Ambac Financial Group Inc (AMBC) 2007 Q4 法說會逐字稿

Greetings. And welcome to the Ambac Financial Group Inc. fourth quarter full year 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Sean Leonard, Senior Vice President and Chief Financial Officer. Thank you, Mr. Leonard, you may begin.

Thank you. Good morning, everyone. Welcome to Ambac's fourth quarter conference call. I'm Sean Leonard, Chief Financial Officer of Ambac. With me today are Michael Callen, Chairman and interim CEO; David Wallis, Senior Managing Director, responsible for portfolio risk management; Robert Eisman, Controller; David Trick, our Treasurer; and Peter Poillon, Investor Relations.

Our earnings press release, quarterly operating supplement and a short slide presentation that summarizes the quarter's results are available on our website. Also note that this call is being broadcast on the Internet.

I'd like to make a statement before we get started. I would like to remind you that during this conference call, we may make statements that would be regarded as forward-looking statements. These statements may relate to, among other things, management's current expectations of future performance, future results and market outlook. You are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this presentation, as actual results may differ materially from any future results expressed or implied by such forward-looking statements due to a variety of factors. Information concerning factors that could actually cause results to differ materially from the information we will give you is available on our press release and on our most recent Form 10-K, Form 10-Q and Form 8-K. You should review these materials for a complete discussion of these factors and other risks. Copies of these documents may be obtained from the SEC website.

I would now like to turn it over to Mike Callen.

Good morning, ladies and gentlemen. Thank you for joining us. I'm Mike Callen. I'm the recently appointed Chairman and interim CEO of Ambac. I have been a Board member of Ambac since 1991 when Citigroup, on whose Board I served at the time, undertook a public offering of Ambac, which it had acquired earlier.

After my introduction, Sean and David will take the floor to discuss in some detail our quarterly results and an analysis of the Company's portfolio. And then we will move to Q&A for as long as you like. I'm advised that there may be a few questions.

Ambac and the industry clearly are facing trying times in the marketplace. We have recently been downgraded to AA by one rating agency, and the market value of the Company has plummeted since the middle of last year. Both of these are external assessments of our business and future, and we at Ambac believe that they underestimate our Company's strengths. So in the next five minutes, I'm going to begin by reviewing the fundamentals and then I'll comment on the future.

A business enterprise, especially one in the financial industry, as you know, is normally looked at from the standpoint of its capital adequacy, its earnings, liquidity, and its asset quality. So, it seems appropriate to me to briefly examine Ambac from those perspectives because I believe that by each of these measures, Ambac is more than adequately positioned. Ambac has a capital base that's very strong. Our claims paying ability -- and that's a calculation you're all familiar with -- is more than $14 billion.

Given the nature of its business, 90% of Ambac's operating revenue is derived from its embedded book of business. This audience knows how unearned premium becomes earnings over the life of the contracts. So I won't elaborate here, but we will certainly provide clarification where sought. Liquidity is particularly strong. Our debt service obligations at the Holding Company total less than $90 million per annum, while the cash position of more than $50 million with potential dividend flows of up to more than $200 million -- without regulatory approval, I might add -- are adequate cushion by any yardstick. So I don't think there is any cause for concern on that account.

Now, how about asset quality? Many of you have expressed concern over this issue. Some feel that our $1.1 billion reserve, which is incorporated in our quarterly results, was a surprise and contrary to assurances expressed by the Company in the past. David Wallis is going to cover this issue in detail when I'm finished. He will provide you with the same analysis that he provided our Board and financial advisors.

I don't want to run on here only to force listeners to hear it all again, but the short answer is this -- we analyze our potential losses using several methods. Until this quarter, the methodologies in which we had the most confidence showed no losses. This quarter, although one methodology in which we had previously relied continued to show no losses, an additional methodology, which is tied to the specific legal structure in ratings on the underlying securities, began to show losses as the rating agencies accelerated downgrades of the underlying securities. Naturally, we took this result into account in setting our reserve.

I'm going to leave the subject here with two thoughts. First, echoing weighing Sean's statement, forward-looking statements are subject to many uncertainties. But second, the loss estimates incorporated into Ambac's stock price today and loss assumptions supporting various models cited in the market are very disparate and drastic; and personally, I cannot find the logic underlying these assumptions. I admit to being mystified by the wide and persistent dissemination of these projections.

There are three transactions, the famous CDO-squared's, amounting to $2.4 billion that have been the source of most of the consternation. Our $1.1 billion reserve was almost entirely allocated against those and one other transaction. The reason, as David will shortly detail, has less to do with the economics of these structures than it does with the legal detail of the contracts.

It's important for you to understand, however, that our claims paid under these assets in 2007 were 0. And for 2008, we wouldn't expect any more than, say, $10 million. So on the fundamentals, it's very difficult to identify the disconnect between the external and internal perceptions of our strength; certainly, the issue can't be one of solvency.

Now, looking at the Company's franchise, looking at our business model and our strategic direction, we believe we can build capital to maintain our AAA under Moody's and S&P as well as reacquire it under Fitch.

Let me make a brief comment on the events of last week. We said that we intended to raise $1 billion or more which, based on the information we hat at that time, would have secured us an AAA rating from all three agencies. Unfortunately, Moody's unexpected announcement and the consequent stock price decline left us in a position of not knowing how much we would have to raise to maintain an AAA, and led us to conclude that raising capital was not an attractive option at that time.

So we are strategically evaluating several alternatives with strong parties. The significant and undervalued economics of the balance sheet are apparent to many, and we and our financial advisors, Credit Suisse, have received a lot of interest. We're continuing to pursue these opportunities to rebuild shareholder value and to enable us to build on the numerous fundamental strengths I have outlined.

I understand that investors and analysts want specificity and one wishes it could be provided, but it is too early today. I conclude by saying that we are hard at work and expect to have substantive information reasonably soon. We believe over time as the environment normalizes and perceptions correspond more closely to reality, the market will more accurately assess our assets and strengths.

Finally, I think it is important to advise that we are in close and frequent contact with our regulators, and they have been very supportive and understanding.

And now let me give it back to Sean.

Thank you, Mike. First, I would like to cover some key developments during the quarter. Then I will turn to the highlights and specific details of the quarter results.

First, let's start with a brief summary of the rating agency actions. On January 18, 2008, Fitch ratings downgraded Ambac Assurance Corporation insurer financial strength rating from AAA to AA. On January 16, 2008, Moody's put its AAA rating on review for possible downgrade, and on January 18, 2008, Standard & Poor's rating services put its AAA rating on CreditWatch negative. Ambac will be actively discussing its plans that Mike had mentioned with all three rating agencies over the coming days.

Next, I will turn to highlights of the fourth-quarter earnings. Our fourth quarter, as well as our full-year US GAAP financial results, were heavily impacted by two large loss adjustments recorded during the fourth quarter. First, losses resulted from an estimate of the fair value or mark-to-market adjustment for our credit derivative portfolio for the quarter, amounting to a non-cash estimated loss of $5.2 billion pre-tax, $3.4 billion after-tax or 33.14 per diluted share.

Of the $5.2 billion pre-tax mark-to-market loss on credit derivatives are actually $1.1 billion pre-tax or $719 million after-tax or $7.03 per diluted share represents credit impairment related to certain collateralized debt obligations of asset-backed securities transactions. An estimate of credit impairment has been established, plus it is management's expectation that Ambac will have to make claim payments in the future.

Secondly, there was a loss provision amounting to $208.5 million related primarily to home equity line of credit and closed and second lien transactions within our RMBS portfolio.

I will now give you some additional detail on these losses and later David Wallis will discuss how these loss estimates were derived.

Our fourth quarter mark-to-market adjustment is the result of dramatically lower prices on our credit derivative exposures, particularly CDOs of asset-backed securities comprising subprime mortgages and internal rating downgrades to our transactions. Factors such as poor collateral performance and lack of liquidity in the marketplace contributed to lower pricing.

Four transactions generated the $1.1 billion credit impairment, including three CDO-squared transactions and one CDO of ABS. All four transactions are ultimately backed primarily by mezzanine level subprime residential mortgage-backed securities. The $1.1 billion impairment amount represents 38% of the par value of these securities. It is important to remember that these are not paid claims, but estimates of the present value of future claim payments.

Mark-to-market amounts above and beyond that impairment amount continue to be backed out of our reported operating results. Ambac continues to believe that the balance of the mark-to-market losses taken to date are not predictive of future claims, and that in the absence of further credit impairment, that the cumulative marks would be expected to reverse over the remaining life of the insured transactions. Additionally, we have updated our internal ratings of our CDO of ABS transactions, all of which can be seen on our recently updated website disclosures.

Next, I'll turn to losses and loss investment expenses. Loss provisioning amounts to $208.5 million in the quarter compared to $9.6 million in the fourth quarter of 2006. I'll provide some more detail on the loss activity.

Total net loss reserves at December 31, 2007 amounted to $473.1 million, up from $273.8 million at September 30, 2007. Total loss reserves include case basis reserves, which are recorded for insured exposures in our portfolio that have defaulted, and active credit reserves or ACR for probable and estimatable losses due to credit deterioration, uncertain adversely classified insured transactions. Case reserves of $109.8 million at December 31 are up $2.7 million from September 30, primarily due to net activity in our RMBS portfolio for transactions that are underperforming original expectations. Of the $9.2 million net claims paid during the quarter, $8.1 million related to RMBS transactions.

Active credit reserves of $363.4 million at December 31 are up $196.7 million from September 30, driven primarily by unfavorable credit activity within the home equity line of credit in closed-in second lien RMBS portfolio. Partially offsetting the RMBS activity is favorable credit activity within the public finance portfolio. Our below-investment grade exposures increased $6.4 billion during the quarter to $11.1 billion or approximately 2% of our total portfolio, primarily due to increases within the RMBS home equity in closed-in second lien and CDO of ABS asset classes. Outside of those asset classes, we are pleased with the overall credit quality of our portfolio. Ambac expects difficult credit conditions to persist into 2008 and we'll continue to closely monitor our entire portfolio.

Next, I'll turn to operating income. In this quarter, we recorded a net loss of $3.3 billion or $31.85 per diluted share compared to net income per diluted share of $1.88 in the fourth quarter of 2006. The primary contributor to the loss reported in the current quarter is a negative mark-to-market adjustment in our credit derivative portfolio, but also includes the increased loss provisioning for our direct insured RMBS portfolio. 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 to arrive at an operating income number that reflects how they view the underlying performance of our business. Therefore, to enhance investors' understanding of our financial results, we continue to provide information on the items that analysts adjust out of GAAP net income to arrive at their current estimates.

Those items are as follows. Net after-tax gains and losses from investment securities and mark-to-market gains and losses on credit; total return and non-training derivative contracts for investment grade exposures; and certain other items. In the fourth quarter of 2007, Ambac recorded net after-tax losses amounting to $2.6 billion or $25.64 per diluted share that is added back to our GAAP results. This amount is net of the impact of the estimated $719 million credit impairment loss from credit derivatives or $7.03 per share that I mentioned earlier.

So just to emphasize, we did not back out mark-to-market amounting to $7.03 per diluted share, which represents our estimate of the present value of estimated claims on the below-investment grade CDO of ABS transactions that I mentioned earlier.

This quarter's result compares to fourth quarter of 2006 when we reported net after-tax gains of $4.3 million or $0.04 per diluted share that were backed out of our GAAP results. On this operating basis, earnings per diluted share were a net loss of $6.21 in the current quarter compared to an operating gain of $1.88 in the comparable prior period.

Some analysts also back out the after-tax effect of accelerated premiums earned on obligations that had been refunded and other accelerated premiums. Total after-tax accelerated premiums amounted to $18.4 million or $0.17 per diluted share in the fourth quarter of 2007, which compares to $18.1 million or $0.17 per diluted share in the fourth quarter of 2006. On this basis, we recorded a quarter loss of $6.39 per diluted share as compared to the prior period's core earnings of $1.71.

Turning to credit enhancement production or CEP. CEP represents gross upfront premiums plus the present value of estimated installment premiums on insurance policies and structured credit derivative issued or assumed in the period. CEP came in at $304.5 million, which is down 3% from $314.5 million in the fourth quarter of 2006.

I will now take you through some of the details of our production by sector and how each has been affected by the current market conditions.

Public finance. Public finance CEP was $97.4 million, up 16% from the fourth quarter of 2006. In the current quarter, we benefited from strong writings of health care and municipal structured real estate transactions. Overall market issuance of approximately $106 billion was down 17% from prior year of total market penetration, which is the percentage of bonds issued during the period with financial guarantee insurance, was approximately 41% down from 44% in the fourth quarter of '06.

Overall, the market was characterized by weaker issuance during the fourth quarter. In December 2007, penetration rates declined to approximately 30% as several municipal issuers chose to forego insurance as the rating agencies reported on the capital adequacy of the financial guarantors. Ambac's market share declined to approximately 18% in the fourth quarter '07 from approximately 23%, primarily as a result of concerns about the ongoing rating agency reviews of our capital adequacy.

Structured finance. Structured finance CEP was $125.9 million, which is up 30% from the fourth quarter of '06. Volumes in many assets classes, particularly in the consumer related assets, were significantly down during the quarter due to the much publicized turmoil in the markets. CEP in the fourth quarter was driven by strong writings of commercial asset-backed transactions, including one large transaction in investor-owned utilities. Spreads are demonstrably wider in most structured markets and pricing has moved up accordingly. During the quarter, we did not underwrite any direct subprimes or second lien RMBS or CDO transactions.

International. International CEP in the fourth quarter came in at $81.2 million, down 39% from the fourth quarter of 2006. While strong writings across several assets classes and geographies were included in the current quarter, the comparable quarter last year included three large UK transactions. Again, this quarter's production is a reminder of the lumpy nature of this sector's production, as 74% of the CEP came from large transactions.

Some brief comments on our reinsurance transaction with Assured Guarantee Re. In conjunction with the previously announced $29 billion reinsurance arrangement with Assured Guaranty Re, Ambac ceded $143.2 million of written premium to that company during the quarter. The AG Re transaction, which took place in early December 2007, reduced normal earned premiums by $1.3 million in the current quarter. In full year 2008, premiums earned impact after ceding commissions is expected to be approximately $24 million.

Our deferred earnings representing future earnings on premiums already collected and the future value of installments stands at $6.3 billion. These deferred earnings will be recognized as earned premium and other credit enhancement fees in the future over the life of the related exposures. $2.6 billion represents cash collected upfront and already invested in our conservative investment portfolio, while $3.7 billion is installment premiums that we estimate will be paid to us over the life of the transactions. In 2008, we estimate total premium earnings based on contracts enforced at December 31, 2007 to be in excess of $700 million. Please refer to page 16 of our operating supplement for a schedule of these expected future earnings.

Investment income was $119.3 million. That's up 8%, substantially due to growth in the portfolio driven by strong operating cash flows in the financial guarantee business. Our portfolio remains a very high-quality portfolio. It contains no subprime mortgage exposures.

First financial guarantee underwriting and operating expenses for the fourth quarter of 2007 amounted to $47 million. That is essentially flat compared to fourth quarter '06. The fourth quarter of 2007 effective tax rate increased to 36.7% from 28.7% in the fourth quarter of '06 as a result of the large loss recognized during the quarter and mark-to-market losses taken for the first nine months of the year. The impact on the effective tax rate from tax-exempt investment securities was reduced significantly due to the proportion of tax-exempt income versus the loss for the quarter.

Two final comments before I turn it over to David Wallis. Ambac recently amended its $400 million credit facility to exclude mark-to-market adjustments, except for amounts considered to be credit impaired, from the determination of minimum net worth, so we have not breached any covenants under this facility. That credit facility has never been drawn upon.

Our financial guarantee business never requires collateral posting. However, there are certain collateral posting requirements in our financial services businesses that are triggered upon certain downgrades. Fitch's downgraded to AA has no impact on collateral postings.

That concludes my prepared remarks on the financial results. David Wallis will now discuss our methodology for establishing the credit impairment loss and loss provisioning for the quarter. After David speaks, we will open it up for questions. David?

Thanks, Sean, and good morning. I'd like to focus on the key question -- how have we computed Ambac's likely $1.1 billion CDO impairment, primarily booked in respect to Ambac's CDO-squared transactions? And what has changed from prior periods?

To cut to the chase, different loss estimates can arise from different methodologies and different assumptions within the same methodology. And what I will be discussing in some detail is an evolution of our analytic focus as we believed events have dictated. Although the following depiction is somewhat stylized, perhaps suggesting a greater distinction than may be entirely accurate, let's review some of these methodologies in turn, which I hope will cast some insight on to the central question posed earlier.

So the first approach is the CDO model approach. This approach consists of using a simulation model based on key inputs of ratings as proxies for probability of default, assumptions on severity or loss given default, and finally, assumptions about default timing correlation. The model is run and insured obligation ratings and expected losses are produced for the transaction-specific average life. And it is these expected losses which might form the basis of a suggested impairment number.

So what are the possible issues and reasons for variance within this methodology? Answer -- essentially different assumptions on the key inputs. Let's look at these.

Ratings. Are the collateral rating inputs up-to-date and truly representative of collateral default probability?

Correlation and severity. Little doubt here that both have increased drastically over the last few months; but how much and for which deals? Should transactions with different vintage components utilize different assumptions, et cetera?

The point is that there is a lot of possible variance in the choice of assumptions. Assumptions can both vary through time and differences exist at the same time. Reasonable people can differ. Thus, it's easy to understand that differences in assumptions can produce different loss estimates, even within the same apparent methodology.

Let's consider a market value approach. Essentially, use market value as a proxy for anticipated losses and therefore impairment estimates; essentially, a mark-to-market approach.

So what are the possible reasons or issues for variance of loss estimates within this methodology? Perhaps more limited room for disagreement than for the CDO model approach, but even this isn't clear-cut. For example, timing of estimation is a big factor. For example, some of the [Tabex] indices fell around 30% from mid-October to mid-November.

Secondly, there is no real market for any of the pretty esoteric insured obligations that we're talking about here. So what is the appropriate basis risk between an observable market price, e.g., a [Tabex] index, and the insured obligation? And are there any intervening factors which could mean that this basis risk may change?

So in summary, while via the apparent transparency of the mark-to-market approach one might not expect a wide variance of opinion, reality is perhaps somewhat different. Some variance is definitely feasible, both through time and at the same time.

Let's turn to a third, again, somewhat stylized approach to estimating losses and constituent impairment. This is the cumulative loss approach. This approach is a much more fundamental cash flow-based approach. As this -- (technical difficulty)

Please stand by. The conference will re-begin momentarily.

I'll just -- obviously there was some interruption on the line there -- I'll just wind back just for a second. So we were discussing the cumulative loss approach and trying to answer the question -- what are the possible issues and reasons for variance of loss estimates within this methodology?

As I said, there are two main possible areas. One to do with information analytic requirements and another in respect to assumptions. As regards information, clearly one needs a great deal of detailed knowledge of precise [cusics] and in a CDO constituents, and the ability to handle all this data, thousands of [cusics]. Secondly, one might have different views on some of the microlevel assumptions; for example, pre-payment speeds, loss curves and severities, et cetera.

In summary, and aside from the information on data handling points, there are again several reasons that differences and assumptions and therefore variations in potential loss estimates both through time and at the same time.

Again, in a somewhat stylized way, I'd now like to turn to the final approach, which in the event is the one that is being used in estimating the likely losses and impairment announced. I'm going to call this a structural or collateral survival approach. And this incorporates rating information along with highly specific transaction structure-based opinions. The approach consists of an inner CDO by inner CDO analysis, assessing each inner CDO's potential contribution to the interest and ultimate principal of the relevant CDO-squared transaction. The approach is essentially a marriage of ratings and legal structure, focusing on the way in which they interact and ultimately affects the insured obligation.

I'll carry on. I'm getting some interruption on the line, I'm afraid.

The assessment comprises a review of underlying RMBS vintage and ratings and the calculation of pro forma overcollateralization tests, using ratings to haircut the RMBS as collateral. The resultant pro forma can be compared against the attachment point of the relevant inner CDO and the view taken of the ultimate survivability of the relevant inner CDO from the perspective of the outer and short CDO. Additionally, and crucially, it's necessary to evaluate the legal documentation of the different inner CDOs in order to assess certain features which will affect the certainty or otherwise of cash flow to the insured CDO. Amongst the important distinguishing features of the individual inner CDOs are whether they incorporate payment incline provisions and similarly, variations in the event of default and liquidation provisions. Finally, the extent to which rating agency haircut are included in these covenant tests is also very important.

So what are the possible issues and reasons for variance of loss estimates within this methodology? I'd say that the variance is definitely possible, although outcomes are somewhat bounded and are transparent. The most likely source of variance may be views on the incidence of future collateral rating changes. Note here that it is somewhat irrelevant as to whether these collateral ratings prove to be accurate. The approach focuses upon the notion that the insured transactions can be directly impacted by rating agency views of the collateral, per se. So again, the effective agency views upon the collateral can be dominant and more or less immediate in respect of its affect, irrespective of the ultimate accuracy of those collateral views.

Having talked about the ways in which the CDO-squared loss estimates may be computed, I'd like to make a few comments about their respective results. Leaving aside the market value approach, our analysis produces the result that it is the latter structure approach which produces the highest estimate of loss under our own assumptions. The approach also provides the most transparent and credible framework, given the combination of the current environment and our understanding of the transactions themselves. As stated previously, it is this methodology which forms the basis for the impairment noted.

To illustrate this further, let's briefly discuss some comparative results and point out what we see as the main flaws in some of the discarded methodologies -- the CDO model approach.

Aside from the possible tardiness or inadequacy of ratings as indicators of the probability of default -- no criticism is intended here -- the model approach has the deficiency of not being able to capture the legal structural mechanics of the transaction as discussed earlier. As stated, the reason is that at a certain point the dominant driver becomes the affect of the degraded ratings in combination with the legal structure as against the model implied increase in default probability driven by collateral downgrade itself.

Essentially, collateral ratings may give off falsely optimistic signals given the legal structure. The models seize and assigns cash flow to assets that are structurally blocked. Fundamentally, past a certain point of rating degradation, structure likely triumphs over collateral default probabilities, as implied by ratings.

What about the cumulative loss approach? It's really the same story as before. Here, structure triumphs over cash flow. Potential value in the underlying RMBS, which [cusic] level drill-down analysis may assert, does exist given the vintage distributions, et cetera, simply doesn't get to be realized by the insured CDO because of the impact of the intervening ratings and structural features. Again, cash flows are blocked.

So to summarize this discussion -- and this will hopefully be clear from the above -- what has changed and therefore led to the deterioration in loss estimates that we have announced? Essentially two things in combination. Firstly, an exceedingly rapid and substantial set of rating agency downgrades starting towards the middle of October and continuing thereafter.

Secondly, resulting from the above, an evolution in our analytic focus from model or drill down that analysis to an examination which is concluded that at a certain switch point, legal and structural mechanics will likely triumph over model expectations and the fundamental MBS cash flow analysis.

Lastly, on the CDO-squared transactions, a couple of brief comments on the timing of potential claims as regards the CDO-squared deals.

In two of the three transactions, Ambac is not likely to experience material claims over the next year or so, as these transactions are very unlikely to force principal claims for some time. The third transaction, which differs in structure, does permit the possibility of earlier principal payments on a pay as you go basis once the subordination has been eroded. However, our estimate in respect to this third transaction is that no interest or principal claims are likely over the next year or so and possibly up to 2010.

Having spent some time on Ambac's CDO-squared transactions, I'll close with a few comments on the MBS book.

Over the quarter, we saw some continued deterioration, particularly as others have noted, in select HELOC and closed-in second transactions. These product types comprised a vast bulk -- over 90%, in fact -- of the reserving activity discussed. The key question is as to when loss rates will peak or burn out and to what extent the present slowdown in voluntary pre-payment rates is a permanent feature of the MBS landscape? Clearly the combination of high default rates and low pre-payments tends to be an adverse one, although one might expect some help in the near future from increased excess spread driven from lower liability costs given recent announcements.

Taking the MBS book as a whole, it appears to be withstanding the current environment relatively well, although there doesn't seem to be a significant letup in this very adverse environment.

Finally, in a sector and vintage where stress is particularly evident, I'll note that Ambac has a large exposure to three 2007 bank HELOC transactions comprising around $3.7 billion in total or about 30% of the overall HELOC portfolio. These transactions are currently performing according to our original expectations and no claims are presently foreseen on them.

With that, I'll hand back to Sean.

Thank you, David. Now we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Steve Stelmach, FBR Capital Markets.

I just want to circle back real quickly on your strategic alternatives. You mentioned a number of parties. I just want to know what those alternatives are at this point? You've taken a equity raise off the table. Presumably that also takes an acquisition off the table, given the valuation of the stock price. Could you just give us an idea of what those alternatives are? And then in terms of the party that you're dealing with, are any regulators or government entities involved in these discussions at all?

Mike Callen here. One can anticipate this question. And I regret to have to say that the degree of detail I want to go into is constrained -- significantly constrained both because of the parties we may be talking to. But let me -- and I'm not going to take anything off the table here, but I will say that we have been in close communication with regulators. They are very familiar with what we're thinking. And we are also talking to very credible parties; pools of capital and so forth. But to go beyond that at this point would be doing a disservice to everybody. So I'm afraid I have to stop at that point.

Okay. Are regulators helping to drive the process or are they just simply sort of a bystander at this point?

I would call them a process of active oversight. Our main job of the regulators has been to keep them completely informed of the fundamentals of what our ideas are. And I have been very pleased with the amount of support coming from both New York and Wisconsin.

Okay. And then just lastly, you mentioned the collateral posting requirements and that the downgrade by Fitch does not impact those collateral posting requirements. I believe they get triggered at A. Should that eventuality come to pass, what is the dollar amount of collateral that you have to post?

I'll turn to Sean. He's got some numbers.

Sure, Steve. I can address that. Our collateral posting requirements are driven off of Moody's and S&P ratings. So that's why the statement I think was made. And Moody's and S&P add the AA level, so all the way down to AA minus, there's posting requirements on our swaps business -- interest rate swaps business. It's not significant. It's less then $200 million. And then there would be some potential posting requirements on some of the total return swaps that we've entered into. And again, down to the AA minus level that's less than $300 million.

There's little impact on the investment agreement portfolio for contracts that we currently have to post under some of our contracts even at the AAA level. So all the way down to the AA minus level, there are the little additional posting, that number is approximately $100 million.

Then, across the board for interest rate swaps and total return swaps, the numbers do grow as thresholds decline under our agreements with our counterparties. Again, though, that business, the collateral requirements, all the way down to the investment grade levels, are not significant. They go up a couple hundred million a piece.

What does become more significant below the AA minus level is the posting requirements, starting at the A plus level for our investment agreement business. And that would require us to post high quality collateral back to those counterparties under those agreements. And they could go anywhere up from currently, which is what we're posting now is about $2.1 billion at the AAA level up to $5 billion and then up to $7 billion. So, effectively, what we would need to do is obtain the appropriate collateral to post under those contracts if that event were to occur.

Okay. And do you feel as if you can accomplish that? That seems pretty steep, the $5 billion to $7 billion number.

Well, one, we don't anticipate being downgraded below the A minus level. The capital adequacy tests, even under a Fitch methodology at the AA flat level would leave us with a capital adequacy based on the model runs that they indicated. [We saw] our estimate of the model runs where they indicated we had a collateral shortfall of about $1 billion. And at the AA level, we had a capital surplus of about $2 billion. So at AA levels, our capital adequacy is quite sound and we would obviously need to work through that and need to plan if that were to occur.

Gary Ransom, Fox-Pitt, Kelton.

I wondered if you could talk a little bit more about the flow of business, particularly as all this news came through in December. It does seem like issuance from municipalities was lower. But can you talk at all about how this flowed into -- perhaps into January? And if you are able, what the Fitch downgrade might -- or how that might affect the flow of business going forward? And maybe you can just talk about inquiries or something like that, that might be a proxy for activity.

Sure. I can talk to that. It's Sean. We did see a decline. As I mentioned in my remarks, we saw declining activity after the rating agencies had what I'll call tiered the financial guarantors. So we did see declining activity in December. We did obviously close some transactions and had a fairly robust quarter. But we did see it decline in the month of December. That has further declined in January. And it's too soon to tell how the Fitch downgrade will impact, but my expectation would be that we would see further declines into the month of January and February as some of the uncertainty becomes more clear as to our plans and our strategies.

Just a follow-up on the municipal side, you made the comment that there was some benefit in the credit portfolio that offset some of the RMBS reserving. Was there any particular area there? And I guess I'm also asking about the Hurricane Katrina reserves, whether they were -- whatever was left there might have been released.

Yes, but very little on the Katrina; about $1.5 million from Katrina items, largely due to principal declines of some of the exposures there. We did have one lease transaction that we did pay a modest claim during the quarter of less than $1 million. And that, with the closure of that particular policy, we did reverse some reserves for that. But all in, the amounts are less than $10 million.

Ken Zuckerberg, Fontana.

Two for Michael and two for Sean.

Sean, on a housekeeping note, could you remind us what if any Holding Company debt is maturing during 2008?

And then secondly, if you were able to comment on what you're seeing in commercial mortgage-backed securities trends, that'd be great. And then I'll ask Michael afterwards.

Well, the 2008 question for principal matureds is easy; we don't have any. We do have a piece of that maturing in 2011. And that's about $143 million. Most of our debt is longer-term debt, including some debt that comes due in 2103.

Okay, so the nearest trigger date is 2011, $140 million, which is far away and not that much?

That's correct.

And commercial, the CMBS book, any trends that you can update us on just in terms of underlying delinquency or -- you know?

On the commercial CMBS, you said?

Correct.

Yes. We have little exposure to CMBS, so that is not an exposure that we have in our portfolio.

Right. Thanks for clarifying. Michael, two questions, and I appreciate what you can and can't say. First, can you help us better understand the somewhat swift departure of Bob Genader? And that seemingly has caused a bit of a communication breakdown with the agencies.

And then I guess related to that, in the event that your strategy going forward is an AA strategy, can you help us understand how we should think about business mix and areas where you want to put the capital to work?

Sure. First, a lot of people have asked about Bob. So, let me gave you an intermediate long answer on that. When the stock price started to decline in the middle of last year, the Board obviously became concerned. At a certain stage we hired our own financial advisor, Credit Suisse, and our own legal counsel, which in today's world is an appropriate and prudent step. And they were reporting directly to the Board and the Board got somewhat more into the hair of the management. And you're going to have some strains, but Bob and his team handled that very well, but let's not assume that there was no conflict or tension; there was some.

Bob, at the same time, of course, was going around to see all our investors, working his heart and soul out, to convince them of what we're telling you now. We've been saying and will continue to say, this is a great franchise, et cetera. A week ago Saturday when we were looking at the plans, the immediate plans, the Board decided that for a variety of reasons we can go into if you wish, we thought the equity and equity-linked issue was the best way to go. Rating agencies had something to do with that condition of the market as we were deliberating had something to do with it. And Bob felt he had to dissent on that position very strongly in favor of a capital note issue at that point. And felt so strongly and I think was committed to our existing investors to a point that he just felt he had to step down.

There was no push from this Board. He was a treasured asset of this Company. I have, as recently as yesterday, consulted him and almost on a daily basis to tap into the depth of his knowledge. He just felt that he was compromised in terms of what he had represented to his investors relative to where the Board came out at that particular time. It's regrettable, but I'll finish this by saying there is absolutely nothing that Bob knew about that would have forced him to go out -- to leave the place.

Now, on strategy. Our decision in this place is that this is an AAA strategy that we are going to pursue. There are some events over which we don't have control in the next -- in the very near-term. We have had to phase the Fitch -- I should add when I go back for one moment here -- we had the deadline that Fitch had laid out, saying you need $1 billion by February 1. We were working towards that deadline. That was the pressure point; when the markets went the way they did, we set aside that deadline, decided that we couldn't be beholden to it to the extent of doing what an equity issue would have done.

So it was all in that context. Now that -- we've informed Fitch that we would meet the deadline and they did what they did, but the plans that we are putting in place now are plans that have AA into our future. And my lawyers have got poison darts aimed at me as I speak, so I have to be very reticent in saying anything more. But we are going to keep all of you as informed as we possibly can as we proceed here with deliberate speed. Ken, I'm sorry, that's about all I can say.

Michael, the comments are very helpful and thanks for taking the extra time with them.

Tamara Kravec, Banc of America.

Just a little bit more elaboration on the rating agencies, with Moody's and S&P in particular and how those conversations are going. And whether they seem to have any such time restrictions as Fitch. How much pressure are you feeling and how much flexibility do you have in dealing with them now that they have placed you on review for a possible downgrade?

It's Sean. I think we have had a good dialogue along the way with the rating agencies. Obviously, we want to get to them as quickly as possible and sit down with our plans and we'll be doing that. I'm hopeful they'll be receptive to some of our ideas and we can work with them and work through our ideas to have what would be, I think, a successful conclusion for a lot of our stakeholders. So, we're going to work through that very diligently, very actively, and very quickly. And I think they will have a vested interest to do the same. And any time that we've had a request or they've had a request, we've both been very quick to act to them. So I would expect that to continue.

(inaudible) and on behalf of everyone, uncharacteristically, somebody who actually listens to what I said, wrote me a quick note and said that I'd used the term our future is AA. What I meant to say to clarify is our future is AAA. And that's for everyone's benefit.

By the way, our rating agencies on your point, in our conversations with them, I don't want to leave any impression other than they've been completely constructive, and the communications back and forth have been useful I think on both sides but are continuing. And we bring them completely up-to-date on what we're thinking so that there won't be any gaps here.

Is there any chance that Moody's is going to release the actual amount of the shortfall? They haven't given any numbers. And according to S&P you don't really have much of a shortfall at all. So I guess I'm thinking that most of you -- and you can correct me if I'm wrong -- but most of your strategic alternatives are still really seemingly addressing Fitch. And I would be curious in your thoughts as to how important is that rating really to your overall AAA strategy?

Yes, just a couple points of clarification. Moody's, in their release, mentioned that the stress out in the market as an uncertainty point. But they were very clear to mention that the recent events just reduced the AAA capital cushion, so it did not eliminate it; reduced the capital cushion. So we still maintain AAA metrics at this point in time, at least to the best of our knowledge under the Moody's models.

Now S&P recently came out with a report where they had upped the first lien subprime percentages. And that created an approximate $400 million shortfall under their model, what we'll be discussing with them capital modeling and obviously our plans. Fitch has not changed any of the numbers, to the best of my knowledge, and that remains at that $1 billion number.

Geoff Dunn, KBW.

Sean, I wanted to tap your previous accounting experience. The question for Holding Company liquidity is obviously circulating around whether or not the deal I would step in and prevent the normal extractions that you would be due under statutory law.

In your experience, is there any kind of precedent for the DOI stepping in, blocking a dividend that does not need approval? Is there any risk that you can see on that front?

Even better than my past experience, we have had discussions directly with the Wisconsin regulator, which would be the regulator that is pertinent to your question and the matters included in your question. So we have had direct discussions with them and our solvency -- we meet all solvency standards with robustness.

We have a statutory -- even after taking some of the impairment losses through our statutory returns, we still have an over $3 billion statutory surplus. That happens to be delimiting when you go to the dividend calculations, 10% of the surplus is delimiting factor. So we have over $300 million of dividend capacity there.

Not only do we have $3 billion of statutory surplus, but under the accounting rules for Wisconsin and other states under statutory accounting rules, we also have about a $3.1 billion reserve set up against our portfolio. So they call it the contingency reserve. So that effectively reduces the surplus that is available for dividends. So just to be clear on that, if there wasn't a contingency reserve -- and we report this on the last page of our supplement -- but it's -- that number would be well in excess of $6 billion.

So from a solvency perspective, when regulators look at those types of numbers and even after the dramatic year that we've had this year with a large impairment charge running through our statutory numbers, we are still relatively on a flat basis from a net income on statutory. So from a solvency perspective and our discussions with them, we feel confident about the dividend abilities out of the insurance company.

Okay. So you currently have roughly $50 million out there. And it looks like you have a very high probability of getting $300 million more?

Well, we currently have -- the way the dividend rules work is you can increase your dividend levels by 14.9%. So just under 15% off of the quarter a year ago without prior consent and then there is certain consent requirements. And then there is what is called an extraordinary dividend, which would obviously require a discussion with Wisconsin.

But just on the dividend levels, if we were to assume that we would bring them up by 14.9%, that would be over $200 million of dividends for 2008, which would be far in excess of the $90 million of interest on our debt and approximately $30 million of shareholder dividends.

Okay and last question. In terms of the investment agreement business -- or the swap business, but more in the investment agreement -- if you're ever in a position to post collateral, what entity would need to post that collateral? Would it be the Holding Company or would it be in the investment agreement business or some other support?

It would be the investment agreement business. And then if there were to be any shortfall, obviously then that would fall on the insurance company. But the investment agreement business, and we provide the asset breakdown and quality breakdown in our supplement pages. But there is a significant asset portfolio there and that would be used or either swapped or liquidated to a certain extent to provide the ability to post that collateral.

Okay. So, but importantly, no recourse or direct bearing on the Holding Company?

No.

Darin Arita, Deutsche Bank.

Can you talk about how you're planning to balance you trying to grow here, although it could be difficult, but trying to grow versus allowing this business to amortize and freeing up capital?

The word that has been banished from our halls here is the word runoff. Nobody here has given that serious consideration.

First of all, there are many, many uncertainties in that type of scenario and any kind of an analysis is somewhat static; because if you really get into that kind of a thing, then you have implications from the raters and from the regulators that we are not even seriously looking at. There is just too many very viable alternatives in front of us. So we have, in the name of good governance, I guess, somewhere we have done -- well, if we were to runoff, where would it all end up?

But it is not anything in my head. I don't think anybody at this table is very much aware with it. It's just not an option we are looking at because nobody here believes -- with all of the numbers that we have been talking about this morning and the level of solvency that we have and the attitude of the regulators, and if you put all that together, why would someone think about amortization?

The one number I think I can give you that you're probably aware of is that just coming to work in the morning, we generate internal capital of something in the neighborhood of $1 billion in the absence of writing new business. So there is a significant ability to generate capital internally but as a going concern, that's kind of a notional number. It's not something we really use for operating assumptions going forward.

And just turning to the CDOs, Dave, that you provided a very detailed explanation here on the changes. Is it fair to assume that your approach has changed here for the mezzanines, that this approach has also been applied to the high grade CDOs?

No, it isn't. The high grade CDOs are different in that clearly in those deals, with the exception of the CDO buckets in the collateral pools, we don't have the kind of structural impediments that I talked about. So, no, the analysis that I talked through is really pertinent to the CDO-squared deals and not, in the vast majority, the high grade deals.

And can you just talk about what has been different from your assumptions on the high grade CDOs, say, three months ago versus today if the ratings have changed quite meaningfully?

Yes, I'll be happy to do that. As you say, if you get back to what the CDO models are about, the first input is ratings. What we have done, and I think I described this on a prior call, is to effectively haircut ratings where they haven't been moved. So I think in a previous incarnation, if the ratings haven't been cut, we downgraded the ratings by four notches or six notches for BBB.

We have progressively ramped up the downgrading where cuts have not been made. In particular, we have focused on the mezzanine buckets because clearly that's where, as we've discussed at length, there is a fair amount of stress. So what we did was to model out a few deals which didn't have mezzanine deals in them and look at the rating degradation of mezzanine classes of those deals.

And if you do that on realistic assumptions, i.e., stress assumptions of correlation of severity and so forth, you can come up with some pretty good proxies of what the appropriate downgrade might be in the absence of a rating agency move at the moment. So for example, our basic metric is that if you have an A rated piece of mezzanine collateral in the CDO bucket that hasn't yet been re-rated, we would incorporate that into the analysis at a C, [CAA2] type level. So we've really substantially upped the projected downgrades, if you will, within the analysis.

We have also spent a fair amount of time on the correlation and severity numbers. You may recall that in underwriting I think we used a correlation of -- I think it was [30%]. We've upped that significantly. And we have chosen to take quite a lot of care into how we differentiate between deals. So what we've actually done is to go into all the high grade deals, split out the vintage distribution of those deals, and use the vintage distribution as a guide to the extent to which we should up the correlation assumptions and also increase the severity assumptions.

So for example, where we believe we've got a highly correlated pool, i.e., that the vintage dispersion is second half '05 and onwards predominately, we have certainly doubled, sometimes more, the type of correlation numbers that we've input; and equally, we've haircut the severity numbers.

So what we've tried to do in summary is to look at what is happening in the market, be thoughtful, especially about the mezzanine buckets, and distinguish between transactions in respect of certain key assumptions using vintage distribution as a key moniker in taking those decisions.

Heather Hunt, Citigroup.

I know that you are not counting on capital being organically freed up as a source of capital to get you back to AAA, but could you just walk us through the amount of capital that you can generate organically? And that hopefully will supplement what you can raise in some kind of a transaction.

Heather, you're using the words -- Mike Callen here, and how are you? -- you're using the word organically to mean internally, I think, right?

Yes, that's correct. So through the maturity of bonds that you back through investment income, through operating income.

Be happy to do that.

Yes. Generally, Heather, we estimate -- and again, it's dependent upon how transactions would amortize the level of refundings and other things -- but generally we believe that capital generation over a year's time considering that and no further downgrades or upgrades in the portfolio, effectively about $1 billion per annum.

Is that from runoff alone and not including investment income? Or does that also include investment income?

That would include investment income because the dynamics -- I can bore you with some details -- but the dynamics are such that if you just looked at the runoff of the portfolio and how that would affect modeled loss, it's coincidental, but those numbers, at least on some analysis that we've done internally, we think that those numbers happen to be about the same, about $1 billion.

What happens is since our claims paying resources includes our statutory capital, and includes our unearned premium reserve and a present value of installment number, our premium earnings are effectively built into our claims paying resources already. So as we earn income there, that doesn't add to claims paying resources; actually it detracts from a tax perspective. And that's where the investment income overtakes that and does provide some organic levels outside of the amortization of the portfolio from a loss modeling perspective.

In your conversations with the rating agencies, does the anticipation of this freeing up of capital over time provide some sort of cushion or help in their expectation of capital and back meeting your capital requirements?

I think it does help, clearly. I think the discussions with the rating agencies have been also discussions relating to franchise, franchise value, generation of business and other qualitative matters that we have talked as well. But there is no question that as portfolio runoffs and the capital metrics improve, I would think that would be helpful.

I mean particularly in classes where the consumer asset classes where the portfolios were to decline, obviously that is a good thing. I think we saw -- and folks can look on our website where we gave all the details of our consumer asset portfolio, including the mortgage portfolio -- you saw some pretty sizable runoff in that portfolio on the mortgage-backed side, which I think is a little bit over $3 billion. And then the overall portfolio consumer, direct, insurance type policies came down, I think, circa 6 for the quarter.

Now, our CDO portfolio coming mostly from CLOs and international business, but that came down $6 billion as well in the fourth quarter. So those dynamics certainly should help and help bring down some uncertainty and should obviously improve capital levels.

Michael Grasher, Piper Jaffray.

Just wanted to follow up with David, if I could. The large exposure in the HELOC's, I think you mentioned $3.7 billion total. Can you talk about some of the underlying assumptions to that? And then I had a follow-up question.

Sure. What we've done is it's three deals, you'll see them on the website. What we've very recently done -- I think it was last week in anticipation of this call and just as a general good housekeeping in any case -- is to look at the remix of the deal and assess where we think they're going.

And right now -- and anybody with any text machine can take a look also -- we do believe that the transactions project out extremely well. The buckets, the delinquency buckets are -- I'll use the word minimal; losses, accumulated losses are 0 in some cases and the quarter is performing really as we predicted it would. So we are not seeing any stress, either in terms of loss or as a forerunner of loss in delinquencies in those transactions.

I mention them specifically because clearly HELOC's are under some pressure -- '07, '06 HELOC's in particular. But in respect of these deals, these are bank HELOC deals. These aren't iBank shelf deals. They have different types of characteristics in terms of the FICO, quite plainly they're sort of, you know, 730, 740, 750 type FICO deals.

The other feature of the deals is that -- and I think I've talked about this previously -- is that at inception, these deals have negative OC. And the notion here is that the OC bills through excess spread and then you're in a sense fully protected, essentially taking the [back] that there are no early or minuscule early delinquencies and losses, and therefore that the [express] excess spread will build that OC. There is absolutely evidence of that. I've mentioned that nothing is really happening in losses. Nothing is really happening on delinquencies. And so these transactions obviously are building and they're not now in a negative OC position. And I guess we'll be out that target in the next month or so.

So we've taken a real good hard look at them. Clearly that they're big exposures. They're '07 exposures, but they are different in relation to the nature of the collateral. And happily they are performing differently also.

Okay. Thank you for that, that's helpful. And then on the $1.1 billion of credit impairment anticipated, I think you mentioned two of the three CDO-squared's were involved with that. And then there was another transaction of a CDO that also was there. Was that the McKinley transaction that's now BBB?

No, we don't reserve investment-grade transactions. The transactions I was referring to are all the CDO-squared deals. The point I was trying to make is that structurally the two $500 million deals, although thereabouts are different from the larger $1.4 billion deals. So specifically, I think I was talking about them in relation to the timing of potential principal claims. And the rule essentially is on the two $500 million deals is that principal payments can't be accelerated and are only payable on the earlier of legal final, which is way out into the wild blue yonder, or liquidation, essentially meaning there is no collateral left. The latter is a very, very, very remote possibility over the near or medium-term, and therefore we can feel pretty certain that there won't be principal payments due on those two transactions because of the structure.

The third deal, the $1.4 billion deal, is different. And the rules here are as follows -- that we have a level of subordination; I think it's 30% per our website. And effectively what happens is that as the inner CDO's are delivered to the outer CDOs -- in effect, the inners have bought protection from the outer CDOs -- that erodes the subordination. I think it's 15 deals can be delivered. And on the 16th deal, that for the first time would tip over the subordination that's in the deal. And if you get those 15 deals, then the one additional deal will generate a principal payment at that time, and then each successive delivery past that 16th deal would also generate a principal payment at that time.

What we've done, therefore, is take a look -- obviously, I've talked about this at some length -- at the inner CDO's, and figured out to the best of our knowledge and judgment as to when these deliveries to the outer CDO will be made. And consequently, how -- when we can see principal payments.

As regards interest payments, it's somewhat complicated, but essentially what we believe is that we won't faced interest payments until around the same sort of time as we anticipate the first principal payment. And that's 2009, maybe even 2010. So, really, no, it's all -- and my discussion was in relation to the CDO-squared transactions and I was really distinguishing the two types of deal that we have in that portfolio.

Okay. That's helpful and thank you for clarifying that. And I wanted to go back to the McKinley transaction. Can you talk to us about the legal structure there, protections that are in place on that transaction?

Sure. The McKinley deal, which I think on our website we rate it BBB minus; I mean that's obviously had a fair amount of attention. There is, as is widely known, an [effective] default in that deal. What that means is that certain waterfall actions take place. We are obviously the controlling party in that transaction. As deals degrade, the terms of the deals progressively change. And so effectively what you've got is that this transaction is now sequential. Clearly it will be static. There won't be any trading allowed in the transaction. And effectively it's in kind of a runoff mode from this point going forward.

Perfect. Thank you very much.

Andrew Wessel, JPMorgan Chase.

I guess my questions circle around more the potential losses and losses going forward and then kind of tying that into customer response and customer demand for your product. But to start with, I guess looking back to September 30, you had about $18 billion of closed-in second and HELOC wrapped. What does that balance at the end of today, because I know seasoning has been pretty rabid.

The HELOC balance today, as of -- per the website, is around -- just under $12 billion, around $11.9 billion [that] closed. And the second portfolio today per the website is about $5.3 billion.

Okay. So a good amount of seasoning there. So looking at loss reserves, that's going to be primarily on HELOC, is that -- what's the average -- I mean, what percentage of that total close-down in the HELOC portfolio together is '06, '07 vintage?

Again, it is all laid out on the website but I will give the numbers. In respect of HELOC's, the '06 net par number is 2.9. The '07 is 4.2. Obviously within that 4.2 are two very large deals which we've just spent a bit of time talking about.

Yes, of course. Okay. So looking at that going forward, through this whole process there's been statements made that there is mark-to-market losses on CDOs, we feel confident about the performance of our second liens and HELOC's and now we have this quarter, obviously, a huge mark-to-market and with the CDOs particularly, the large impairment due to a change in which methodology you choose to believe in more at this point. With that level of whipsaw between we would expect to reverse that entire mark-to-market loss out over the term of the agreements versus now actually recognizing $1.1 billion impairment this quarter, how have your customers responded to this? Investors, it's obvious, but your customers coming to you looking at your product as being either AAA or AA or whatever it is going to be in the short term. Longer-term, what's been their response to you and based on what you've said in the past and what's happening today?

Yes, I think the mark to -- certainly on the impairment side, it is certainly a disappointment. There is no question about that. So that has -- we've discussed that with a number of parties, obviously. I think we have to put it a little bit in context with the environment that we are in is a pretty dramatic one.

We do have these three transactions that are obviously carrying quite a bit of impairment. I think folks have talked to us and obviously we have sat around the table many a times as well, thought about how would we have done things differently looking back in time. I think there's certainly a complexity factor amongst those three transactions that is a difficult one to talk with customers and others about.

So I think that we have obviously analyzed the portfolio very thoroughly and we think certainly the rating agencies have also done that. So we feel like we've done an extremely thorough job with coming up with what we've come up with. So while we do have some impairment and that has been a confidence type issue, we are confident in what we have done.

Maybe I would just add one thing. I think after spending a lot of time quite understandably and reasonably, and we have expressed our disappointment on them, but we are talking about four deals. So I think one of the things that is important to grasp here is that we do not believe that there is any indicator, if you will, of systemic failure. What we've got here is four deals. Clearly, we wish we hadn't done them, but it is four deals and we all know that the environment is phenomenally stressed. So it is not systemic. We believe in our book of business and so on and so forth.

Sure. And then from the fixed income Investor Relations side, has that been a positive response from your customers based on that kind of explanation of the problem? Or has it been -- have you seen a lot of pessimism or fold back from customers looking to [wrap deals now] in the midst of this current market where, like you say, the guarantee is ever more important. Has there been a pullback in their willingness to use you versus a newly capitalized competitor, a competitor that has taken less of a beating in terms of the rating agencies or just in terms of emotion?

[It's] Callen. Let me make a quick comment as a one week veteran in the Chair I'm in. It's interesting that where you sit sort of determines where you stand. The customers have been very understanding. And I have had probably a very large number of discussions in that one including investors. I will say this to you that this is how I would summarize my experience after that time. People come and there is fear because with uncertainty comes fear. And they hear all kinds of things from all sorts of sources.

And so -- and into that environment we step. And that's why I wanted David here today, to explain something that isn't the easiest thing I've ever explained. That is, we have been telling you one thing now, we put up a reserve of [$1.1 billion]. That is where we're working at. Because into the environment where people are coming to me and saying, thanks for the call, Callen, is it true you abused children and beat your wife and Ambac is about to go off a cliff? We heard from this source, that source and another source.

So in this environment there are stories about that are bizarre in many respects. And responding to them is necessary. I have no idea where they come from. But I haven't found one yet that has any validity. It is an emotional issue. Our customers have been very supportive. But if I told you that our product is unblemished at this stage, it just wouldn't be correct. It has been blemished, of course. And that's what we're really addressing here -- or addressing in the next couple of weeks, I'd say.

Arun Kumar, JPMorgan.

Most of my questions have been answered. I just wanted clarity on two of them. One is in response to your question about the Holding Company dividend, you mentioned that you expect to take about $200 million from the Wisconsin operation to the Holding Company. Could you elaborate on the timing of that? When you actually expect to be allowed to take those proceeds out?

And the second question is in relation to the asset management unit and the collateral placement. You mentioned that the Holding Company has no -- there's no recourse to the Holding Company for the placement of collateral. Could you comment if the operating company is in any way potentially for the collateral posting or is all the collateral posting going to be done out of the asset management company itself? Thank you.

Sure. [I answered] a dividend question quickly, we anticipate dividends in January, May, July, and October relating to cash flow from the operating Company Ambac Assurance Corporation and Wisconsin Company up to parent Company. And in equal increments on a quarterly basis.

Regarding the collateral posting, Ambac Assurance has a guarantee to -- guaranteed investment contracts of that business. That business, those contracts are backed by assets. And you can see the breakout in quality of the assets disclosed in our operating supplement. That company would be required to post collateral under any of the guaranteed investment contracts that would be triggered or currently have collateral push requirements or would be triggered based upon some type of downgrade trigger.

Just a quick question -- the $200 million will be prorated over the course of the year, is that correct? Am I reading you rightly there?

Yes, by the months that I described.

Okay. And regarding the collateral, could in any way you just transfer those assets that require collateral posting back to the institution that gave you the money to manage the GIC? Do you have to post collateral? Or could you just say I've been downgraded, these are the assets that support the GIC and they'll give their assets to you?

This is David Trick. There are several answers to that question. One is, certainly we can post collateral. There's certainly eligible collateral in the portfolio as it stands today. But there are other cure methods. One of those other cure methods would be to get, if we were downgraded, a wrap, if you will, from another counterparty. Or just simply giving back the cash to the investors. So there's different ratings levels. And depending on the contract they are different cures.

So today, as Sean had mentioned, we posted about $2 billion of collateral. The incremental collateral that would be needed for those contracts through a AA minus ratings level is relatively minor, as Sean had indicated. And post sub-AA minus, we get to a category certainly where we have to post a lot of collateral. But they are within the investment [creating] business existing portfolios and assets that are eligible for posting under those contracts.

So while certainly there is incremental collateral we'd have to acquire, either through swaps or through a sale of assets or perhaps sales of assets between the insurance company and the GIC business and even inter-company loans, there are different pockets of collateral within the Company. So we'll do our best to minimize the amount of collateral we have to get from outside the Company.

Jonathan Adams, Oppenheimer Capital.

I had two questions. The first is for Mike Callen and has to do with shareholder dilution. I wonder if you could address that topic in the context of various strategies the Company is going to pursue to maintain its AAA claims paying rating. Perhaps as you address the question, could you be mindful of some points that were brought up in a recent shareholder letter from [EviCorp] that was publicized recently? Then I had a follow-up for David Wallis.

As I thought the [EviCorp] letter was a very thoughtful one and was read carefully around here. It wasn't treated as just another letter. In fact, I was thinking of inviting the gentlemen to the class I teach down at the Georgetown Foreign Service School to maybe fill in on a lecture.

On the subject of dilution, I can only tell you what is uppermost in our minds, as I said earlier today; it was uppermost in Bob Genader's mind. The investors who have stayed with us through this difficult period deserve to be treated very well. The situation we faced as of February 1, considering the interface we had with the rating agencies, consider the flexibility we needed and so forth, we looked very carefully at a rights issue, particularly for the dilution issue.

And once again I'm in a position of saying, gee, I wish I could say more. I just want to assure you that we are very, very mindful, as is our financial advisors, of the dilution issue. And statements of guarantee here would be out of order. But just trust me; we know exactly what the sensitivities are and what our royalties have to be.

Okay. And the follow-up question was for David Wallis. I wonder if you could address the speed of the internal rating erosion? And what's troubling is that several months ago it appeared a pretty thorough analysis had been done, not just to the CDO-squared's, but the high grade CDOs. And it now appears that certain structures -- or structural considerations are driving a wave of downgrades. It's not clear to me why those kinds of considerations wouldn't have been understood and reflected in your internal rating in the past.

I guess the fear is that despite your assurances today, three months from now you'll discover CDO rating methodology number five that warrants the high grade CDOs suddenly going to low investment grade.

I certainly hope not, but I in a sense take your point and let me respond to it. I guess, as somebody once said, if the facts change, I reserve the right to change my opinion. I think in this case what I tried to articulate was really an evolution of our approach based on the frankly unprecedented kind of environment that we've got. We take a lot of time to look at the portfolio in lots of different ways. And at different times, different methodologies will give you better or worse results. I think it's still fair to say that on some approaches and one that we absolutely believed in, the drill down type approach, I don't think you'd really generate any losses today.

However, the facts change. I think it will be stupid to sit here and ignore the fact that the facts have changed and not to evolve in the way in which we're looking at this. I think we did not anticipate -- and probably we're not alone in that -- the kind of markets that we've got and the kind of rating degradations we've had. These things are unusual and very sharp in terms of their timing. And as such, yes, you look at things in a different light when the environment changes and the impacts on your deal change.

20/20 hindsight is obviously useful. I can assure you that we're being very thoughtful. We're trying to look at all our deals all sorts of ways all the time. And in the case we obviously have changed the way in which we look at it, we're going to the worst kind of outcome. But I think in a sense, the most transparent and credible outcome. There's no point in saying that drill down produces a 0 result; the CDO model produces a loss of you know, $600 million, $700 million, $800 million or whatever it is. And saying, well, let's go with that one if you don't believe it. So we're trying to be flexible. That's not a word perhaps you want to hear, but we're trying to be transparent and honest with our assessment of the credits at a point in time.

Maybe I can be more precise with the question. I'm not clear on what facts have changed, because the structures are the same. And if you stress the collateral, presumably that would lead to assume ratings downgrades which lead to assumed cash flow consequences. So I'm not really sure what facts have changed.

Well, I think the facts that have changed, I mean, it's really how the market has changed. I think I mentioned that just using a market proxy to have [expelled] 30% in a month from around mid-October. So in fact, it was incredibly obvious that the market was deteriorating to that degree, presumably that index would have moved earlier.

So I think -- am I surprised by the extent of degradation? Absolutely I am. And obviously by definition, absolutely is everybody that has downgraded any of these transactions. They wouldn't have been rated as they were if one had anticipated the environment that we're in at that time they were initially rated. So I think that there has been quite an unbelievable -- I mean, the extent of it, if you look at charts of downgrades, it is incredible.

I think the point that you make on cash flows, it's hard -- when you take a particular approach, be it CDO modelings or cumulative loss approach, you tend to think within the confines of that approach. So, for example, in respect of the CDO modeling type approach -- and that was, and maybe to many still is, the way in which to look at these deals -- it's very hard to see the ratings that come out, see the collateral ratings that -- see the performance that comes out, see the performance expectations that are there, be they right or wrong, rate those deals and then in effect perform them mentally to ignore the rating impact from a probability of default viewpoint and instead, kind of morph into a different methodology of looking at these things.

That's what we've done. Obviously, I wish we had done it earlier, but even if we'd thought of it, I don't think we would have seen the massive degradation that we've observed very recently.

Joe Auth, Harvard Management Company.

I had just two quick questions. The first one relates to the disclosure and the -- and I believe the third quarter 10-Q about the $3 billion contingent insurance policy that was being provided on the CDO-squared transaction. Has there been any loss estimate or updates of performance on that transaction?

And then the second question was in relation to several of your high grade deals. If you look at the Ambac attachment points, I think they generally range from -- if we look at the '06 and the '07 deals, generally from mid-teens to upper teens and 25%. And then if we compare that to the amount of CDO collateral and A RMBS collateral, in a lot of those deals, the A RMBS and ABS CDO collateral I think exceeds the Ambac attachment point by multiple times.

And given that the market and the rating agencies are projecting significant losses, if not total losses, on those types of collateral, what do you -- you look at the Ambac ratings on those deals and they're still in the AA and A level. What do you think the likelihood is that in a couple of quarters we're going to be looking at ratings that are CCC or D on those high grade deals?

Let's take your questions in order. I mean, obviously we have looked at the transaction, the specific transaction you refer to. Clearly, it's somewhat distinguished in terms of its vintage dispersion and so on and so forth. And earlier, I made some comments about one of the things that we do in terms of some of the base assumptions when me see that kind of vintage dispersion; i.e., we do not think that this pool of transactions, as it were, is anything like -- is correlated and so on and so forth as some other transactions.

So yes, we are constantly looking at this deal. We've very recently reassessed it but we see no reason to change that assessment that we've disclosed.

Vis-a-vis your comments, which I think are good ones in respect of the high grade deals, and particularly in respect of the mezzanine buckets and comparing that to subordination and thinking of the lower rated RMBS assets, really I can only kind of repeat what we talked about earlier. We believe that we have taken quite a hammer in terms of the collateral ratings to those mezzanine pieces of collateral in the buckets. If it's A, it's CCC; if it's BBB, we assume it's defaulted and so on and so forth, in respect of mezzanine deals.

We also have made more harsh, as it were, assumptions vis-a-vis RMBS collateral generally. So if it's BBB, we've taken it down six notches. If it's AAA, AA, A, we've taken it down four, and we've stressed correlations and severities as I described, and using vintage distributions as a proxy for that.

So I think we're banging this stuff up pretty severely. Clearly, the markets are highly stressed. But I think -- I'd like to believe and I do believe that when you take something that is an investment grade and you assume it's automatically defaulting, that's pretty harsh.

Clearly, in respect of some of these deals, they'll have -- this is, I'm referring to the underlying collateral -- they'll have some value as an IO. I mean, you can get all sorts of CDOs, which even at a mezzanine level, with no triggers -- and those deals do exist, some cash may be coming from them, even though they (inaudible) and so on and so forth.

So, in summary, I absolutely hear the concern and I'd like to think we're being very transparent and somewhat thoughtful about how we're looking at those issues.

[Andrew Kwan], Primus.

This is Steve Aronowitz from Primus. I just have one question remaining. You had talked about that there's no consideration at the Company now for a runoff scenario. What I was wondering is, is there a trigger for a runoff scenario that might be imposed upon you by the rating agencies? And if that's the case, is your dividend and capability up to the Holding Company automatically cut off? Thank you.

We haven't spoken to the rating agencies about a runoff. And when you start talking about runoff, we really are in uncharted territory. We haven't, as I've indicated earlier, had any discussions internally. The whole focus here is back to AAA with -- and come from a reaffirmation from the other trading agencies plus Fitch. So I don't have a good sound answer to what happens in that scenario and I hope I never do.

But I also think if you went and asked the regulators and others about that kind of an issue, they would be, from what I've seen -- and we're seeing one of the regulators again today; we talk to them almost every day -- I think that they would have to scratch their heads and say, well, we'd have to see what the circumstances are. And there would be a lot of uncertainty expressed on that kind of a subject because it's a very uncertain subject. And I'm really -- I'm sorry that I can't be more specific, but -- do you have anything, Sean?

Just to be clear, the rating agencies couldn't stop dividends out of the insurance company. That is a regulatory Wisconsin domicile issue. So it's not a rating agency issue.

Tom Walsh, Lehman Brothers.

You guys mentioned before the share price of the Company had gone up. And I guess we were looking at this disclosure between 9/30 and 12/31. And it looks like back on 9/30 you were adding in unrealized losses on your credit derivatives and it totaled $796 million. It sounds like you put that in your [D31] surplus but you now show sort of the estimated impairment for losses at 756. And given the size of the mark on the portfolio, I'm wondering why that still doesn't run through statutory surplus?

Sure, I can address that. Ambac's company that writes the credits derivatives is a company called Ambac Credit Products. That company is a wholly owned subsidiary of Ambac Assurance. Ambac owns the common stock of that company. The statutory accounting is such that we need to pick that company up, the operations of ACP, Ambac Credit Products, on a U.S. GAAP basis under the equity method.

The question comes in is -- obviously we've had significant unrealized mark-to-market losses there -- the question comes in is do you let the negative -- do you let the equity of that company run negative? Because they've taken losses under a U.S. GAAP basis.

The way the statutory accounting rules read is you would only do that if you thought that there was effectively an impairment at that company, whereby the equity holder would be contingently liable to provide additional funding or has a guarantee. The insurance company in this case has a guarantee so it meets that criteria. So one would need to estimate what the probable and estimable losses are under the statutory accounting rules.

So, that's what -- at the end of the year, it's reflective of that. I think our operating supplement in the third quarter had an element of the mark-to-market. That has been corrected in the December 31 numbers. So within the December 31 numbers, just to be clear, we're picking up an impairment of actively that what resides in the Ambac Credit Products Company of the $1.1 billion that we've talked a lot about today. Due to some capital and capital generation that will exist in that company, we picked up in Ambac Assurance approximately $800 million of a liability. So a reduction to our statutory surplus in the fourth quarter of 2007.

Okay, so, great. That's helpful. And one more disclosure issue. I'm just trying to understand a little bit better. On your CDO disclosure, you had been disclosing current subordination levels and now it looks like you've gone back to subordination levels at issuance. And I guess I'm just trying to understand why the change.

Sure, I'll address that. We felt that the number post the origin of the deal was potentially misleading. So we thought about this quite deeply. The problem is that you're talking about liability subordination and not assets, and that could be difficult. To the extent that you don't write down the liabilities that the assets have been written down or impaired, then you'd look at that number and I don't think it would be useful to a viewer of those numbers.

So the notion is to give people -- and we very clearly state that this is an original subordination -- to give people a sense of the kind of protection in the deal at origination. And obviously you can then compare that as others have done to different buckets and so on and so forth. But I think it's potentially misleading on a going forward basis as you get movements on the assets side and therefore we decided to remove it.

Okay. And final question. Just on -- you guys talk a lot about the GIC portfolio and you got $6 billion almost of mortgage and asset-backed securities in there. It is there a breakdown anywhere on that roughly $5.9 billion? Or have I just missed that?

I'm just flipping the page. You're looking at the mortgage and asset-backed security number?

Yes, sir.

In the financial services business, the mortgage number in the financial guarantee business is mostly agency securities. We have approximately out of that $6 billion about (technical difficulty) -- it's about $3 billion dollars of mid-prime mortgages all AAA rated mortgages in there. And then there is other asset-backed securities, so credit cards and other asset classes within there.

Okay. And anything with respect to vintage?

I don't have that right in front of me. I think the vintage is going to be large -- it's going to be a mix of vintages. I don't have that in front of me so I don't want to quote it.

Okay, great. Helpful. Thank you.

Scott Frost, HSBC.

I think you went over this a little bit before, but what is -- you said AAA is in your future. That's how you're planning things, but what's sort of plan B? I mean, the agencies have kind of come out in the middle of it. I don't know what the term would be, but Fitch saying that if you weren't able to raise the capital, they'd only take you down one notch, and now you're down two on watch for downgrade. Moody's affirming you December 14 and now you're on watch for downgrade.

I mean, is -- how would the plan work if you were to operate at AA? Is there sort of a contingency plan in case that happens? Or what's kind of the deal there? Like what is [amount if it'd] be up to you?

Pardon me? Oh, yes. Well, at some level of capital, it is up to us, right? And if you're looking at the Muni portfolio, that's clearly an AAA type of portfolio. The question then would be, could you perceive the structured finance side and the international side having a useful franchise at an AA level? And one could make that case for sure. There aren't that many companies that are rated AA and there is some precedent with AA companies having done just fine.

When I say that we don't control the environment, obviously, we do control the structure of our capital. We do know what the rules the rating agencies have laid down and, to repeat again, that we are in constant communication. So our plans are built around the known rules. And we have a fair degree of confidence that within a reasonable amount of time, we can do whatever is necessary to build ourselves a situation that complies with those rules; in fact, exceeds those rules.

And I don't know -- I don't remember if it has been mentioned, but I am sure you are aware of the business conditions we face today are as good as anything I've seen in terms of pricing and so forth in 10 or 15 years. So there is a positive side to all of this. And we are focused on exploiting that.

C. Lund, Morgan Stanley.

[Sy Lund] from Morgan Stanley. Just a quick question in the context of what other banks and brokers have been saying about the financial guarantors. I mean, we've seen several banks even take provisions for some of the AAA financial guarantors. Could you just comment on your discussions with counterparties? And is there any anxiety from counterparties? And is there any anxiety from counterparties, particularly in the context of some of them certainly laying out the exposure and also some companies actually taking provisions for AAA financial guarantors?

Hard to say. We've wondered about that. Clearly we've talked to counterparties. They are a little reluctant -- the accounting rules change when you're talking, say, to a city or a [BMP] and people like that. I don't know quite how they treat all this. To say that they're unconcerned about it just simply is not the case, as you can well imagine. They're as anxious as you are to know what you're going to do about this problem in this environment. We're as constrained at this point today with them as we are with you.

And so one feels this pressure to come up with answers. You may feel even a little inadequate if you say we know about all these pressures. We know what we have to do. But it's not like turning on a light switch. And we're going to keep you as an informed as we can in the process of going down this road.

But yes, the basic answer, we do talk to the counterparties; we have been talking to the counterparties. They are not totally relaxed. But we are trying to communicate confidence that we also have our own plans. And again, to say what I said before and I think it's important -- the one thing you have to be impressed by is the amount of capital and interest in participating in these kinds of solutions that we have been discussing.

Okay. And then one quick follow-up, Michael. In the context of you having been onboard a week, can you just give us some background on your exposure and level of understanding of each of the transactions in the CDO portfolio and also the RMBS portfolio, and the portfolio more broadly as you transition from long-standing Board member to CEO as of a week ago?

Big change. Big transition. I have spent, I can tell you, a fair amount of time and will continue to do so getting down deeply into those transactions. I have had them walk me through the drilldown analysis. I think I understand pretty well the event of default issues that we're facing.

So I have spent a number of hours, but I want to spend more hours because I want my familiarity to be down to a third degree. I would characterize it as we speak to a second degree. But it's not as if I'm Genader, who's had many years, or Phil Lassiter before him. It's a question of a week with a whole lot of demands. But you have just hit on one of my key objectives. I want the details; I want the understanding; I want to be able to pass the toughest exam. But these are complicated transactions.

If you were to ask me, by the way, is there any one-liner you can give us concerning mistakes made, I think it centers on that. I think we've got, however safe one might consider them internally, that we just got too complex.

Eleanor Chan, Aurelius Capital.

It's actually Mark Brodsky at Aurelius. I have a few questions. On the collateral, I think you said earlier in the call that presently you're posting $2.1 billion of collateral. And that under some circumstances, it could grow to either $5 billion or $7 billion, roughly. A few questions about that.

Could you just let us know how much collateral had been posted as of September 30? Could you just clarify again please? It wasn't clear earlier what the triggers are for the increase from [2.1] to 5 to 7. And whether there are any obstacles to posting the collateral, additional collateral, if you were called on to do so. For example, would the regulators take umbrage to that end stand in the way?

My other question relates to the GIC's and other investment contracts. Could you just explain under what circumstances the holders of those instruments could seek their redemption?

Sure. At the AAA level, the collateral posting requirements as of the end of the year are approximately $2.1 billion, as we stated. That comes almost entirely with some smaller amounts from collateral postings on investment agreement contracts themselves. So the contracts were entered into with collateral posting requirements from the beginning. So that's the $2.1 billion.

There's very little posting as it stands right now based upon the mark-to-markets and the threshold levels who are interest rate swaps and our total return swap portfolio. So that $2.1 billion is almost entirely investment agreement contracts.

The triggers for additional collateral posting are based upon ratings of S&P and Moody's and is the lower of the two. So what we had mentioned when the collateral posting through AA minus level goes up to about $2.2 billion, so very little additional collateral postings required at that rating level. And again, this is in the guaranteed investment contract companies. These companies are outside of the insurance company umbrella and they are underneath the parent company. But nonetheless, they get -- you're guaranteed by the insurance company.

At the A plus level, that's where you jump up from the $2.2 billion to the $5 billion-odd number. And then in order to get up to the $7 billion number, you would need to be in the BBB category.

Gary Johnson, Alliance.

Most of my questions have been answered. I did have one about the regulators. And this is, would the Wisconsin Commissioner prevent dividends from being upstream from [Opco] to the Holding Company based on a GAAP negative equity on the consolidated basis?

Our GAAP is not in a negative equity position at the end of the year. Even though we took circa $6.3 billion of mark-to-market, we are not in a negative equity position. Our equity position is approximately $2.3 billion total stockholders equity at December 31, 2007 under U.S. GAAP.

But as a hypothetical at future periods, if that were to turn, theoretical basis, negative, would there be a problem with the regulator permitting dividends upstream?

No, the regulator looks at their solvency requirements. And their solvency requirements are dictated by the regulated entity and the statutory surplus and other dividend tests that they would look towards.

Amanda Lynam, Goldman Sachs.

It's actually Donna Halverstadt from Goldman Sachs. Most of our questions have been touched on, but one thing we wanted to clarify -- you said that you amended your credit facility so that you're no longer -- so that you're not in default of those two financial covenants. But is there any sort of [max] clause that would prevent you from drawing on that line even though you're not in breach of those financial covenants?

First point I'll clarify is we were not in default of those arrangements. We did amend the covenant to exclude the mark-to-market except for the impairment charges. We approximately have -- when you look at the numbers, we also increased the net worth as part of that overall change. So at the numbers as they stand right now, we have about, I would say about $1 billion of where we're above the net worth covenant test.

There's another test which is a debt to cap ratio test. And we're also in compliance with that test as it stands right now.

No, we realize that you're in compliance with those two financial covenants. I was curious if there's any sort of general material adverse change clause that even though you are in compliance with the specific financial covenants, would preclude drawing on that line?

There's only [max] clauses at the closing of the facility. There's no [max] clauses for any draws on the facility.

Corey Gelormini, John Hancock.

Just want to be clear here on the investment management agreements that you talked about. So I think what I heard you said is, there's a subsidiary under the main insurance company that basically writes the agreements. And then the [Opco] sort of guarantees that. I don't know if that's in an insurance contract form?

And I guess in terms of your collateral maintenance, I guess can you give us some sense of what that subsidiary looks like in terms of collateral and agreements? And then after that fact, I'm trying to see what -- legally how a regulator would look at that type of contract versus one of your regular financial guarantor contracts?

Okay. First off, the Company is not a subsidiary underneath the insurance company. It is a sister company. It is a subsidiary of the parent organization. Just to clarify that. You have a good snapshot if you look at our operating supplement on page 17. You see the investments of that particular business that support those guaranteed investment contracts. Those investments you can see are very high grade assets. And we provide detail as to the various buckets of securities.

I think a gentleman asked before about mortgage product. I believe our third quarter 10-Q broke out some of that information as well. So we will obviously be looking to do similar disclosures at the end of the year but I would refer back to that for additional information, if you so desire.

Well, I guess, obviously in terms of the $8 billion of financial service investments, I guess that's everything at the 7.8 fair value, I guess that's all that's in the sister company. Is that correct? And so the collateral is being pledged at the sister company level?

Yes. Yes, that's correct. And then there's the insurance contract that guarantees those obligations of that particular company.

So in terms of the equity at that entity, can you give us how that's capitalized? Maybe -- it's $7.8 billion in fair value assets; I don't know what liabilities are, how many GIC's you [are] basically or whatever the investment agreement's in, how is that entity capitalized? I assumed it's thinly capitalized.

Yes. Approximately it had a little bit less than $100 million of capital at the end of the year. We can check that number, but effectively the investment agreement notionals are approximately the same amounts as the fair value of the assets that are being shown at the end of the year in the supplement.

And that $100 million would be after all the -- and I assume your accounting there is on a mark-to-market basis? Or fair value basis, I guess I should say?

Yes, all these assets are on our balance sheet at fair value through the equity section, so what's called other comprehensive income. (multiple speakers) [They'll be] --

But I guess just looking at that entity on a stand-alone basis, that $100 million would represent a fair value accounting treatment in the assets, our collateral there. So in terms of any shortfalls that would come under the contract, it's only on once you go through that $100 million, so to speak, and that's why my question is are the assets on a fair value basis?

The assets, what you see here, the assets are on a fair value basis. The liability (multiple speakers) --

So when you say $100 million in capital, I want to make sure that that's on an equivalent fair value basis.

I guess I'm not -- I mean, what you're saying is, is the capital inclusive of those adjustments in the fair value?

That's right. I want to make sure it's not like the insurance company would be book value accounting, for example.

Right. It is mark-to-market through equity. I'll have to give you the overall equity of that company. I just don't have it. But that would be reflective if it was a GAAP equity of the company, just like on the insurance company or the holding company when you look at our balance sheet, when you look at the equity section, it does include an element of mark-to-market within that equity balance.

And how much of those assets -- and I guess this is a question for that entity, but also at the insurance company -- how much of your assets at each entity are wrapped by other guys? And can you give us some disclosure of who those other guys are? And maybe they're your own wrap, for example.

Very little of our own wrap. We've disclosed the level of wrapped securities. And it's just not significant in the context of the overall portfolio. Also, I know there's a large asset that's coming due in the next couple of days that will bring those balances down even further.

From the standpoint of other wrapped product, it's mostly in the municipal sector -- in our municipal portfolio. I don't have -- let me see -- I don't have those numbers directly in front of me. Just give me a second.

I'll have to track that down. I can't seem to be finding the report in the stack of stuff I have here. Maybe we can follow-up off-line on that particular comment.

Okay, thank you, everyone. We've gone over our expected two hour time limit. We understand that there may have been a few more callers in the queue with questions. Please call us directly with those questions. Pete and I are available all day today or this week, as well as Mike Callen, to answer your questions.

Thank you again for attending our conference call.

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