'm not going to give you the actual issuer name, but we did have a situation during the quarter of a deal that we took regarding our investment grade exposure in that particular sector. It was actually two deals, one larger and one smaller deal in that sector. I just don't want to specifically comment on issuer names, but it's related to transportation bonds.

Okay, and then could you quickly update us on your EETC exposure?

Sure. We've had some positive experience in the quarter relating. We have a couple of issuers emerging from bankruptcy. We did have some positive activity in some pay-downs, so that was positive. We continue to look, obviously, at those transactions, and the nature of the [airplanes] in those transactions in order to remediate any potential concerns that we have there, but it is built into -- we do take a view, obviously, each quarter, and it is built into our process regarding active credit reserving and loss reserving.

Thank you.

You're welcome.

Our next question is coming from David Chamberlain of [Temple]. Please proceed with your question.

Hi, yes, just a question on your [mid-com] results, potentially the spread [wide in Orange group] conditions in some of your markets. Can you be more specific, maybe, in whether it was the MBS market or other markets that you saw, perhaps, competition, the spread environment doing better?

Yes, the credit environment is still tough. We're still operating under tough conditions. We did mention that we did see some opportunities in the mortgage backed sector to accomplish some transactions, but the credit spread environment is still tough. We're potentially hopeful that some of the credit events that occurred this quarter, including Katrina, and some corporate type issues that have come up will help in that regard. We haven't seen that in a significant way to date so we are still operating in a difficult environment.

If I were just to add on -- if I were to look at current [space] in general, [agency] MBS market, at what point, given where they are now versus where they could be, at what point do you think is -- there is a tipping point between whether the market says the insured product makes sense or when to do this versus something else?

Tipping, I don't quite follow the question.

Do you think the credit spread would have to widen and pay 20% from here before you really saw a change in the environment?

Clearly we're still able to transact business that we believe is still profitable business. Clearly an increase like that would be positive, certainly from our perspective, and it perhaps would open up some sectors that we have -- we were very successful in originating business back in 2003 and 2004. So I think that would have clearly a positive impact on the business.

But regarding a tipping point of what will drive that, that's a difficult number to pinpoint.

Okay. Maybe I'll ask a little differently. Just you're looking at penetration in the MBS market now versus, say, two years ago or do you -- would you say there's a 10% of what you -- versus 30% or just give an idea there.

Yes, it's -- I think that's a reasonable characterization. It has declined substantially. And certainly in the first six months of 2005 it really had declined dramatically.

Okay. Thank you.

You're welcome.

Our next question is coming from Darin Arita of Deutsche Bank. Please proceed with your questions.

Hi. Good morning.

Hi Darin.

Hi. Just with respect to the 35 Katrina-related credits that were put on the classified plus list. Just wondering how those developed since Ambac posted the exposures on September 13. And I'm wondering as the information came in from the issuers, did it seem like the credit profiles were improving or worsening?

Look, Darin, what we have posted on our website was what the -- was a broad area that was a scheme designated accounting that didn't give quite justice to the impacts or try to grade specific communities within that -- that wide area. So it took us a while to contact issuers due to the dislocation and issues down there.

So since that time we have obviously looked at the details of each individual issuer, trying to get a better sense for damage to the actual community, dislocation of the residents, incidental impact on the ability to raise taxes and collect taxes.

So I think that's -- from that standpoint we're trying to give a disclosure as best we could at that point in time, trying to be as transparent as possible. But since that point is preparing our part financial statements, we need to look to see what we think is the inherent loss within that portfolio. And we're specifically looking at each individual issuer and then informing a view based upon what we know from talking to folks visiting the area and in the underlying protections in the deal.

Okay. And I guess in the aftermath of Katrina and seeing the evacuation of a large U.S. city, can you just remind us how Ambac manages its risks with respect to earthquakes and other potential catastrophes?

Yes, our underwriting guidelines and we'll certainly be looking at those again if there's lessons to be learnt here, but our underwriting guidelines generally look to broad revenue sources, double-barrel revenue sources, if that's the case on a specific issue might be, for instance, toll revenues plus vehicle registration fees. So it might be broader.

We would look to insurance on specific catastrophes. We would look at size of communities, that type of thing. But we are going through a process currently to determine whether or not there are lessons to be learnt here and whether or not -- and how that will impact our underwriting policies.

Clearly we're looking at geographic diversification and concentrations and that type of thing. But that's largely built into our underwriting process and we will be looking at that to see if can improve those.

Alright. Thank you very much.

You're welcome.

[OPERATOR INSTRUCTIONS]. Our next question is coming from Rob Ryan of Merrill Lynch. Please proceed with your question.

Good morning.

Hi Rob.

I see that on a net basis the case reserve decreased. But were there any significant ins and outs or was it pretty benign?

It was pretty benign. There was not significant swings positive or negative.

Okay. Switching over to net investment income, I realized there was some unusual activity in the quarter itself. But the general environment in terms of your current portfolio yield compared to new money available rates, how would you characterize that?

Comparing which -- just comparing the current -- just in the current periods?

Well, do you continue to lose ground for the overall portfolio yield based on what's available in today's new money environment?

Yes, if you were to compare, just to give you a couple of comparisons, if we were to compare third quarter last year to this year, we did have -- if you take out that one adjustment, I think most of the variance is volume variance. There is a modest rate variance on the downside, but not significant.

So just from the standpoint of sequential quarter to quarter, I don't have those numbers in front of me, though we can probably -- we can certainly get those to you, but probably expected a modest improvement, close to flat or modest improvement quarter to quarter.

Okay. And can you remind us where you are on the duration of the portfolio currently and where you would have to be in an interest rate environment to perhaps lengthen that duration?

Yes, we're currently at about 5.5 on the duration, slightly down from 5.6. Yes, regarding the lengthening of the duration, we primarily were managing towards credit and preservation of capital, and we're also managing towards the overall view of the book. So you don't necessarily intend to have a significantly wider duration. But we would consider if there was a -- obviously we would look at current market rates and current market yields to influence that. But we're more managing it through our book of business, not through a total return-type basis.

Great. Thank you.

Our next question is coming from [Payna Stromberg] of Ixis Capital. Please proceed with your question.

Hello. I was just looking at the numbers for the international segment for current enhancement projection. And year over year it's down 40% and I was wondering if you perceive this environment to last into next year and, if not, what are the factors that would prevent that?

Yes, the international business is, as we mentioned in the script in the lead in, that there has been a bit of a tough [sledding] there. We do consider to see the business there markets characterized by still relatively few complex large dollar transactions that don't necessarily have stated on the PFI, on the project finance infrastructure, a consistent flow, say, as of June or as of December natural heavier issuance by quarter.

So we continue to see that kind of characteristic. But we are hopeful that -- and we do see the capital market activity, but we just -- we have just been unable to close the transactions so we're still somewhat hopeful in that sector.

Okay. Thanks.

Our next question is coming from Jerry Salomon of Bear Stearns. Please proceed with your question.

Hi. Good morning. The call is actually here with [Dale Witkin] as well who I think has a question or two. Talking about airlines for a second, I know your insure a transaction of [indiscernible]. I know Delta did challenge -- has issued something to the court saying they're contemplating a challenge to that allegation of bankruptcy. Have you made any reserves for that or are you contemplating, or what have you done in regards to that? Delta Surelink is based upon your ETC exposure at this point in time. And have any of those leases been rejected by any of the airlines and what kind of recovery values do you expect?

Yes, we're not going to specifically comment on our loss reserving for specific credit as we think there's some potential business issues there. Generically, obviously, we do consider that transportation exposure, one that we will actively -- and has our full attention, will actively remediate that particular item.

We are obviously looking at current events that have been discussed in the courts relating to characterization of lease and financings. So that's clearly one item we're looking at very specifically. So we will definitely keep close attention to that and that will obviously influence our loss reserve. But we have considered all that to date and that's reflected in our financial statements.

And on the ETC side?

On the ETC side we've had a couple of favorable developments from the standpoint of specific performance. So, generically we do have exposures and we do provide our view regarding at least what we disclose is below investment grade and [even D] transactions. Clearly we can see how the work goes and continue to look at the aircrafts in those transactions and believe, at this time, that we have appropriately considered all current information in forming of our loss reserve judgments.

Okay. Thank you. I think Dale has a --

Yes, I had questions, Dale Witkin. Of the 35 specific issues that you're talking about of taking this $90m reserve, do you do it on like a probability basis where you say okay, we have this 35 that are at risk and so we think that this percentage of these deals will default for this amount of time? Is that they way you come up with it, or do you really think that you're going to have a loss on 35 deals?

No, we would look at the 35 deals have varying grades of stress that we think, depending on where the specific issuer's located, the extent of damage, dislocation of population, security in the transaction, looking at the debt service over the next several years to get a sense for how we would -- at what level we would classify. So, within those 35 credits there are ones that we think have deteriorated more than others.

Is there other general obligations credits in that mix, in the 35?

Yes.

Do you have an idea -- can you give us a sense of what percentage of the transactions are GOs versus revenue bonds?

I don't have those statistics handy. I will say that it's substantially in that -- in the municipal issuance sector. But I don't have those numbers right in front of me.

Alright. Okay. I would imagine it's far harder to model the general obligation bonds than the revenue bonds, I would think.

Yes. At this point, as a general characterization, with certain exceptions, revenues bonds would perhaps possess a debt service reserve whereas it is atypical that is general obligations would have such a reserve. So -- and then the impact of the ability to raise taxes when you have a dislocated population and those types of things, it does become a little bit more difficult.

Okay. Thank you very much.

You're welcome.

Our next question is coming from [Jeffrey Brewster] of [Mint State]. Please proceed with your question.

Back to the $92m loss estimate on Katrina, the question that I have is what percentage of that loss do you believe will be due to the interest payments that are going be needed to be made up by your Company and then principal payments.

And then the question I would have as a follow up to that is then what percentage do you believe that in the future would be due to principal default and how do you model that in?

What we have looked at is we have looked at the best service requirements through 2008 of the specific stress credits. That would include both principal and interest. There are some -- I don't have specific percentages of what that split is, but just to give you an overall sense for debt service with those specific credits is we're looking at about $90m for the fourth quarter, looking about $114m for 2006 and about $116m for 2007. So that ought to give you a sense for the debt service.

I don't have - I don't have the principal and interest split. But it would be typical that these are longer-term obligations, so my expectation is that there will be some principal in there, but not a dramatic amount.

So then a follow up to a question that was asked earlier, should we model in additional losses due to Katrina in the following years and in a 2006 event and in a 2007 event or a principal default occurs and then we have to model that back in?

Yes, again, our current estimate is our best estimate of what we think is the loss reserve. So we are considering a number of things, including debt service at this point in time. We will obviously, as we go forward, will obviously provide updates on that. But at this point in time I don't think I can specifically answer that question other than to say we have made our estimate based upon the information we know to date. And that could potentially change in the future as information becomes available.

And one last question on that. I noticed on the release that you gave as far as the net PAR outstanding on 07.31.05, with effect of about a 1.4 -- I think $1.4b in the housing MBS sector. And what -- do you have any dollar amounts there as to principal -- scheduled principal repayments that you've had to come up with this quarter or coming forward as well?

No, typically in those deals we would be in the senior layers of those transactions that we think are diversified. But we have not -- we have not made any claim payments or anything like that. We feel pretty good about our exposure in the structured finance sector and concentrations in that particular area.

Okay. Thank you.

You're welcome.

Our next question is coming from David Chamberlain of [Temple]. Please proceed with your question.

Hi, just a final question. Just on the excess capital situation, barring any business opportunities that present themselves over the next 12 months, what is your current excess capital position right now?

We don't disclose excess capital position. Currently we do obviously look at overriding factors that I mentioned earlier. But we would obviously consider the credit events that have occurred in the quarter and we naturally want to keep an appropriate cushion above any minimum due to rating agencies' views regarding their capital requirements relating to our business and then maintenance of our triple A rating. So we don't currently disclose excess capital position.

Okay. Let me just ask another question related to that. If you looked at your capital -- your statutory capital ratios, your financial [inaudible] ratios, what are the minimums that the [inaudible] you have? And historically how low have those gone in terms of for instance, this quarter of 131 to 1 on the capital and then 52 to 1 on the financial resources ratio. I just wondered what they look at. If that's not, maybe you can tell me.

Yes, yes. The rating agencies -- each rating agency has its own specific view on the capital requirements. I would suggest you look there. I would say had the general matter, then most owners allocator of capital to the S&P model. And S&P has a margin of safety and excess and then they provide ranges of where each financial guarantor falls within those calculations. Ambac has historically been in the 1.3 to 1.4 range. And the minimum would be at a 1.25 level.

Great. Thank you.

You're welcome.

Our next question is coming from Al Copersino of Columbia Management.

Hi. Sean, I don't think this question, if I could step away for a moment, the large amount of share repurchase in the quarter which I was happy to see. Could you tell us if there was a significant amount of that that was done prior to Katrina in the quarter or was it evenly spread out? Was there any timeline on the share repurchase this quarter that we should be interested in?

Yes, it was substantial -- it was substantially before Katrina, so up through the end of August and since then most of the activity took place. And that activity, I think you can characterize that as occurring evenly throughout the quarter up until that point in time.

The -- I'm not sure if you all can comment on this or not, but the level of confidence you have in your estimates for the Katrina losses, will that in any way -- will that in and of itself in any way preclude a similar level of share repurchase in future periods?

It's just -- commenting on the confidence in the Katrina, obviously we're preparing financial releases that require us to make our best estimate. And we're doing it based upon information that we know to date, that there are obviously a number of factors that influence our analysis. And that will be a dynamic process that will be ongoing. So we anticipate that that will be something we have to follow obviously very closely, and may cause adjustments in the future.

Regarding the -- regarding the Katrina levels and capital, one would need to look at the potential rating agency effects of how they're looking at these specific exposures and what actions they may take. And that will -- those actions will drive bigger capital requirements that we will need to keep at those -- based on their specific rating agency capital models. So we'll have to watch that very closely and that will be part of our consideration of any capital management decisions.

Okay. Thanks very much.

You're welcome.

Gentlemen, there are no further questions at this time. I will turn the floor back over to you for any further comments.

Well, we thank everyone for listening in to our call. We will be available to answer questions. So if there are additional questions, please give us a call. Thanks again.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.