Ambac Financial Group Inc (AMBC) 2008 Q1 法說會逐字稿

Greetings and welcome the Ambac Financial Group first-quarter fiscal year 2008 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Sean Leonard, Senior Vice President and Chief Financial Officer for Ambac Financial Group. Thank you. You may begin.

Thank you. Good morning. Welcome everyone to Ambac's first-quarter conference call. I'm Sean Leonard, Chief Financial Officer of Ambac. With me today are Michael Callen, Chairman and CEO; David Wallis, Chief Risk Officer, and Bob Shoback, Head of US Public Finance.

Our earnings press release, quarterly operating supplement and the slide presentation that follows this discussion are available on our website. I recommend that you follow along with the slide presentation as we speak today.

Also note that this call is being broadcast on the Internet.

I would also like to remind you before we get started 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 in cash flows and market outlook. You are cautioned not to place undue reliance on these forward-looking statements which reflect our current analysis of existing trends and information as of the date of this presentation, and there is inherent risk that actual results, performance or achievements could differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. These differences could arise from a number 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 our most recent Form 10-K and subsequently filed 8-Ks.

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 who will comment on the current market environment and Ambac's prospects.

Thanks, Sean, and thank you, ladies and gentlemen, for joining us. The first quarter was, indeed, another tough one for Ambac. Earlier expectations have turned out to be optimistic, and the environment continued to deteriorate.

As you know, we raised $1.5 billion of additional capital under what I would consider to be near impossible conditions and were awarded affirmations of our AAA ratings by Moody's and S&P. We also strengthened our risk management and refocused our business. We cannot dismiss the serious impact market events have had on Ambac during this quarter, but the current environment highlights some key strengths of the business model. In fact, I think the business model is more relevant than it has ever been.

Until now this guarantee model has not been seriously tested. Ambac founded the Financial Guarantee industry over 37 years ago, and since then we have experienced variable claims, and they were easily met from operating earnings. Our considerable claims paying resources were maintained to guard against unexpected losses but were never drawn upon. We are now experiencing an environment that many and consider highly improbable. Given this, it should not be too surprising that Ambac will pay sizable claims and need to draw on those claim paying resources.

Yet I can say that I'm highly confident that we will be a stronger company for having managed through this period.

It is worth noting the key feature of the business, and that is that we only guarantee -- we only guarantee scheduled principal and interest. We're not subject to acceleration or collateral posting on our insured obligations. We have seen financial institutions suffer liquidity problems and teeter on the brink, but liquidity has never been an issue for Ambac. Paid claims to date have been minimal, and our conservatively managed investment portfolio has held up well.

As Sean is going to detail, we also continue to benefit from the considerable embedded earnings in our insurance portfolio, approximately $6 billion, equivalent to what we have earned since Ambac went public in 1991. This embedded value, coupled with our very low expense base and solid investment earnings, are going to carry Ambac through the current turmoil.

Mortgage market has deteriorated significantly. We expect loss rates to eventually plateau and ultimately burn out, but it is impossible to say when that will happen. Our CDO-squareds continue to fall in value, and as expected, some of our high-grade CDOs of ABS are under pressure.

Our real disappointment during the quarter has been in segments of our direct RMBS book, particularly closed-end seconds. On a few deals as David Wallis will discuss a little later, losses could reach as high possibly as 80%. That is truly extraordinary.

In contrast to the closed-end seconds, our direct subprime book is holding up very well. We attribute this performance to our decision to focus on fixed-rate subprime loans in recent years. Again, David will address our entire RMBS book in detail. The US government, of course, has been aggressive in addressing the housing crisis and the credit crunch. But it is difficult at this point to quantify the positive impact their actions may have on our portfolio.

I have two important goals for the near-term. The first is to manage ultimate losses and preserve our AAA ratings. And the second is to protect and grow the franchise. Ambac's AAA ratings remain a cornerstone of our franchise. As is evidenced by our recent capital raised, we remain committed to preserving those ratings.

Now I will turn it over to Sean and David, and they are going to provide additional detail on the quarter and the state of the portfolio. Following their remarks, I will offer a closing observation before opening up to questions. Sean?

Thank you, Mike. First, I would like to start off with a brief discussion about the capital raised that was priced on March 6 and completed on March 12. In total, we raised $1.5 billion of capital. That was comprised of $1.25 billion offering, a more than 181 million shares of common stock at 675 per share.

Concurrent with that sale, we raised $250 million through an offering of 5 million equity units at a price of $50 per unit. All of the net proceeds from the capital raised were contributed to Ambac Assurance, with the exception of $100 million which was maintained at the holding company to provide incremental holding company liquidity to pay debt service, to cover operating expenses and to pay dividends on common stock.

The remaining net proceeds, which totaled over $1.3 billion, brought Ambac Assurance's claims paying resources to a level determined sufficient by Moody's and S&P to maintain a AAA rating. Fitch kept the rating at AA. All three agencies took us off RatingWatch or review for downgrade but kept us on negative outlook reflecting the ongoing uncertainty in the mortgage market.

Now I will turn to our financial results for the quarter. Our bottom-line first-quarter earnings are certainly reflective of the stressed mortgage environment. Having recorded our second large GAAP net loss in a row, coming in at a loss of $1.66 billion or $11.69 per share. I will provide a brief overview of the results, but will spend more time on the credit-related issues.

Normal-earned premium amounted to $172.9 million in the quarter, declining $3.4 million, primarily due to the December 2007 Assured Guaranty cede. If not for the cede to Assured, normal earned premium would have increased. Given that we wrote very little business during the quarter, this demonstrates the value of our embedded book of business. Accelerated premiums declined $25.7 million or 65% to $14 million on a significant decline in refundings in the municipal market, combined with fewer refundings in our structured finance and international businesses. However, we have seen refundings pick up in the first couple of weeks in April, particularly in our healthcare book.

Realized gains and losses and other settlements from derivative contracts, which in previous periods had been labeled Other Credit Enhancement Fees, increased $1.4 million or 9% to $17 million. The reclassification of this line item is an industrywide effort to report credit derivatives results consistently.

Investment income, excluding VIEs, increased $7.9 million or 7% on increased volume driven by net positive cash flows from operations and to a lesser degree from the capital raised in March, which was primarily invested in short-term securities immediately after the closing.

Now let me focus on the credit issues that arose during the quarter. Our mortgage-related exposures continued to drive the poor financial results. We had troubled mortgage exposures in three areas -- Financial Guarantees of RMBS transactions, CDOs of asset-backed securities, and to a limited extent in our investment agreement investment portfolio. I would like to emphasize that the net loss resulted from the large loss adjustments recorded during the quarter. It is not indicative of our net cash flow, which was strongly positive during the period even exclusive of the capital raised. I will discuss liquidity a little later in the presentation.

As was the case last quarter, the losses resulted in part from an estimate of the fair value of mark-to-market adjustment for our credit derivative portfolio, which in the quarter amounted to an estimated loss of $1.7 billion pretax.

In addition, we recorded a loss provision amounting to $1.04 billion pretax, related primarily to home equity line of credit and closed-end second lien transactions within our RMBS portfolio.

Within our Financial Services segment, we reported other than temporary impairment losses of $95.4 million on certain RMBS securities within the investment agreement investment portfolio and mark-to-market losses of $82.2 million on a portion of the investment agreement portfolio.

Finally, also in our Financial Services segment, we reported mark-to-market losses amounting to $73.7 million related to basis risk on certain interest rate swaps with municipalities as counterparties.

I will provide some additional detail on each of the credit-related amounts, and David Wallis will further discuss the impairment losses and how those losses were derived.

Mark-to-market adjustments reflect third-party market value inputs. As you know, the housing market turmoil that started in mid-2007 continued full force into 2008. Liquidity across all segments of the MBS market is at historical lows. The values that we've received from independent third parties on our CDO-squared transactions attribute almost value to these transactions. These deals are now essentially written off from an undiscounted cash flow perspective.

The $940.4 million related credit impairment is primarily for these CDO-squared deals, but also include some impairment on certain high-grade CDO of asset-backed security transactions, which we have internally downgraded to below investment-grade. To date we have reported impairments amounting to nearly 100% of the notional value of the two $500 million single-A CDO-squared deals and approximately 60% of the notional of the $1.4 billion AA CDO-squared deal. In total, the CDO-squared deals are now more than 70% reserved. We expect to start paying claims on both single-A CDO-squared transactions this quarter, but the projected cash outlays for those transactions for all of 2008 are nonsignificant.

The credit impairment reserves represent our opinion as to the estimable economic losses inherent in those CDO of ABS exposures. Any mark-to-market reserve above and beyond that remains unrealized and continues to be backed out of our reported operating results.

To the extent that the mark-to-market reserves do not results in actual impairment, they will reverse in earnings over the remaining lives of related exposures.

Now I would like to take you through the loss provisioning for transactions executed as insurance contracts. In the first quarter, our loss provisioning related solely to our direct guarantees of senior securities of RMBS transactions. Loss provisioning amounted to $1.04 billion in the quarter. Total net loss reserves on March 31, 2008 amounted to $1.48 billion, up from $473 million at December 31, 2007. Total loss reserves include case basis reserves, which are recorded for guaranteed bonds that have defaulted and active credit reserves or ACR for probable and estimable losses due to credit deterioration on certain adversely classified insurance insured transactions. Generally transactions internally rated below investment-grade.

Case reserves of $350.6 million at March 31 are up $240.8 million from December 31, primarily due to net activity in our RMBS portfolio for transactions that are underperforming expectations, mostly second lien products.

As we've repeatedly stressed, reserves and impairment charges do not represent immediate cash outlays but are estimates of future potential claim payments. During the quarter actual net claims paid amounted to approximately $34 million, virtually all of which related to second lien RMBS transactions.

ACR of $1.13 billion at March 31 are up $767.9 million from year-end 2007, again driven primarily by unfavorable credit activity within the HELOC and closed-end second lien RMBS portfolio.

Our below investment-grade exposures increased $5.6 billion during the quarter to $16.7 billion or approximately 3% of our total portfolio. The increase was due to increases within the RMBS, home equity and closed-end second lien and CDO of ABS asset classes.

Now I would like to discuss liquidity both at the holding company and operating company levels. I will start with the holding company.

As I stated earlier, we retained $100 million of the net proceeds from the capital raised at the holding company. The $100 million retained brings total holding company cash to approximately $158 million, which covers approximately 1.2 years of debt service, dividend payments and operating expenses for the holding company. Ambac plans to dividend approximately $54 million per quarter from Ambac Assurance to the holding company, which would grow this cash position to approximately $238 million by year-end. That is approximately 1.8 times the holding company's annual cash needs. We feel very comfortable with our liquidity position at the holding company.

As mentioned earlier, the majority of the capital raised in March approximately $1.3 billion was contributed to Ambac Assurance. That amount, plus an estimated $390 million of capital generated organically during the quarter under the Moody's capital model -- an estimate of the Moody's capital model, primarily via net business runoff improved our capital position. We currently exceed S&P's AAA level of capital by approximately $700 million, and we believe that we will exceed Moody's AAA target in the second quarter of 2008. Our capital position estimates assume no significant changes in either rating agencies' theoretical losses.

I would like to now discuss near-term liquidity needs resulting from our loss provisioning. During the first quarter, Ambac paid claims amounting to approximately $34 million related to direct RMBS transactions. Our projected claim payments for the full-year 2008 amounts to approximately $151 million, and we expect to pay out only about $24 million related to CDO losses in 2008.

Even if we write no new Financial Guarantee business over the next year, we would continue to receive sizable interest cash flows from our Financial Guarantee investment portfolio, which when coupled with expected installment premiums for transactions already booked, should generate in excess of $800 million in 2008. Ambac will also benefit from reduced federal income tax payments.

So as one can easily see, our liquidity position is quite strong. From an earnings perspective, our deferred earnings are presenting future earnings on premiums already collected, and the future value of installment premiums will carry us through periods of low CEP. These deferred earnings amounting to $6.2 billion will be recognized as earned premium and realized gains from credit derivatives for those transactions executed in credit derivative format in the future over the life of the related exposures.

$2 billion represents cash already collected and invested in our conservative investment portfolio, while $3.7 billion is cash that is contractually due to be paid as installment premiums over the life of the transaction.

Page 18 of our operating supplement schedules out our expected future earnings over the lives of the transactions. Included in the quarter that just ended for the next five years, we expect to earn more than $2.9 billion on our current guaranteed portfolio.

Just a quick comment on our credit facility. Ambac recently amended its $400 million credit facility to exclude mark-to-market adjustments on credit derivatives and total return swaps, but excluding credit impairment. However, mark-to-market adjustments in our investment portfolios are not excluded from our net asset covenant tests. The results of the quarter, excluding the non-impaired mark-to-market on credit derivatives but including the investment portfolio mark-to-market and credit impairments booked in the quarter, have caused our calculated net worth to be approximately $115 million below the amount required by the covenant test. Ambac will be discussing potential solutions with our credit banks in the near future. But I remind you that this credit facility has never been drawn upon, and our liquidity position is quite strong.

Turning to Financial Services, our Financial Services segment comprises our investment agreement and derivative products businesses. Ambac reported losses in this segment amounting to $72.9 million for the quarter. This was primarily a result of basis risk in our interest rate swap business. On certain transactions whereby a municipality issued variable-rate bonds to the public and entered into a fixed rate interest rate swap with Ambac, we are contractually required to pay the issue-specific variable-rate in the municipality in return for a fixed rate. We refer to these transactions as cost of fund swaps.

We hedge these cost of fund swaps against general interest rate fluctuations, but they are not hedged for movements between taxable index rates such as LIBOR and issue-specific rates. A decline in demand for variable-rate municipal debt has driven issue-specific rates to very high levels, thereby increasing Ambac's payment obligations under our cost of fund swaps, resulting in a $16.8 million realized loss and a $56.9 million mark-to-market loss on this portfolio.

During the quarter we terminated, restructured or otherwise mitigated approximately $1.1 billion of notional, reducing our cost of fund swaps from $2.2 billion notional outstanding at December 31, 2007. We continue to work hard at mitigating the remaining $1.1 billion. The reduced notional size of the portfolio will reduce the negative carry in future quarters if the current market dislocation persists.

Also, within the Financial Services business segment, we reported credit impairment losses amounting to $95.4 million related to certain previously highly rated Alt-A RMBS securities data. The impaired securities remain highly rated but are under review by the rating agencies. We have closely scrutinized the remainder of the investment agreement portfolio and have noted no other impairments.

We also recorded a mark-to-market loss amounting to $82.2 million on a liquidity portfolio that comprises primarily asset-backed securities. The portfolio was recently established to pay possible draws on investment agreement liabilities. The $1.3 billion liquidity portfolio is classified as available for sale, and any mark-to-market losses on the portfolio is reported currently through the income statement in accordance with GAAP.

These two impairment charges once again reflect the turmoil noted throughout the ABS markets.

A final discussion point regarding Financial Services as collateral posting. We had provided information in our 10-K filing about our collateral posting requirements under various scenarios, including downgrades as low as A- by both Moody's and S&P. You can see in our updated disclosures in our presentation, which is on page 73, that the amounts have not changed materially and do not become significant until a downgrade below AA-. Please keep in mind that any collateral needed for posting would primarily come from the investment agreement investment portfolio. Also, keep in mind that our Financial Guarantee business never requires collateral posting.

Final comments on operating expenses before I turn it over to David Wallis. Gross Financial Guarantee underwriting and operating expenses for the first quarter of 2008 amounted to $38.7 million, down 21% compared to first quarter '07 and 18% from last quarter. The reduction mainly reflects reduced compensation expense, primarily from prior year bonus accrual reversal, lower stock compensation and lower premium taxes.

An important consideration in analyzing our expenses is that in the first quarter of 2008 Ambac significantly reduced the percentage of its expenses that it defers to future periods as a result of the slowdown in business writings. So while net expenses are no longer comparable period to period, we call your attention to gross expenses, and obviously we are quite focused on managing that line item.

That concludes my prepared remarks on the financial results. David Wallis will now talk through some detailed elements of the portfolio.

Thanks, Sean. This morning I'm going to focus on the direct RMBS and CDO of ABS books. For those of you following on the webcast, we are now on page 10.

The direct RMBS book has seen some $5.3 billion in amortization in the last quarter. The majority of this has come from international deals and to a lesser extent the domestic HELOC book, which declined by around $600 million. The focus for discussion of the direct book will be the closed-end second segment, HELOCs and mid prime or Alt-A as it is alternately known. These are the sectors which have experienced most degradation and where we have taken reserves. The $8.1 billion subprime element of the portfolio continues to perform satisfactorily in the market context, and we will briefly review this too.

The ABS CDO book has shown continued deterioration, particularly in the CDO-squared transactions. Given rising cumulative loss estimates and the consequent ratings downgrades of the underlying RMBS, the inherent legal structure of these leverage transactions can give rise to extreme severity outcomes, and we have now effectively written off some significant exposures. I will discuss this in some detail later in this presentation.

Secondly, we continue to closely monitor the high-grade CDO exposures in our book. These high-grade transactions have fundamentally different characteristics from the CDO-squareds as their basic building block is not the BBB tranche of a RMBS deal but instead a significantly more highly rated tranche. The transactions are also generally cash deals with synthetic components of less than 10 to 20%, which is important as cash bonds are not subject to credit events like implied write-down or distressed rating downgrades, which can introduce cliff-like default propensities.

Finally, the RMBS component pieces of the high-grade transactions are not subject to the possibility of liquidation by higher tranches within their own structure, although the same cannot be said of some CDO exposures within the CDO buckets of these high-grade transactions.

With that by way of introduction, let me now move to page 11, which is a snapshot of our direct RMBS book. Of most concern are select exposures within the 2006 to 2007 origination vintages, particularly in closed-end seconds, HELOCs and to a lesser extent mid prime. The 2006 to 2007 originated balance of these products is around $14.7 billion, of which $11.3 billion comprises the two second lien product types.

Page 12 illustrates portfolio quality, showing the product type and Ambac rating. Dark blue signifies exposures that Ambac considers below investment-grade quality. The par amount of the BIG credits is $6.7 billion, represented by around 34 transactions. Per Ambac's customary investment-grade demarcation, it is these credits which will tend to hold reserves.

Page 13 outlines the reserving position with the categories presented accounting for around 98% of total RMBS reserves. The chart shows net par on the below investment-grade component, together with the corresponding reserve. Within the overall RMBS portfolio, it is striking how concentrated to a relatively few number of transactions the deterioration is. Five transactions account for around about 61% of the reserve, 10 transactions for around 80% with there being, as I said earlier, around 40 transactions on the reserve list.

Page 14 focuses on the HELOC portfolio alone, splitting the portfolio up into three segments -- prime HELOCs of any Vintage, nonprime HELOCs originated prior to 2005, and lastly, 2005 to 2007 HELOCs which are nonprime Bank originated. The data is presented on a net par weighted basis and clearly shows the differential performance of the three segments with the 2005/2007 nonprime HELOCs being the clear outlier in terms of adverse performance.

The next several pages give for us an overview and then a drill down to the transaction level of select underperforming transactions within the relevant product sectors.

Page 15 summarizes the closed-end second position. Ambac has reserves against seven transactions, which themselves comprised 41% of the CES portfolio. As illustrated earlier, most of the CES book is 2006/2007 exposure, and the remainder of the book is more granular, incorporating a total of 26 transactions. Given the recent degradation, the CES book is now BBB plus on average compared to single-A conception. No claims have yet been paid on the existing CES book.

Page 16 shows 60-day delinquencies with the worst performing deals being Bear and First Franklin, which have shown a very early pickup in delinquencies.

Page 17 shows cumulative lost data. Again, the Bear and First Franklin deals are outliers in terms of their early and rapid buildup of cumulative loss. As an approximate benchmark, reasonable (inaudible) whole life losses for these deals might be around 10 to 12% if the two transactions combined average around these numbers in just 11 months. As the slide notes, Ownit and Terwin rated AAA and AA at inception are a little unusual in that Ambac's guarantee is the legal final and not on a parity basis.

Page 18 moves on to summarize the HELOC position. Ambac has reserves against seven transactions, which themselves comprise 20% of the HELOC portfolio. As illustrated earlier, most of the HELOC book is 2006/2007, though the HELOC does have a lesser vintage concentration than the CES book. And there is a clear segmentation of type credit quality and vintage. Given the recent degradation, the HELOC book is now BBB on average compared to BBB+ at inception.

Pages 19 and 20 show delinquency and cumulative lost data for certain select underperforming HELOC transactions. Firstly, page 19 shows 60 days plus delinquencies with the outliers here being the SACO and HEMT transactions originated in the third quarter of 2006 and first quarter of 2007. To give a flavor for these transactions, they have weighted average FICOs of 718 and 700, weighted average CLTVs of 92% and 86% respectively, and were both executed at BBB. In the SACO transaction, Ambac benefited from a mezzanine layer of first loss provided by an independent third-party. Both deals were investment bank shelf deals, therefore SACO, Credit Suisse and HEMT.

In relation to page 20 and for illustrative purposes again focusing on the SACO and HEMT transactions, both transactions suffered from structures which contained zero or very low initial OC, which subsequently failed to build given the unanticipated and rapidly escalating delinquencies and losses.

In relation to claims, the HELOC book has had less initial benefit from attachment point and hard credit enhancement in the form of subordinated bonds or overcollateralization than the CES book. Correspondingly, unlike the CES book, Ambac has started to pay claims in the HELOC book. As of March 31, Ambac has paid a total of $41.2 million in claims across four transactions during their lives shown in this chart.

Page 21 summarizes the mid prime or Alt-A position. Ambac has taken around $200 million in reserves against this portfolio with the transaction showing the greatest deterioration being originated in 2006 and 2007. Collateral loss expectations for select transactions are now in the 20 to 25% range as opposed to around a quarter of this at inception.

Correspondingly, while substantially all transactions were underwritten at AAA levels, I think one was done at AA plus, select transactions are now below investment-grade.

To best illustrate what may be happening here, page 22 shows cumulative losses for select deals, most of which do not look at all troublesome. However, page 23 tells a different story with a very large buildup in real estate owned and foreclosure.

Briefly for illustrative purposes, let's consider the fourth transaction from the right, NAA07001. It shows negligible cumulative loss, but around 20% of current collateral balance in REO and foreclosure combined, plus not shown on the chart around 3% in the 60 days plus bucket. If all the loans in the aforementioned buckets default and a loss severity of around 35% were applied, then this would more or less exhaust current credit enhancement. Thus, although there has been some recent evidence of backward migration across buckets, that is from 60 days plus delinquent to 30 days to 59 days to current, etc. on some of these deals, and additionally the thumbnail sketch above largely ignores the value of excess spread, the combination of bulging delinquency buckets and high pool factors clearly indicate some of these transactions are below investment-grade despite the absence of material cumulative loss.

Page 24 summarizes the subprime position. Ambac has reserves against seven transactions, which themselves comprised 5% of the subprime portfolio. Approximately $1.6 billion or 19% of Ambac's $8.01 billion subprime portfolio was originated in 2006/2007.

Very briefly, pages 25 and 26 focus on delinquency performance of Ambac's subprime portfolio originated in 2005 to 2007, this being the most stressed market segment. In Ambac's case this segment is almost exclusively fixed-rate, and all deals are performing in satisfactory context.

Pages 27 and 28 show lost data for the 2005/2007 vintages with performance again generally being broadly satisfactory in market context.

For example, OC, overcollateralization, is presently fully funded, and although delinquencies and losses have risen, they are on average presently tracking around the levels experienced by the 2000 vintage, which itself is likely to finish with cumulative losses of around 8%. At inception, all the 2006/2007 transactions showed a modeling resilience to losses in excess of that level. Thus, especially given slowing prepayment rates, which add to credit enhancement and drive their effect on excess spreads claims, are not currently projected on these transactions.

To end the direct MBS portion of this presentation, page 29 gives a summary of the methodology used to project second lien reserving amounts. So let us briefly review that.

Ambac uses a roll rate methodology, seeking to utilize appropriate historic and current patterns, which betray the tendency for borrowers to migrate from one delinquency buckets to another. Once these patterns have been established and losses estimated obviously for closed-end products incorporating 100% loss severities, then these losses are spread over the life of the particular transaction, incorporating its specific enhancement structure and projected prepayment ranges. The result of this analysis is an overall cash flow run, which encapsulates a view on the extent and timing of potential claims.

Page 30 summarizes the results of this analysis for the Bear 2007 01 transaction that we looked at earlier. The analysis projects around 82% collateral loss up against an original expectation of circa 2 to 12 -- 10 to 12, I beg your pardon. The transaction was originally rated A+ and structured to withstand around 28 to 30% cumulative losses. The transaction is approximately now 11-months-old as indicated by the vertical blackline.

Page 31 illustrates the projected collateral loss explicit in the present reserve. Note the rapid escalation of losses expressed as a percentage of the original balance in the last few months. From a future claims perspective, this escalation in monthly realized loss is exacerbated by rapidly slowing voluntary prepayment speeds.

I've just presented a lot of information, and I will remind you all that Ambac's RMBS exposures are listed on our website. To state the obvious, some of the performance of the direct book is extremely disappointing. While in retrospect, it is clear that underwriting mistakes were made and that in common with many Ambac is being hit by a dramatic deterioration in the environment, you will no doubt be interested in what active remediation steps we're taking, and page 32 gives a summary of these.

An active process is underway. As noted, 17 transactions are presently under some form of scrutiny, and we have engaged external diagnostic, forensic and legal assistance on these transactions. Based on the work we've completed, we expect to expand this effort. Although as one can imagine, obtaining the necessary information is sometimes a lengthy task. Our reserving assumes zero returns from this active process, which we consider to be a very unlikely eventual result.

Let me now move on to the CDO of ABS portfolio. The impairments that we took in the fourth quarter were related to four deals -- one mezzanine CDO of ABS and three CDO-squared transactions. I'm going to focus on two main things today -- the increased impairment in the CDO-squared portfolio and the impairment on three high-grade CDO of ABS deals.

Page 34 shows a snapshot of the portfolio. As of the end of the last quarter, we reported $32 billion of CDO of ABS exposure. The majority of this exposure is a high-grade ABS, and while one 2004 transaction, these were written from 2005 through 2007. In all cases Ambac protects the most senior CDO liability or class. Ambac is starting to see the exposures amortized as overcollateralization tests fail due to rating downgrades as transactions end their reinvestment period as a result of events and defaults, and it manages not to reinvest principal collections.

Currently there are 11 transactions that may still reinvest principal collections, including at least one which the manager has ceased reinvesting these collections. 13 transactions fit in events of default, of which four occurred in March or April.

Page 35 shows the progressive downgrading of the portfolios the market has deteriorated. At inception, 98% of the portfolio was rated AAA. The Ambac AAA attachment point was significantly in excess of rating agency AAA attachment points, but given the terrific stress, this extra subordination has not insulated Ambac from progressive downgrade.

As of the fourth quarter, the percentage rated AAA fell to 8%, while 70% was rated AA or single-A. At the end of the first quarter, the equivalent number was 31% with 60% being rated BBB and below. In an impairment context, it is the BBB portion of the portfolio which by definition is closest to generating a future impairment provision.

Page 36 gives basic details of Ambac's CDO-squared transactions. As we have commented before, the main structural issue is that Ambac typically does not have control rights as regards to constituent inner CDOs as Ambac's economic interest in the respective (inaudible) is at the mezzanine A or AA level.

Furthermore, if an inner CDO is liquidated, i.e. the assets are sold, the senior tranche of that inner CDO will be the beneficiary of the proceeds of the liquidation of these assets. Given that the market value of all mortgage-related assets is severely stressed, the junior classes of the CDO, likely up to and including the mezzanine AAA tranche, are presently likely to see a complete loss.

Page 37 demonstrates the continuing downgrade of RMBS assets that are the building blocks of ABS CDOs, including the squared transactions. This chart provides a good backdrop into the summary mechanics of how these downgrades can lead to the liquidation threat highlighted earlier. Briefly many CDOs have invented default triggers in the form of an overcollateralization test. This test is a numerator/denominator calculation, using assets against liabilities respectively.

Commonly when an asset is downgraded, for example, to CCC, it will then only get 50% numerator or asset credit in such a test. Downgrades will, therefore, erode the OC test to a point where my cash flows may be contractually diverted to the benefit of the senior tranches, and continued erosion may also precipitate a series of actions like acceleration and liquidation. All these actions may have the effect of shutting off cash flow to the mezzanine tranches of the inner CDOs. Thus, as these actions mount, the alpha CDOs may start to experience a cash shortfall, and ultimately liquidation may be (inaudible) in the collateral.

To give some context here in terms of the rapidity and extent of events, one of the agencies very recently published 122-page report covering rating actions as I preliminarily understand it between March 31 and April 16. The first 29 pages are largely CDOs. The remaining 93 pages largely RMBS.

Page 38 discusses the $4.1 billion in high-grade deals that we have taken impairments against. There are two main drivers of the deterioration. In one case a transaction had a significant BBB bucket, which is somewhat atypical of most high-grade deals which have a minimum requirement of single-A rating. In this case the lower collateral attachment point is likely problematic in the context of the environment we're in.

For the other two deals, the main issue is the CDO bucket. These deals have CDO buckets of 30 to 40% versus subordination levels of 19 to 20. As previously indicated, although Ambac has control rights in those securities which it directly insures, this is not the case that ingredient CDOs, such as those in the CDO bucket, and therefore, the acceleration and liquidation thread can come into play.

Page 39 shows the breakdown of cumulative impairment against deal types within the CDO of ABS portfolio. The relatively high numbers pertaining to the CDO-squared portfolio reflect the severity dynamics previously discussed.

Page 40 briefly reiterates the methodologies that are being used to evaluate the portfolio. We continue to use a variety of techniques to view this portfolio. As discussed on prior calls, our thinking has developed, and our assumptions have become way more severe than those used in underwriting, and we are not alone in either case.

Page 41 concludes the CDO section of these remarks with a few comments on remediation. As per earlier comments in relation to the direct RMBS book, the portfolio is being aggressively and actively managed. We're exploring a variety of options aimed at reducing Ambac's ultimate exposure and/or capping the tail risk. Acceleration and liquidation possibilities are being evaluated, as is the potential to mitigate loss by taking advantage of current high asset spreads as against the much lower locked in liability costs of these structures.

Finally, I will comment briefly that the remainder of the portfolio is performing satisfactorily and that the appendix to the chart provides some supplementary material on particular sectors that may be of interest.

With that, I will hand it back over to Mike.

Thanks, David, and thank you, Sean. The worst may be behind us, but rest assured that we recognize we are working through a crisis of confidence. With the passage of time, the world will clarify, but in the meantime we only have projections. There have been a number of published estimates concerning Ambac's ultimate losses. We do not endorse any of these analyses, but they do provide other data points, even if we feel that they are sometimes excessively pessimistic.

So in an effort to increase the transparency of our Company, we intend to post some of these analyses on our website. And we will provide other relevant information that we hope will be informative and helpful.

Recently we announced a large-scale effort to deal with the high cost of auction rate and variable-rate demand bonds that carry our guarantee. I want to assure our clients that we are dedicated to resolving these issues as aggressively as possible. I'm personally committed to seeing that this matter is carried through to an early resolution.

Our success in the competitive bid municipal sector has been improving, and new business production in the secondary market during the first two weeks of April equaled the entire production in the first quarter. So while early signs are encouraging, we realize that Ambac is a long way from the trajectory it needs to return to the market in full strength.

The competitive environment has improved considerably. Spreads are wide, and about 25% of the monoline capacity has exited the market. I believe that investors a year from now will look back and conclude that our Company survived the worst-case. But above about this, I'm absolutely certain -- investors in Ambac wrapped paper will not have missed a single principal or interest payment.

So before we open up for questions, I want to briefly mention the proxy that was filed on April 21. We're asking shareholders to vote on an increase in the authorized shares from 350 million to 650 million. As most of you know, the capital raised in March substantially decreased the number of unissued shares. This increase is reflective of our prior unissued share position, and that will provide flexibility to meet future business and financial needs. The board has no current plans to issue or utilized these additional shares.

And now we would welcome your questions.

(OPERATOR INSTRUCTIONS). Andrew Wessel, JPMorgan.

I just had two questions, one I guess the first would be for Sean. What have the conversations been like recently with the rating agencies in light of obviously loss expectations having to pick up? Do you feel like the way your losses are tracking are -- and what you are modeling going forward are somewhat in line with what the rating agencies were expecting, or do you feel like there has been any surprise here?

We have had discussions with the agencies, normal course of businesses to give them a preview of the quarter and discuss some of the events in the portfolio. What we are talking about is the fact of some of the deterioration is clearly well within the stress losses that the agencies have published. The fact that the reserves that were taken that David mentioned on the CDO side of the portfolio are transactions that are already heavily stressed from the rating agencies. So there is somewhat of an expectation there that they have already included some additional severity stresses. So those are already in the numbers, if you will.

We have had discussions relating to the remediation efforts that are ongoing that are not built into the reserve estimates at this time until we can move those further along. But there are active remediation efforts. Some of the cumulative loss numbers that David mentioned, upwards 70 to 80%, is indicative obviously of very, very interesting performance and stuff that we're looking into very diligently. So that is part of the discussions that we have had.

We're not aware of any additional efforts that they are going to undertake at this time to update their stressed modeling exercises that they have just recently done. I think they have made some statements that they wanted those analyses to have some staying power, and the levels of loss that they were indicating in those analyses were indicative of that.

With that said, I'm sure we will have continuing discussions with them as we go along and perhaps as they gather data from others in our industry and others out in the marketplace. But at this time, we're not aware of any additional plans that they have.

Andrew, Mike Callen. I would just like to say that if there is any good news here, it is the fact that our internal capital generation as a result of runoff has exceeded our expectations. We're currently running at a first-quarter rate that exceeds $1.5 billion for the year, and I'm talking about the Moody's model. You had another question?

Yes, great, thank you. That is a helpful point. And then the other question just revolves around staffing. I guess, first, there has obviously been some missteps in underwriting. There has been as early as -- as recently as five or six months ago, I think analysts were told that there was no expectation of loss across any CDOs, and then, of course, the fourth quarter happened and now some mortgage losses are ticking up.

Can you talk about what changes you have made from actually on a staffing level within the credit risk or the underwriting group to kind of deal with these mistakes that have been made? And then also, as kind of a pear on that question, your current staffing levels, what kind of assumption are you making in terms of when you will be back up in the underwriting business, or is that not part of this decision?

If you were to look that those responsible for these underwriting decisions, you, frankly, would not find them here any longer. So I think appropriate accountability has been put in place. The people ask where is the accountability across the board? Ambac, as I think most people are aware, Andrew, has for a long time loaded up their compensation structure with equity. The last time I looked I think the senior management has had a decline in their net worth, which is appropriate of some 70 or $80 million, so everybody is feeling this pain.

I will also tell you that we just recently because the staffing that we currently have, which is down about -- this is a guess. I can get back with an exact number, something in the neighborhood of 50 people. We have now a kernel of staff that we want to keep in place and, in fact, have even issued recently a bonus guarantee for the year because you have to manage the psychology going on, and we have great faith in the staff that we have in place now.

Our assumption in terms of new business generation is that we have to demonstrate a quarter or two of losses having been recognized and now under control and having plateaued. So I would say the way I look at it is the first of next year, we're back up and running or thereabout.

Tamara Kravec, Banc of America Securities.

I have a couple of questions. David threw out a lot of numbers, but I was hoping just to get a broad brush of your thoughts on the closed-end second portfolio versus the HELOC. You clearly had five transactions that are accounting for the majority of the reserves on the closed-end, and you have seven transactions on the HELOC. But are you seeing -- it does not seem like you have reserved as much of that portfolio.

So I would be curious if you could just talk about the assumptions you have made in your reserving of HELOC versus closed-end. And in light of that, maybe bring in my comment about the closed-end seconds reaching 80% losses at some point.

And then my other question is, there was some talk of acceleration and liquidation I think on the CDO side. If you can give us an idea of the criteria for liquidations, things you would consider and how that would impact your portfolio, your cash flow, any of the financials, that would be very helpful.

Sure. Happy to help on both those questions. So the first one was kind of talking about closed-end seconds and the HELOCs. And you're right. In general, it is the closed-end seconds that are hurting the most.

I think specifically I think you kind of -- you're looking at these things differently, and the answer is we are not. We are looking and using the same type of methodology in either case.

I think we've talked about this a little bit before, that one of the kind of theoretical differences I think between a HELOC, which is obviously a revolving credit potentially and a closed-end second which is not -- it's just a fixed-rate loan that you've got or largely fixed-rate loan that you have got and that is it; you cannot revolve it -- is that in some HELOC structures there is the potential for once a trigger is breached for further draws on the HELOC to be in effect beneficial to the guarantor of that specific HELOC. We don't give a lot of credence to that theory because what is happening -- I mean there's no doubt about this -- is that many of the large HELOC providers are basically saying that and have sent out hundreds of thousands of letters saying, well, look, I'm sorry HELOC borrower we recognize that you have an undrawn balance on your HELOC, but we don't think that you fulfill the representation that you made in terms of LTV, and therefore, you can no longer draw on that HELOC.

So this helpful revolving feature, which can in some circumstances provide enhancement to a HELOC, we think has probably gone by the by. Therefore, we take the view that we look at them both similarly. And that is looking at past histories, and there's not a lot of history here -- I will be the first to say that -- of 100% LTV products where prices have been selectively on a regional basis obviously declining. And what happens, what has historically happened in terms of delinquency buckets and migration between them and escalating those buckets up obviously into loss of 100% severity thinking about repayments, rolling this all through in text and doing the analogous work in terms of closed-end and HELOC.

The HELOC portfolio -- and you're right; there's a lot of data. We're just trying to get as much as we can to you all. The HELOC portfolio is very segmented along the lines that I tried to tease out. We have some I think excellent, I mean really vary, very strongly performing HELOCs, which are the prime bank HELOCs. So these are the kind of Wachovia, Morgan Stanley deals to give you the sense that that portfolio which comprises $4.8 billion has a weighted average loan life of 22 months, cumulative losses of 0.16. Very, very low. And we have some very old HELOCs, you know, pre-2005, they are performing just fine.

So it is this middle phalanx of HELOCs that are not performing well, and that the nonprime tend to be bank shelf type HELOCs that are underperforming.

In relation to the closed-end seconds book, you know, it is again concentrated. We have two or three deals, and we highlighted two of them for you, Bear and First Franklin, that really due account for an absolute mass of the reserves. So I think I gave you a statistic that the top five deals across the whole portfolio take 61% of the reserves. Well, I can tell you that the top two are responsible for 43% of the total (multiple speakers).

Yes, so very focused, very disturbing deals. Obviously we're very active on those deals. They are -- let's put it honestly, they are very surprisingly poor, and we will just leave it at that.

In relation to your second question, which was acceleration, what does it do, when will we do it? When wouldn't we do it? Obviously the maximum is we will do it when it is in our interests to do it.

Let's just be clear what it is. What acceleration does is to make a class of debt payable. So it is upfront for debt. It all comes due.

What that means is that any debt tranche below that debt does not get any cash because nothing seeps through the waterfall. So at face value, you would think, well, this is a thing that you should do every time when you get the chance.

The difficulty there is or the writer for that general statement, really there are two. One is that sometimes it does not get you anything that you have not already got. So, for example, if the OC ratios deteriorate, then cash begins to get cut off, and sometimes you don't get anything extra. The cash is already cut off by operation of the OC ratio.

A different circumstance is that in some deals, particularly deals with a big synthetic element, sometimes if you accelerate, that can have adverse consequences in that some of the synthetic elements become due, and they become due at par. And so one would not in those circumstances want to accelerate the generality of the deal because, in effect, you could be out of pocket in respect of the derivative that might itself be accelerated and that would hurt you.

So yes, we are very cognizant of what acceleration and liquidation can do for you. It demands I will say a real fine legal (inaudible) because these transactions are very complicated, and candidly there are better disagreements at times about how these documents work. We are having a number of discussions right now, but pretend to some disagreement of one status or another into exactly how they work.

Just to give you some numbers, we have around a think it is 13 deals I mentioned which have events of default. And I think somewhere else -- I have not got it to hand I'm afraid. There's actually I think it is two deals that have been accelerated. I will come back if it is different from that, but I think it is two.

Okay, that is very helpful. Thank you. And just a quick follow-up, there was a thought process that there were some letters going out on HELOC where they were actually reducing the credit line and forcing a payout. Would that have any effect on your cash flows in reserving? Is that something that you have thought about in your assumptions or not?

I'm not sure I understand the question. I'm not familiar with -- (multiple speakers)

The letters going out from the banks have actually not only said you cannot draw down on it anymore, but you are actually -- we're taking your line down and requiring a payment.

I have not heard that. I would have to think that one through. I'm afraid --

Okay, I can follow-up with you too. And then yesterday Assured Guaranty issued a press release about some of the classifications on new industry accounting rules and for TDS. Is that anything that affects you or not?

Yes, that is what I mentioned in some of my comments is what the SEC and industry participants have been discussing with the SEC is a consistent method of financial reporting for the elements of credit default swaps both on the balance sheet and the income statement. So it is not leading to fair value calculations. It is just presentation of the amounts. So their press release was trying to give folks a heads up some of the various changes that are going to be apparent in their income statement and balance sheet.

From Ambac's perspective, it is pretty simple. We have never included credit derivative items as premiums or at least over the last couple of years. They have always been in a separate line item called Other Credit Enhancement Fees. And we have not had the need to record or have not segregated out any specific loss reserve amounts for those in our income statement. That was not our financial reporting construct that we followed. So we have a pretty simple situation. As you are just going to see, the Other Credit Enhancement Fee revenue line moved down and down with the derivative mark. So you will see the same number, but it will be labeled something different, a little bit lower in the revenue section of the income statement.

Okay. Thank you so much for all this information.

Just at the acceleration point, it is comprising about $3.4 billion in par.

Darin Arita, Deutsche Bank.

I guess turning to the CDO of ABS, could you just talk a little bit about each quarter we're seeing the ratings migrate downwards. And what is developing worse than your assumptions each quarter? Can you be a little more specific there?

Sure, happy to. There are several elements to this. I think the big one and it kind of makes sense both in a macroeconomic way, a commonsense way and also a modeling way is just a correlation of things. Correlations have shot up, so you've got two things going.

You have got all deals -- I know that is an exaggeration -- but most constituents RMBS transactions are suffering all at once. And also obviously within the CDOs, that generates a leveraged effect. So I think the correlation is pretty hurtful.

To give you some history on this, at inception I think agency correlations were around 15%. They are selectively 50 through 80 depending on what the deal is now. So I think that has been a major factor and it continues.

I think the other factor and I gave you some statistics on this, is just continued rating migration, and obviously the two are related. You have got lots of migration all at once that is correlation. And the final thing I would point to is severity. We have got a mortgage market which clearly is in tremendous disarray. And when you hit the sorts of triggers that I talked about in relation to CDOs for sure, then liquidation is a factor, and unexpectedly with the benefits of a year or two as hindsight, but even over the last six months, I think it is fair to say that the market has absolutely tanked and, therefore, that the liquidation proceeds are very low and hence severities have increased. So it is correlation, it is rating migration and it is severities.

I guess is it fair then to assume that as long as the housing market continues to deteriorate, the ratings on these CDOs will moved downwards, or is there a point where the ratings will try to get ahead of the deterioration here?

I think that -- you know, time will tell. We have commented before, the mass of what is going on is getting pretty stretched in some circumstances. There was an article out I think yesterday published by a hedge fund, which again just did some math similar to that which I believe Wachovia did a while ago looking at the balance of subprime that is outstanding with the losses that have been taken so far, the pipeline delinquencies and what might one expect for loss given those pipelines. You add the whole thing up on any kind of prepayment rate and it is just getting difficult to hit some of the numbers that have been talked about. So I think my view is that increasingly more time will perhaps make the math work. I think Mike --

Let me comment on -- try to lend some context which we try hard to do around here. And I think the study many of you have seen is Bank Stocks by Tom Brown, and I was quite surprised. If you canvas even a very knowledgeable group such as on this call and say what percentage of the '06 subprime do you think have been prepaid, I got estimates like 10%, maybe 5%. In fact, very close to 50% of the original $600 billion. And then of the $300 or so million left -- I'm working from memory -- you have $100 billion of that that is enough to buy the way the 50% repaid, we have $12 billion in losses, and then of the other half that is still left, about $100 billion, 60 days past due and more. And if you apply as severe a set of assumptions as you can imagine to that delinquent bucket and add it to the $12 billion that has already been written off, you have $200 billion left that has been servicing quite nicely and on-time, put some loss numbers on that. It is very difficult to get to some of the stress loss assumptions. So maybe we're seeing the pig and the python. I don't know. This is a Wachovia thesis. We're not in the prediction business here, but this analysis by Tom Brown is very interesting just for the fact base it lays out.

Alright. That is helpful. And if I may ask one more question, I guess assuming the rating agencies revised their stress test models and increased the capital requirements again, and at what point would it be uneconomic for Ambac to raise capital to preserve its AAA ratings?

Well, I will take a shot at that. I think the business models that we run internally given our internal capital generation and given the market developments with the amount of capacity reduced and the pricing that is currently available, the idea of getting back to market and bridging this confidence gap is, in fact, from a business point of view a very attractive one. The question is, how do you do that as quickly as possible? And that is pretty much where we spend a lot of our time.

Nobody here likes these first-quarter loss numbers. We thought it would be a disappointment. It was a disappointment to us when we finally came up with them in the early part of April. We like to hope that maybe we have seen the bottom of this. That is not a forward-looking statement no matter what it sounds like. There is a good business out there because there's a lot of injured capacity, and we're looking at every opportunity to go back. So we think by the end of the year, if we use the stress models in place now, we're well in excess of their AAA target, and if they were to rejigger that, which they have a right to do, we could find ourselves conceivably in a deficit position such as we were right after our capital raise. And it just means that generating the capital we do internally, it would be a little more time before we covered that.

I don't know how helpful that is, but I don't think we are -- there are too many variables here to say that we're anything close to uneconomic in that respect.

Avery Son, Ivory Capital.

Can you clarify for the home equity and the Alt-A reserve strengthening, are the credit reserves there now kind of reflective of estimated lifetime losses? And if so, I guess that is my understanding of how it works per quarter. What has changed if you look at Q1 where we are versus Q4? And what could move us further down back that in terms of changes as we look forward through the year?

Sure, let me take a go at that. Just we announced the first ABS, the notion is that we're taking a present value of the losses or the claims that we expect to pay over the life of the deal.

Just to relate that, people always like to relate it to cumulative loss because that is the statistic that people bandy around. Let me just give you a bit more insight onto that. I think in the presentation we talked about -- in fact, it is the most egregious example, the Bear Stearns deal, where we are expecting or remodeling at least around 82% of collateral loss. So you've got 100 people in the round that took out a closed-end second in this deal, 8.2 of them have walked out -- 82, I beg your pardon -- 82 have walked out and not paid you a whole lot back, 100% severity.

Just in relation to other transactions, just to give you some more data and just be open with what we're looking at here, I mentioned that in mid prime, we are kind of 20 to 25% collateral loss. In HELOC they vary, the ones we have reserved from I think about a low of mid-20s to a high of just north of 50. So that is collateral loss.

In terms of what has happened and where does it go from here, probably a good thing to do is to look at the chart on page 31, and you get a pretty good sense of what has happened in the last few months. You know, basically losses have taken off in that transaction.

Sometimes you get perplexing movements. I will draw your attention to one. If you look at the First Franklin deal, which is also in the charts that I presented, you will see four months ago I think it was quite a marked flattening in delinquencies. That proved to be a false dawn because, although delinquencies -- the trajectory there has flattened, actually losses have continued to escalate. So the data is difficult. You get very odd data.

To give you a sense of how odd the data is, the remix are actually beginning to come in in somewhat late because sometimes people don't believe the data that is being presented, and they send it back and say, well, that cannot be right. But, in fact, unfortunately some of it is right, and the numbers are huge.

Where can it go? Again, look at page 31, and I admit this is the extreme example. A criticism might be, well, look at the very sharp dimunition in monthly realized loss that is being projected here through the role rate methodology. And it is true, it is a fairly sharp diminution. However, it has to be because if it is not, you end up with more than 100% of collateral loss, which does not make any sense either.

So I think further discussion that Mike just had in relation to subprime and what is outstanding and what does that imply about future default and severity rates to get to a given collateral loss, we're seeing some of the same things certainly in relation to our most stressed transactions. You know, how bad can it get? 81 people and 100 walking away sounds pretty bad to me.

Okay and then thanks for that answer. Just given that dynamic, if we kind of look forward into the next few quarters, what should the right run-rate loss be or provision be on a quarterly basis assuming that the charges that you guys have forecast on page 31 are kind of accurate going forward?

Well, if the forecast was accurate going forward and let's face, it won't be. It could be plus or minus, and there would be no impact really. I mean that is what we're setting up. So the only thing that would happen would be some PVing.

But what we're trying to do, getting back to I think the first question, is put it out there in terms of that is the expectations through life.

I think where moving aside from this one specific case, this gets into the methodology that we use, and it is just important that it recaptures this. I think that we use this probable and estimable notion for posting these impairments or reserves, and the probable demarcation is investment-grade.

By definition, therefore, other things being equal, you are closer to a reserve if your portfolio degrades and gets closer to that BBB demarcation line, if you will. That has happened. I think I gave you some statistics on the high-grade deals. We think we have beaten them up pretty heavily. The future is unknowable, but yes, we have seen some degradation there as I tried to point out.

Sean, do you --?

Yes, I was just going to point out too and maybe, David, you could discuss kind of the breakout of some of the HELOC portfolio being that big portion of the portfolio is related to large bank transactions versus shelf transactions.

Yes, I mean I think (multiple speakers)

And I think that as a demarcation in the portfolio that David talked about where you have the bank, the nonbank and certain vintages, and then you have older vintage transactions, and we're seeing obviously most of the distress coming from the recent vintages and the investment bank shelf transactions.

Yes, it is very striking. One has various hypotheses about this, and we are investigating those hypotheses. But it is very striking how concentrated, how very concentrated, some of the poor performers are, and that gives rise to all sorts of obvious questions.

I mentioned that we have diagnostic and forensic people working on some of these deals. We are beginning to see stuff back from that. The diagnostic is basically running tapes looking at delinquencies and trying to figure out given what you now know and what you knew then, would you have expected that delinquency or not? And if the answer is not, well, that is interesting.

So, in other words, you have an incredibly low FICO within a pool, and it is delinquent. Well, maybe you expected that. But if it is incredibly high and the LTV was incredibly low, then maybe you would not expect that.

So then what you do is, you take an adverse sample, so you run the tape through a program, take an adverse sample, i.e. looking for the suspicious ones, and then what you do is you go look at the files. That is a very difficult long process, but you look in the files. You look at the transcripts of servicing records, and you see what you see. And all I will say is that there is some pretty amazing stuff to see. So very concentrated adverse exposures, that is really the message here.

Let me add one thing. We're trying in terms of rebuilding confidence in the coming months to -- one step in that process is to be as absolutely transparent as legally possible. And among other things, we're going to try to provide you with tools on our website so that you in trying to project the future can incorporate whichever variables on ratings and things like that that you would wish to do. And out of this tool will come -- this calculation will come to loss that would result from those assumptions. So I don't know of anything offhand that we can provide in terms of information that we are not endeavoring to do in the coming weeks.

Scott Frost, HSBC.

Thanks. Just a couple of questions. Could you go over again how much business you have written since your downgrade by Fitch in I guess mid-March?

Also, for your credit facilities, has the bank at anytime stopped you from borrowing on the facility?

The answer on the second part is no. The Fitch downgrade for us came back in January, in fact. If I remember, it was January 16. It was about a day after I got here. Give me -- give us just a couple of minutes before the end of the call. We will come back and tell you what the business volume has been since that particular date.

Okay, thank you.

Just a little bit more on the Alt-A credit facility. The credit facility, we have never drawn. We will have discussions with the banks to talk about the minimum net asset test that I mentioned in my comments.

The liquidity in the Financial Guarantee business for the reasons that we mentioned relating to guarantees of principal and interest and the fact that we're setting lifetime reserves over the entire transaction, the cash outlay for those items that we have either case reserves or impairment for CDOs is relatively modest compared to the total size that was -- of the reserve that was posted at the end of March.

So from a liquidity perspective, we have a very high-quality investment portfolio and good cash flow. So there has never been a need. We do not see it at least currently. In the investment agreement portfolio, we have a portfolio of asset-backed securities. Clearly the market for those securities has been under stress, and the values indicate that. That portfolio, however, we have identified securities that we think would be more liquid, and we have been turning -- we have a fairly sizable cash position in that portfolio, about $300 million. So that provides what we think is appropriate liquidity going into -- considering any potential draws that we would consider in guaranteed investment contract business.

Okay, thanks. I'm sorry, I misspoke. I meant since your rating was taken off Watch and affirmed at AA by Fitch, that is what happened at midmonth, right?

Yes, that (multiple speakers) you're talking about since capital raise I think?

Right, right. Yes, yes. Okay.

But the business -- I think you had a business question in there. The business obviously has slowed down dramatically. We provide some of the numbers in our press release. Primarily the production came in the quarter from transactions that we had committed to prior to the start of the quarter. We did see some uptick in secondary market transactions on a limited basis, some in the public finance side, some direct transactions. But the balance of the production is really coming from transactions that have been in the pipeline and also from some of our conduit transactions where we booked production numbers on a quarterly basis due to the nature of those transactions.

But I know what your question is, and before the call is over, I will get it. I'm in the process of getting that done.

Ken Zuckerberg, Fontana Capital.

I have a question for David and then a question for Michael. David, you provided some good specificity today. I just wondered whether or not you could line up the HELOC and the CES exposures with a little more granularity, meaning I know you mentioned the Bear and the Franklin, and that was a certain amount. You also mentioned Wachovia and Morgan Stanley. Could you provide any additional specificity even if it is just in the context of bank versus broker versus other origination?

Sure. Maybe we will try and put this out on the website. I would be happy to do that. So I will just give you some numbers. I will start off with the bank deals. $4.8 billion, 22-month weighted average life. Weighted average cumulative loss 0.16.

Then the next segment is essentially the shelf deals. And it is $4.5 billion, 3 points of loss, 28-months weighted average life. And then the final segment is $2 billion, $2.1 billion I guess cumulative loss of about 1.37 on a weighted basis again. 44 months weighted average life. So --

I would like to slip by on MBAs --

So you can see that the segments perform very differently.

Great. And just in terms of remaining exposures that you have not posted, just the notional amounts. Are those mainly broker originated loans, or do they come from more traditional bank channels?

They are the former. Also, by definition, HELOCs tend to come from banks because you need to have to draw the thing. But no, the point I was making on the slide, and just be clear like on the prime HELOCs, if you will, they are much higher FICO and tend to be framed within a relationship of other, whether it is wealth management or other financial products. Whereas the shelf deals, the aggregated deals, if you will, don't have that and typically are lower FICOs. It is still relatively high. It could be 700 very easily. I think I put some numbers on the chart. But the prime deals are significantly higher and framed within the relationship. So it is a kind of, you know, know your customer type thesis.

Great and thanks for the helpful color. Moving on to Michael, with respect to your ability to I guess subrogate may be the word, is there call back to some of the folks that provided you with these deals in the event your diagnostics find out that they were either misstated loans to values or misstated FICO scores?

There are legal remedies. If you find that you have been injured and that there have been false reps and warranties, as a statement, David is working on this. I will ask him to comment.

Let me just tell you that the policy of the industry and certainly of Ambac as far as policyholders are concerned is to protect them at all costs. That is what the franchise is all about. So in a case like I can tell you as the CEO of it, even if we found ourselves injured somehow, we are never going to be seen in the marketplace to fail to make a payment. There are transactions, however, where you can -- there can be failures on the other side to perform, or there can be false representations, and in that case you take normal steps. Did you want to say something?

Yes, I will just give a little bit more color on the topic, and really at base camp as it were, there are kind of two ways of going about this in terms of seeking reparations from fraudulent deals. One is the loan by loan. So this is the matter of well, the LTV was supposed to be X; it clearly was not. It was supposed to be owner occupied; it clearly was not. And that is empirical. It is obviously difficult and time-consuming, but it is loan by loan (multiple speakers) it is fact-based. That is what you do, and i.e. I think that a lot of folks will be doing that.

I noticed there was an article in the Journal yesterday in relation to some transactions. The other theory is a kind of grander theory, and going back through time here at Ambac, we have had some experience with this in relation to not loan by loan, but really kind of more grandscale fraudulent inducement. And also the trick is to not go down one route or another and not preclude one route or the other but to kind of pursue both and take a choice at some future point. So two avenues. Loan by loan or grander theory, and you kind of need to work at both and take a choice later down the track.

[Eleanor Chan], Aurelius Capital.

I just have a question about what you guys said about the rating agencies capital cushion. I think I heard you guys said that you have a cushion with respect to S&P of about $700 million. And not much has been mentioned about Moody's, so I'm just wondering what is the corresponding cushion you have with respect to Moody's minimum AAA ratio?

And also, you also mentioned that you expect to exceed Moody's target AAA ratio by the second quarter. And I'm just wondering how do you guys plan on achieving that?

Let me give you some flavor and a few numbers on that. Let's take Moody's first. On February 15 Moody's under their new and more conservative model announced we were $2 billion short. We raised $1.5 billion of that and took about $1.3 billion down to the insurance company. So that left us about $700 million short.

Internally, mainly through runoff we generate, we estimated at that time about $1.2 billion a year in the event. And, by the way, the Moody's model was as of year-end '07. In the event in the first quarter, we have generated about 390 -- let's call it, 400 in rough terms.

So, as we speak, we would be in deficit against their target, not against their minimum, but against Moody's target of roughly 300. We know we have some heavy economic capital eaters or users running off in the second quarter at a higher rate than we had in the first quarter. So I'm not going to commit to this, but but my sense is that we will generate well north of 400 in the second quarter by the end of June. And then that would put us over the top as far as Moody's is concerned and would put us well over $1 billion of cushion against the S&P target.

So by that time, we should be in a very comfortable position. And provided we are very judicious and disciplined in underwriting, I would anticipate by the end of the year to be well in excess with S&P at more than $1 billion with Moody's probably in the neighborhood of 500 or $600 million surplus by the end of the year.

Okay, I have another question. It seems like the Alt-A collateral losses that you guys are assuming of 20 to 25%, that seems like very high compared to what some sell-side analysts have been expecting on Alt-A collateral. Can you please explain like or maybe elaborate a little bit on why is it that your Alt-A or mid-prime is what you call, deals are so much worse than I guess the representative Alt-A deal out there?

Sure. Obviously the averages deceived, and and we're not talking about our portfolio in the aggregate. We're talking about half a dozen deals or thereabouts. But let me try and give some color to that. You know, really two things.

It is, as I tried to indicate, no great losses in terms of some of the '07 deals, but correspondingly very, very high call factors. You know, 92, 93, 94% or something, so very little amortization. Very low losses, but unfortunately very high REO and foreclosure balances, I mean staggeringly high. So we have got deals just looking at a list now in foreclosure 14.29, 14.67, 14.48, 11.93 and so on and so forth. Those are very, very high balances to be in that bucket at this point in the transaction's life.

Obviously what will happen is that these deals will be liquidated. I mean we have seen a little bit of evidence actually on the call of some backward migration. Not from foreclosure clearly, but from 60 plus going backwards into 30 and eventually into current. But the bulk of foreclosures and REOs is clearly going to be liquidated. So then it's just a severity question as to what that will produce in terms of loss. Severities are anything, 25 through 35% thereabouts.

The issue with the deals is that Alt-A was really designed to reflect -- the (inaudible) there was designed to reflect relatively higher FICOs. And the way these deals work is that if you have relatively higher FICOs, then you don't have relatively higher credit notes because in theory you don't need it.

So if I give you the FICOs on some of these deals are just looking at a list here aroundabout the 700 mark. So these are way north of subprime borrowers, and enhancement levels correspondingly are somewhat slim, 4% or 5% thereabouts. Historically losses 1 or 2, you feel fine about that.

There is not that much excess spread, again because the borrower is essentially a decent borrower and does not want to take out an expensive loan.

So what you have got is a structure that innately more than some other deals depends upon getting the borrower credit right because there is not that that much more protection.

So if in the very early days of the transaction, call factors of 90%-odd, you see these sorts of sums in foreclosure and REO, you either hope it is a major pig and a python, i.e. all the best stuff is coming out first, or you've got a problem. And we're taking a judgment in the middle of that essentially and doing the numbers along the lines that we have discussed running out in tax runs and the like, and you get to around the sorts of collateral loss that we have put there.

I think that clearly this portfolio is going to be a focus of remediation efforts because it does stretch credulity I will admit that you have these sorts of borrowers who traditionally have performed pretty damn well suddenly performing incredibly poorly. And it is very, very spotty. So we have got some very poor deals, and we've got some very good deals. So deals originated within weeks of each other, you can have some with apparently very, very similar characteristics showing in the foreclosure bucket less than 1% has against some with 14%. You know, clearly strange things happen.

So that is the background. We think we're giving it a bit of a hit. It is not the 20, 25 number is not representative of our portfolio. We have lots of deals that are performing just fine in terms of adverse characteristics. But we have one or two or three or four, in fact, or half a dozen I guess that are performing very poorly, and we have taken what we believed to be the correct action. Although we will be very aggressively chasing these deals.

Thank you.

May I break in for one second? I was asked about business production. And Bob Shoback would like to provide a few numbers and some flavor on that point. It will just take a second.

Yes, the question was related to production since the capital raise, and what we have closed in terms of production since then in new CEP is about $12 million. A number of transactions have been in the new issue negotiated market, a few more in the new issue competitively bid market, and a fair amount in the secondary market. So we have seen most activity in the secondary markets recently.

In addition to that, there is a number of commitments that are outstanding for deals that have been awarded where bonds have been issued but they have not yet closed. So the bottom line is that $12 million in CEP since the close of the capital raise.

[Joseph DiMarino], Piper Jaffray.

Could you talk about some of the assumptions used for your estimate and how much capital is created when the book runs off?

Sure. What we do is we take an estimate of the -- we look at the portfolio and we look at the payment schedules underlying the obligations of the portfolio and schedule those out at time and look how the theoretical losses would fall as par falls away. So that is on the loss side.

Compared with the claims paying resource side, which has an element of investment earnings payment of expenses, there is kind of a cycling of the premium from one bucket of claims payment resources to surplus. But you're able to look at that, project that out, kind of assuming no new business and look at how claims payment resources moves over time versus the movement of theoretical loss. And that is effectively the calculation that the rating agencies undertake to determine levels of capital AAA levels of capital.

So that is what we do. The pieces that are difficult to project and we have given out what we think is pretty conservative numbers of approximately $100 million per quarter of capital that is freed up through just portfolio runoff, and the stuff that is difficult to predict is the refundings, different refunding levels and transactions that either structured finance refunded away, prepayment speeds and the like. That helps to increase the number, and during the first quarter, we saw in my comments we mentioned that the calculations, our estimate is about $390 million of capital generation.

What we're seeing in the second quarter is kind of an acceleration of refundings, particularly in certain asset classes, but we are seeing it on the public finance side, particularly in health care. So we could see a fairly sizable reduction in par in that health care portfolio. We are currently looking at some expectations perhaps in the quarter of a runoff near $5 billion in health care alone.

So health care generally, due to the nature of the risk which we have been very successful in underwriting but nonetheless the rating agencies take a harsh view of that particular asset class due to the potential severity due to the nature of those institutions. So I think that will add to it.

I think I may have misspoke. 100 per month is our general base assumption, and I think I may have said 100 per quarter, but 100 per month, so 300 per quarter.

And how much capital do you expect is freed up?

Yes, and that is a conservative number. In the first quarter we freed up, it looked like about $390 million, and we expect at least in the second quarter with the -- it all depends on the refundings, but it is starting off at a quarter that it is looking like the par is coming down faster than it did in the first quarter in certain asset classes, which would be positive from a loss modeling perspective.

Thank you. This is probably for David. Can you go into a little more detail in terms of the disagreements you mentioned in terms of when (inaudible) people takes place and some of the cash flows get diverted to the senior tranches?

Yes, I don't want to enter into specifics obviously, but I guess the deals are very, very complicated, and they have interlocking documents of one sort or another. And you get to discussions shall we say in relation to how some of the documents interrelate and even in extraordinary cases about the precise nature of notifications. If somebody jolly well knows that X, Y and Zed is going to happen and there have been lots of e-mails and conversations about it, then does that constitute notice, doesn't it constitute notice and so on and so forth?

Clearly we have entered into these high-grade deals, the CDO ABS deals, but they are all synthetic, and what they rely upon contractually is an obligation on behalf of our counterparty to perform in a manner in terms of giving instructions to the appropriate trustee in respect of the deal and the tranche that we insure. And so that is just a slight difference, a slight nuance from a normal insured transaction where obviously we would be in direct contact with the trustee.

So again, it can be just a little bit of friction there. I don't want to exaggerate the issues here. I think they really are about complexity and also candidly about the sorts of pressures that the sectors are under. There is no doubt that global financial institutions, including us, obviously somewhat regret some of the transactions that we are in and others are in, and some people take a very literal line perhaps in relation to their obligations. Clearly those are things we are aware of and thoughtful about, and we will take them forward as needs be.

(OPERATOR INSTRUCTIONS). Tim Bond, JPMorgan.

I had a couple of questions. Actually two parts to this. Could you step into the market and actually by HELOCs or CDO deals with your insurance investment portfolio?

Could we? I would say the answer is yes, we could. I think that the rating agencies might not be terribly happy with that, and that could stop us. Callen speaking, purely personal opinion, it might turn out a year from now to be a very smart investment. But we shall see.

But the direct answer to, could we, and the answer is yes. Would we, is something else.

Yes, the issues from a financial perspective as it relates to capital and capitol and the rating agencies models, particularly is that transactions when they go to a rated BBB or lower receive 100% capital charge under certain rating agency capital models. That would make it difficult for us to take risks to transactions that one could downgrade into that bucket, or two, exist already in that bucket. So that would be a capital user that would be a difficult one.

The other point I would make is just generally liquidity of those type. We generally have a very extremely liquid investment portfolio on the Financial Guarantee side. So obviously we would be -- that would be something that would be of concern to make transactions that are large in that type of asset class.

Just passing it would be just from a risk perspective, we talked a little bit about correlation and how that is hitting us and many. Clearly whether the risk is on the insurance side or the investment side it is all risk, and arguably we have got enough RMBS risk.

So from a correlation and overall enterprise risk perspective, that is something that obviously we would want to be thoughtful about also.

I was thinking also in context of actually decreasing your exposure if you are purchasing from the market and your collateral loss expectations from 80% and you are able to purchase for significantly lower than that, you could opportunistically lower your net exposure there. And then if the market does recover, you would have some upside.

But the second question I had was, in regards to the statutory surplus, I know you have mentioned the liquidity was strong. But I guess my concern is, if reserves continue at this level, the statutory surplus becomes important. The fact that the regulators could step in and actually take control, and I wanted to get your views on that.

Sure, I can answer that question. If you look on the last page of our operating supplements, that is on our website. It is page 27. I will just give you the numbers if you don't have it handy.

But on that page, it provides March 31, 2008 statutory numbers. As you can see, the qualified statutory capital and the surplus to policyholders, which are two important numbers for regulatory purposes, have increased from the end of the year primarily due to the capital contribution.

One thing minus any -- minus the CDO reserves that were taken, minus any dividends that were paid out of the insurance company to the parent as I mentioned, $54 million, that gets you to -- plus the quarter results -- that gets you to the ending March number.

So the issues there would be as surplus to policyholders is the governing constraint for dividends. Then we can dividend 10% of the beginning of the year number. So that $3.3 billion, that is our capacity to dividend under normal constraints not considered to be an extraordinary type dividend. Qualified statutory capital is kind of a single risk limit number.

But nonetheless you can also see some contingent reserves. There are contingency reserves, which is kind of a statutory accounting concept for ACR in a sense. That is for reserves for unknown type items.

So you would have to have additional CDO impairments. You would have to have additional tumbling of ACR into case. Those two items would have the effect of reducing capital. But you would also have income. You would have investment income. You would have the earnings on a statutory basis to offset that.

So at this point in time, you can see, even though we've booked some big reserves, it would be more of an immediate impact from the CDO side, and then it would be lesser of an impact, plus it would be case -- like problem transactions moving from a future reserve in ACR, if you will, to case reserve.

Any further questions, sir? [Stephen Lesko], Credit Suisse.

First, on the answer to the last question about how much you can dividend up from the operating company, is not there also a statutory net income restriction where you can really dividend minimum of 10% surplus in either the one or three year net income less previous dividends?

Yes, what the test is, it is the lesser of 10% of surplus to policyholders at the end of the year. So in this case, December 31, 2007. So at the lesser of that or and this is a two-part test, either the income from the prior year or the aggregate income for three years. So in our case, the limiting constraint for us is the 10% for surplus to policyholders, and that limiting constraint is $331.6 million.

But what is the year-to-date statutory net income?

I don't have that number in front of me but hold on a second. The statutory net income is approximately for the first quarter it is a loss of about $850 million, and that is due to the reserves taken for the -- additional reserves from the CDO-squared transactions and the high grades that we posted and reported in our press release.

I see we have a number of questions on the Web. I want to get through the queue of people here, but we are going to answer every one of those questions either at this conference or by e-mail. All the questions.

I will answer one right now. It is, are you going to go bankrupt? And the answer is no. And we will answer that one as well. But there are number of others. I do not want to be discourteous and ignore them, but let's continue with those in the queue here.

Okay and just a question for David regarding the CDO disclosure. Could you give any color on the pool of ABS that is less than 25% MBS bucket of like $2.8 billion? I know [MDIAs] they did not disclose what was in there, and it turned out to be 20% RMBS and like 80% CDOs (technical difficulty)--

Yes, you are cutting out just a little bit. I think you're asking about the non-ABS CDO portfolio.

Well, the pool of ABS that was less than 25% MBS?

Yes, that is right. So I think in the appendix to the slides that we presented, there is some pretty good material on there.

So page 43, for example, splits up the book both by bond kind, the predominately high-yield CLOs, about 65%, and by rating 70%-odd, 74% AAA.

We feel pretty good about our book. I think that the ratings indicate that corporate default rates can escalate way north of where they are now. So if corporate loss default rates or any kind of reasonable severity jumped up to 10%, that would not cause us great concern.

I think that we have about 8.9% of that book is in market value CDOs. Clearly for all the obvious reasons, that has been a real focus for us. That portfolio has really kind of done what is supposed to do. So yes, at times different triggers have been hit, and one or two things has happened without exception.

Either equity has been injected, or portfolio sales and deleveraging has occurred. So there has been some stress there, but candidly obviously the idea of those deals is to be self-correcting in terms of the measures that are prebuilt into them.

So no, we are feeling pretty good. We have got the focus I'm particularly focused on is we have got about 4% of the trust deals. This is regional banks, regional insurers. And, you know, you read the journal everyday, and you look at the extent of RMBS, this is whole loan not security, RMBS holdings, as a percentage of assets, and candidly I think this is something that will be perhaps a future of the landscape over the next six months, i.e. moving away from RMBS security concerns to looking at loans, which obviously are more difficult to value. And you look at regional banks, and you worry about that segment and the regional concentration perhaps that those banks might have in their lending books. So we are very focused on that.

We are conducting a review of that entire book as we speak, but the initial run seems to be, yes, it looks fine. So I guess that is a long way of answering the question, that the high-yield book can take a heck of a lot. The market value book is performing as it should. I mean clearly things have happened there, but the deals have performed further plan as it were. The [tropes] I think I personally focused on, thus far they look okay.

So no, we are not experiencing undue concerns. Certainly corporate default rates can escalate significantly from where they are now, and I think they probably will, but hopefully not to levels that will unduly trouble us.

[Ben Kadim], [Kadim Capital Corporation].

Within the presentation in response to a question, you said the cash flow on an annual basis runs around $1.5 million to $1.6 billion. And also when you floated the equity offerings, you mentioned that the cash flow of the Company runs about $1.2 billion. So obviously you indicate an improvement.

My question is, assuming no way capital mark-to-market changes, assuming it is a big assumption of course, but assuming no changes in markdowns or markups in that case, from operations are you profitable, or is it -- how does the business look strictly operationally?

I want to clarify. I think you may be referring to the accretion of capital internally which is derived from a runoff of the business, which, of course, absorbs capital and from the earnings from our investment portfolio. And just to clarify my answer and then I will go on and answer you, the rate of runoff in the first quarter actually of health care and things like that that absorb a lot of capital exceeded our projections when we said $1.2 billion. And we know in the second quarter, we're going to have an even larger runoff of those capital expensive transactions. And so I have moved up my own projection of capital accretion and add back from $1.2 billion rather to $1.5 billion.

Now to the answer of your question, yes, in the absence of deterioration in the portfolio almost exclusively on the mortgage side of the portfolio, we have a profitable business. Most of the profit, in fact, as we have pointed out already embedded in the balance sheet. So we're talking about a business here that generates earnings of 750 to $800 million a year after-tax, and that would include no incremental business.

So we have said several times, and it is of some interest for analytical purposes, it does not change economic reality terribly much. But the number of troubled transactions in a very large book are remarkably few. And if one could set those aside or snip them off, Ambac is a good viable profitable business, yes.

And you also made a comment that the portfolio rolled out about 70%, so the evaluation is not 30% of face. What portion of the portfolio is that that you mentioned the average is around 30% of face?

I think what you're referring to is the proportion of the CDO-squared deals that we have reserved against. I am just thumbing through the deck to try and find that. But I think that is what you're referring to.

So that is an impairment that we have taken, an impairment rather than reserve because it is credit derivative against --

Yes, I think that -- Callen sneaking in here again -- our CDO-squareds have been the most troubled part and the most visible certainly high-profile. And I think what we said was, of that face value on the CDO-squareds, we have now reserved in excess of 70% of that. There were two single-A CDO deals, which have both been fully reserved. They were 500 each. And then there is another transaction of $1.4 billion. We call it the bespoke transaction with one counterparty, and we have reserved that about 60%.

So if you take the entire CDO-squared portfolio, it is pretty much largely behind us I guess.

You're talking about a total face of about $2.4 billion of (inaudible) average 70% reserve?

That is correct.

Sy Lund, Morgan Stanley.

Just a question on the comments you have made about Moody's. You said that you hope to hit the Moody's target in the second quarter. I mean those are targets for Moody's as of March, and obviously your outlook has changed since March. Are you confident that the targets that the rating agencies have will not change in light of what has happened in the market and also in the context of your expectations for the year?

You know, one always has to be careful trying to speak for someone else, and I'm obliged to repeat that. But when they arrived at the numbers they did using the models that they implemented after the mortgage meltdown began, they incorporated some very, very conservative assumptions. And what we are saying is that the assumptions they incorporated are pretty much what we're seeing here. They anticipated stress.

So I cannot guarantee they will not come out and say, oh well, now we're going to change the goalpost. But the purposes we have said before of these conservative functions multiplying times 30% above that was so that in the event that events unfold the way they are, they would not have to do that, which I could give you a guarantee. I can only express some confidence that our capital position even given the unhappy results we have reported are adequate and getting more adequate against their targets.

Excuse me, I'm sorry. I would not be surprised to see them come out with some comment at some point in connection with some of the actual results being reported for the first quarter, not just for us but for others as they watch the developments in the marketplace. But the prospect of an immediate downgrade in my opinion is not high, certainly not high.

Again, a quick follow-up as far as the operating company. You said you're taking a dividend out of the Wisconsin operating company. I mean if I look at the holding company cash, I can roll forward until the second half of 2009, and given the capital position you have right now, why are you actually taking a dividend out in 2008?

Yes, what we wanted to do was we wanted to grow that cash position at the parent company to approximately a two times level. So we want to grow it to that level. That is what some of the rating agencies would like to see at the holding company level. So we are going to go about doing that. And then we once we hit that kind of target, if you will, which we expect to hit close to or closer to the end of the year, maybe in the first quarter of '09, then we will sit back and determine what the appropriate actions would be after that.

Thank you for all the detail.

Joe Auth, Harvard Management.

I would just like to ask a question about the FGIC business in relation to ABS CDOs. Given that there are a number of ABS CDOs that are in the process of liquidation or that they have already liquidated, I would like to see if you guys could tell us how much exposure you guys have to FGIC business within ABS CDOs?

Sure. If you look in the slide back you have access to that, but if not you can look at it at your leisure. But if you look at page 71, slide 71 gives detail as to where the investment agreements reside as of the end of the quarter, at the end of the first-quarter '08. In that you see the various buckets, so of about $7.1 billion of investment agreements, liabilities that is, we do not really have much on the asset side, very very limited exposure, and it is mostly to corporate assets, not residential. But we're talking about the liability side, and that is what slide 71 is, is $2 billion of ABS CDOs across 10 deals. And then we have credit linked notes, structures of about $1.3 billion. So about 3.3.

When you peel that back, the ABS CDOs about 55% relates to RMBS transactions, and then when you peel back the CLNs, less than 10% relates to residential asset transactions. So generally our exposure to RMBS transactions on the ABS CDO liability side is about $1.1 billion. In our analysis we think that there could be potential draws on those due to credit type events in 2008 of a little over $400 million. Our cash position is pretty sizable in the business right now, and we have some liquid securities to handle that type of -- those types of issues. So I think those issues are contained, and hopefully that was helpful.

Scott Frost, HSBC.

Thanks for the follow-up on the business written. You said that you had $12 million since the capital raise, and does that include close and what you have circled?

No, that includes just what we have closed so far.

Did you give us an amount that you have circled that is in the pipeline?

You know, I think it is a similar number. But I don't want to go into detail on it.

Okay. And did you say that this represents mostly secondary rewraps of muni bonds, or is any of this sort of new business?

There are a couple of new issue, new market transactions on the municipal side, both negotiated transactions as well as those that are competitively bid. The competitively bid number is much, much larger.

So while we have done a couple of negotiated deals, one week a couple of weeks ago, for example, we closed six competitively bid transactions.

On the secondary side, those are for smaller deals. They are not for the entire deals, but for single maturities or pieces of them, and that represents a large number of transactions that are relatively small volume.

I'm sorry, so you said the rewraps are small size?

Yes, generally they are for single maturities within the transaction one at a time, not the entire transaction, and most of them are not rewraps of other transactions. We have gotten requests to rewrap issues that have been insured by other monolines, but there is also secondary market business of transactions that went uninsured in the primary market.

Okay, okay. And just for -- do you have any sort of -- for scale could you give us an idea of what it was for a combo period last year, or is that --?

Actually from a secondary market perspective, since in previous years' periods, the penetration rate for insurance was much higher than the primary market. We at Ambac have done very little in the secondary market. So our production in the secondary market actually is relatively high compared to what it has been in past first quarters, for example.

But your total business written -- (multiple speakers)

It is really way down. (multiple speakers). Total business is way down. The insured penetration rate is running about half or so of the level that it has been at in previous years, and volume is down significantly as well. particularly in the first two months.

And the last point, you alluded to the capital ratio on page 27. That is not exactly analogous to like an RBC ratio that we would normally see on a statutory statement of a non-monoline. Could you sort of give us some color or remind us what sort of levels you would have to hit for I guess Company action and authorized control level capital, or does that apply to you here?

I think these ratios I'm not familiar with bank RBC.

insurance RBC.

I mean insurance RBC calculations specifically. These are illustrative purposes to show kind of principal and interest leverage again statutory type measures. So these are not regulatory ratios per se. We have calculated by surplus levels regulated by single risks based upon qualified statutory capital levels or -- (multiple speakers)

Right, but let me come at it another way. You have got to qualify statutory capital numbers; that is your total adjusted capital. What is your minimum capital requirement under statute?

Well, we would need to have -- I'm not sure -- I'm not sure I understand that question. I mean, the way we are regulated is from a surplus perspective, obviously you would look to a positive surplus condition. The contingency reserve is kind of the way to set aside surplus funds for potential losses. So that grows over time. (multiple speakers)

I mean you have other things, so it's not an RBC type calculation. So the contingency reserve has an element of that because it's trying to take natures of exposures and build that up, and obviously that is a draw off of the capital base. So that is a part of the regulatory scheme. There is also single risks limits, aggregate risk limits. There is minimum numbers. I think it is $75 million of capital to be -- I think California might have some regulations as well. I cannot quote them off the top of my head but around those similar type numbers. Minimum levels of capital. And then you obviously have the various capital models that we look to and adhere to to maintain the AAA capital level.

I will now turn the conference back over to management to take some written questions.

Yes, let me answer [Mr. Dennings] question. And it reads, even if Ambac has the reserves necessary -- David, could I have the microphone? Even if Ambac has the reserves necessary to make it through the current market dislocation, has not the bond been -- the brand been irrevocably damaged? How can you win back market share when conditions normalize?

I will give you an answer that my colleagues here will not be happy with because there is a temptation to preach from the mount here. But the truth is, one does not know the answer to that. But the facts behind that are that we have been all over the country talking to all of the various constituencies. And while I understand people say what you might want them to hear -- you might want to hear at times, there is a need for the service. There is a need for the name. There is a recognition of the name. And I feel a sense of underlying support.

I do believe it would take a quarter or two of significantly attenuated losses before this process of an inch a day getting back into the market and having our name accepted as a worthy underwriter is going to work. We've got to put a lot of doubts to rest.

On the other hand, I opened up with a comment that I feel strongly about, and that is that we are being tested and the value of the product is being demonstrated. We think we are managing this place in a way that can withstand this kind of stress. I personally believe in a year from now that is how we will look at it as having come through the worst of times intact. But we do have a confidence we have to rebuild. That's a very hard job. It is an inch a day, and there is no lack of dedication to doing so however.

[Mr. Nardelli] asks about, can you comment on consolidation going forward within the Financial Guarantee industry? And the answer is that I think there will be consolidation. There have been some players who have dropped out. It would not be telling any secrets to say there are a lot of discussions going on between various parties. There are combinations that would tend to make sense. And I don't speak for Ambac, I think I speak for the industry that those type of conversations will continue, and I would not be a bit surprised without pretending to reveal any confidential information -- I would not be a bit surprised to see transactions occur in this industry over the next year or so. Anytime you have the kind of stress we are undergoing that is almost invariably a business outcome. And thank you for the question.

So if there are anymore in the queue, we would be happy to sit here as long as required. And I will commit to if that is the end of our session, I will commit to having all the other questions that came across the Web answered in writing within certainly by the end of the day and perhaps before that. And we thank you very much for your attention and your interest and look forward to seeing you all with much better news and between now and our next telephone conference. I suspect we will see many of you. Any feedback you can give us, we absolutely are dedicated to being as transparent as possible. Thank you very much.

Thank you, sir. This concludes today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.