Ambac Financial Group Inc (AMBC) 2009 Q1 法說會逐字稿

Greetings, and welcome to the Ambac Financial Group, Inc., quarter one 2009 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Leonard, Senior Vice President and Chief Financial Officer.

Good morning to everyone and welcome to Ambac's first-quarter conference call. I am Sean Leonard, Chief Financial Officer of Ambac. Presenting with me today are David Wallis, Chief Executive Officer, and Greg Raab, Ambac's Chief Risk Officer.

Our earnings press release, quarterly operating supplement, and a slide presentation that follows along with this discussion are available on our website. I recommend that you view the slide presentation as we speak today. Also note that this call is being broadcast on the Internet at www.Ambac.com.

During this conference call we may make statements that would be regarded as forward-looking statements. These statements may relate to, among other things, management's current expectations of future performance, future results and 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 an inherent risks 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 on 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 will now turn it over to David Wallis, who will comment on Ambac's strategic priorities.

Good morning everyone. Ambac continues to focus all its energies upon stabilizing the insured portfolio and proactively following strategies that will ultimately provide shareholder value. We have been pursuing these strategies within a credit environment that is as bad as one can remember, but perhaps also one that may now be beginning to show some tentative signs of reprieve.

The primary shareholder value question remains a deceptively simple calculus of future claims as against future claims paying resource. But recall that the majority of claims are anticipated 20, 30 or more years into the future. It is between now and then that there is a major opportunity to manage the risk in the portfolio and execute upon other strategies, which can also generate shareholder value.

Risk management remains the cornerstone of our proposition. As we announced on March 3, we have successfully recruited a new Chief Risk Officer, Greg Raab, and he and we remain excited by the opportunities to manage our portfolio to the benefit of all our stakeholders. I am not surprised by our ability to attract talent. And I believe we will have ample opportunity to proactively deploy it in a variety of areas in the coming years.

Another key objective is to lever off our existing assets and capabilities, perhaps occasionally augmented, to take advantage of the stressed credit markets that are bringing new opportunities as historical market practices and structures have been found inadequate. These needs and the consequent opportunities include those revolving around superior analytics, transparency, and the overall management and investment in risk.

A final major set of activities for Ambac involves the perspective launch of Everspan, our back to basics, singularly focused municipal-only guarantor. Remained highly confident of the business proposition, and those that query this or Ambac's almost unique opportunity to execute remain in a significant minority.

However, the last few months have been frustrating in that we have been seeking outside capital to prove beyond reasonable doubt the notion of separateness from Everspan's parent, Ambac Assurance, but have had to do this in the most capital constrained environment for a generation. Rest assured, that we intend to pursue this initiative, but will only do so on terms and pricing that are sensible in relation to the stakeholder value objectives that remain our guiding light.

A final feature of the quarter was Moody's downgrade of Ambac Assurance to Ba3 on April 13. As we noted at that time, this is the 10th rating action since January 2008. This is not to say that familiarity breeds contempt, but is to say that any impact upon our markets, operations or stakeholders is relatively minor.

I will now hand it back to Sean.

For those viewing the slide deck, please turn to slide 4. In my prepared remarks I will provide an overview of the quarter's GAAP financial results and the primary factors driving them. I will also provide a summary of our statutory results and surplus levels, and finally a brief overview of the Company's liquidity position.

But before I get to the quarter results, I would like to address Ambac's implementation of a new accounting standard for financial guarantee insurance contracts called FAS 163. As you may recall, the Financial Accounting Standards Board initially took on the project a few years ago in an attempt to ensure that all financial guarantors account for losses consistently. After deliberating, the FASB decided to greatly expand the project scope, ultimately delivering a standard that resulted in a substantially new accounting model for financial guarantee insurance contracts.

The most significant changes relate to the recognition of premium revenues, recognition on the balance sheet of future installment premiums for contracts -- existing contracts, which are typically structured financial exposures, and reporting of losses.

Due to these changes in accounting, 2008 and 2009 results are not comparable. Ambac implemented FAS 163 as of January 1, 2009. The effect of applying the provisions on that date was an increase to total assets of approximately $5.6 billion, primarily representing the present value of installment premiums receivable; an increase to total liabilities of approximately $6 billion, mostly relating to the recording of the unearned premiums related to these installment premium receivables and changes to loss reserves; and approximately $381 million reduction to stockholders equity.

The single biggest component driving the reduction to stockholders equity is required use of a risk-free rate to discount loss reserves. We use the weighted average risk-free rate of 1.5%, rather than 4.5% used previously based on the yield of our investment portfolio. As mentioned, the increases to assets and liabilities were primarily due to the impact of including amounts relating to installment transactions on the balance sheet.

Under the new accounting standard Ambac now reflects the present value of future installment premiums over the contractual term for all insurance policies, except those with homogenous assets, such as mortgage-backed security exposures, as a receivable on our balance sheet, with a corresponding adjustment to unearned premiums. Related adjustments are also recorded in the financial statements for premium taxes and reinsurance.

Over time accounting for installment premiums will cause volatility in our premium earnings for two reasons. First, premium receivables denominated in foreign currency will be adjusted to US dollar at quarter end. And second, premium adjustments due to policy terminations and differences between actual and expected prepayments will be reflected as well.

Importantly, with the implementation of FAS 163, we have changed the methodology of earning premiums from both upfront and installment premiums. Specifically, Ambac is required to recognize premium revenue for both upfront and installment paying policies by recognizing a fixed percentage of premium to the amount of exposure outstanding at each reporting day, referred to as the level-yield approach, rather than recognizing premiums evenly over the term of each maturity for upfront paying policies.

For installment paying policies FAS 163 also requires that the accretion of discount, equating to the difference between the undiscounted installment premiums and the present value of installment premiums, be recognized through the income statement.

For loss reserve accounting, Ambac is required to recognize a loss reserve for the excess of A., the present value of expected net cash outflows to be paid under the insurance contracts over, B., the unearned premium revenue for that contract. To the extent unearned premiums are greater than the expected loss, no loss reserve will be recorded.

Additionally, the new standard requires that companies used the risk-free rate in discounting estimated future loss payments in the calculation of loss reserves.

It is important to note that accounting for investment securities and accounting for our credit default swap contracts did not change as a result of this new accounting standards.

Now turning to page 5, I will discuss the financial results for the quarter. Net loss for the first quarter of 2009 was $392.2 million or $1.36 per share. That compares to a net loss of $1,660.3 million or $11.69 per share in the first quarter of 2008.

The first quarter of 2009 loss was primarily driven by a net provision for loss and loss adjustment expenses amounting to approximately $740 million, primarily related to Alt-A affordability product RMBS transactions.

Other than temporary impairment adjustments amounting to approximately $830 million taken on Alt-A securities held in our investment portfolios, and an increase of approximately $600 million for the evaluation allowance on our deferred tax asset, these adjustments were partially offset by positive changes in the fair value of our CDO portfolio and increased accelerated earned premiums resulting from re-fundings.

Total net premiums earned for the first quarter 2009 amounted to $196.8 million, an increase of 5% from the first quarter last year. Accelerated premiums, a component of total net premiums, amounted to $41 million during the quarter. Our net par outstanding at March 31, 2009 amounted to $413.3 billion. That is down 5% from the end of 2008, and down 19% from March 31, 2008. The structured finance portfolio is down about $35 billion or 21% from a year ago.

Investment income amounted to $97.5 million, down 19% from the first quarter of 2008. The decrease was driven by cash payments made for commutations and other losses since the first quarter of 2008. Also a decline in LIBOR rates, combined with a repositioning of our investment portfolio to short-term securities to provide enhanced flexibility contributed the decline.

Those negative factors were partially offset by proceeds received from the $1.3 billion capital raise in March 2008, and the issuance of $800 million of Ambac Assurance preferred stock in the fourth quarter of 2008 and the first quarter 2009, as well as cash flows from premiums collected and net interest income from the investment portfolio.

During the first quarter Ambac Assurance in the investment agreement business reported net security losses of $742.9 million, almost totally related to other than temporary impairment write-downs for Alt-A, RMBS securities.

Recall that Ambac Assurance purchased Alt-A RMBS securities from the investment agreement business in the fourth quarter of 2008 and this quarter to provide that business with the appropriate levels of liquidity. Our detailed analysis indicates a certain of the securities will experience payment shortfalls, and as such we are required to write those securities down to very severe market values.

The current valuations are not indicative of the expected cash flows to be generated by these securities through maturity, but are reflective of very high investment yields that will be recognized in future investment income.

During the first quarter Ambac recorded net mark-to-market gains related to its credit derivative portfolio amounting to approximately $1,546 million. Mark-to-market losses were primarily impacted by the larger discount effect of wider Ambac credit spreads in the calculation of fair value, partially offset by deteriorating price performance in the CDO portfolio and internal downgrades in that portfolio. I am sorry, that would be mark-to-market gains. I misspoke.

Total RMBS incurred losses for the quarter were $727.7 million of the total $740 million of losses incurred. These primarily related to deterioration in our Alt-A affordability RMBS portfolio.

During the quarter we paid $267.5 million in RMBS claims, almost all related to second-lien transactions. Greg Raab will provide greater detail about our loss -- about loss in our portfolio performance later on this call.

During the quarter the deferred tax asset valuation allowance increased to approximately $2.7 billion, an increase of about $600 million from December 31, 2008. For purposes of estimating future taxable income available to utilize net operating losses reported to date, during the quarter Ambac revived its estimate of potential future increases in loss reserves to conservatively reflect the potential impact that further deterioration in Ambac's insured portfolio would have on future taxable income.

Additionally, due to the low interest rate environment currently encountered, management revised its estimate of future investment income generated by its investment portfolio. The revised estimates resulted in an increase in the valuation allowance.

To assist users of our financial statements in the analysis of our reported earnings, we also report our earnings on an operating and core basis.

Now please turn to slide 6, which summarizes these earnings measures. Both operating and core earnings measures are considered non-GAAP. Operating earnings excludes the net income loss impact of net gains and losses from sales of investment securities and mark-to-market gains and losses on credit, total return and non-trading derivative contracts that are not impaired. Core earnings further excludes that income impact of accelerated earned premiums from re-findings.

Operating loss per share in the first quarter of 2009 amounted to $3.22 per share. In calculating the operating loss we exclude the impact of unrealized gains from our credit derivatives portfolio, but do not exclude the impact of estimating credit impairment within that portfolio. However, for the second consecutive quarter, Ambac did not record any additional credit impairment. Core loss per share amounted to $3.31 per diluted share.

Now I would like to discuss the Company's liquidity, both at our operating and holding companies. On slide 7, I'm going to discuss the components of liquidity at the holding company. Total holding company cash and short-term securities amounted to approximately $178 million at March 31. That amount represents 1.57 times the holding company's annual debt service needs. As of March 31, all intercompany receivables from affiliates have been settled at the parent.

Dividends in 2010 from Ambac Assurance will depend on 2009 statutory income, and give positive may be limited to 10% of statutory surplus at the end of 2009.

I'm going to turn to slide 8, please. On slide 8 we have laid out the statutory capital as of the end of the quarter. Due to the statutory operating losses recorded by Ambac Assurance in 2008, AAC will not be able to declare and pay dividends to the holding company in 2009, without first receiving approval from the Office of the Commissioner of Insurance of the State of wisconsin, or OCI. AAC did not seek approval to pay such dividends in the first quarter of 2009. AAC did receive approval from OCI to pay preferred stock dividends thus far in 2009, and has approval through June 30.

AAC's statutory surplus at March 31 amounted to approximately $394 million. As mentioned in last quarter's conference call, during the first quarter Moody's downgraded most of Ambac Assurance's Alt-A mortgage-backed securities to below investment grade ratings. Under statutory accounting we are required to carry these below investment grade rated investments at the lower of cost or fair value.

Reductions to surplus in the first quarter for investment valuation adjustments amounted to approximately $1.3 billion. Also note that Ambac Assurance has recorded Ambac contingency reserves amounted to approximately $2 billion at the end of the quarter.

Ambac Assurance's claims paying resources at March 31, 2009 amounted to approximately $12 billion. Those resources are supported by Ambac's fixed income investment portfolio. The portfolio has a market value of approximately $7.4 billion at quarter end, and an amortized cost basis of $8.5 billion.

Approximately 97% of the difference in market value in amortized cost in this portfolio relates to the mortgage and asset-backed securities that were acquired from the investment agreement business, mostly during the fourth quarter of 2008 in support of that business' liquidity needs. The remainder of the investment portfolio is made up primarily of high-quality municipal bonds, US government obligations and US agency obligations.

Ambac Assurance's cash flow for the quarter has been impacted by the level of loss payments. For the balance of the year we expect to receive principal and interest related to this high-quality investment portfolio amounting to $395 million. You can see those numbers on slide 36.

Additionally, we expect to receive about $282 million of installment premiums over the remainder of 2009, and approximately $280 million in tax refunds related to taxes paid in 2007 and 2006 during the second quarter 2009. In summary, Ambac Assurance's consolidated operating cash flow for the balance of the year is expected to be flat.

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

Please turn to slide 10. Before I start discussing Ambac's insured portfolio, I would like to take a few minutes to elaborate on Ambac's de-risking strategy. David has previously discussed the importance of risk management and reduction, and you have seen us make concrete progress against this extremely important initiative.

As we look ahead, de-risking, which is enterprisewide, will include, one, portfolio restructurings of our CDO exposure. Two, a heightened focus on RMBS servicers to reduce losses through appropriate applications of loan modifications, REO disposition and other loss mitigation actions. Three, a consolidation of collateral management activity to ensure that we are working with the strongest asset managers and servicers.

Each of these activities will be supported by enhanced mortgage analytics and a new platform solely focused on distressed workouts. We have an incredible amount of access to market data through our insured portfolio. This data will allow us to efficiently monitor the portfolio and evaluate the effectiveness of proposed solutions.

All of our activities will be driven by a singular focus, which is minimize the loss given default and to protect our capital base.

With that introduction, let's move onto the RMBS and CDO of ABS portfolio on slide 12. The housing market has continued to deteriorate in the first quarter of 2009. What started as a housing-related recession has turned into a full-blown economic recession with unemployment levels approaching those not seem since the early 1980s. While the government has introduced approximately $15 trillion in economic programs, we have not seen a stabilization of home prices.

Early in the housing cycle there was a great deal of focus on second-liens. Aside from the greater leverage in these products, we discovered rampant nonadherence to loan underwriting standards and fraud. In the last two quarters, however, we have seen disturbing trends in the delinquency data for first-lien mortgages. We have discussed this previously in the context of our Alt-A portfolio.

As of the end of the first quarter, we have approximately $2.5 billion in reserves against our RMBS portfolio. Almost half of these reserves, $1.2 billion, relates to our second-lien portfolio, and were up slightly after adjusting for claims paid during the quarter. The remaining $1.3 billion is related to first-lien product.

Given these trends and the sharp increases in delinquencies against Alt-A, option arm, neg-am and interest-only products, we have taken a fresh look at some of our classifications.

Turn to slide 13 briefly. As you can see from this slide, we have $24 billion of first-lien collateral. Of this collateral, 82% relates to mid-prime, subprime and affordability products. On slide 14 are the first-lien collateral trends.

Affordability product, as most of you know, was used primarily in parts of the country where home prices had seen the greatest increases, such as California. Now that parts of California have seen home prices decline between 40% and 50% from their peak, we are seeing dramatic increases in delinquencies. The midprime bucket has been refined only to include Alt-A product.

Alt-A continues to be a difficult category to define, given its broad coverage between subprime and prime. The main issue with these mortgages is that they were structured with credit enhancement levels closer to prime borrowers, but they have performed more like the subprime sector.

During the first quarter our analysis was driven by slowing voluntary prepayment rates. Despite low mortgage rates for first-lien borrowers, borrowers are finding it difficult to prepay and refinance due to the loss of equity and more stringent underwriting requirements.

Over the next few quarters we will do -- we do expect to see some stability as a result of a plethora of government programs. But this expectation is not reflected in our analysis for this quarter.

During the quarter we added $460 million in RMBS reserves, including $513 million and $164 million for neg-am and I/O products, respectively, and offset by lower second-lien reserves, which was mostly attributable to claims paid during the quarter.

We paid $268 million in RMBS claims in the quarter compared to $288 million in the fourth quarter of 2008. We will reunderwrite first-lien mortgage pools with financially viable sponsors, much like we have already done on our second-lien deals.

As I mentioned earlier, we refined the segmentation of our first-lien affordability and mid-prime portfolios. This change was necessitated by the unique credit characteristics of these collateral types. Our focus in analyzing these transactions is to start with the late-stage delinquencies and assume liquidations in severities consistent with those observed in these pools.

For the current borrowers we use a roll rate approach. The most important observation comes from the timing of losses. In most cases we are projecting a higher and more concentrated loss timeline than previously anticipated. Our analysis assumes that this front-end loss experience will persist for most of 2009.

Beyond 2009 we are anticipating that losses will abate over a period of about two years. This analysis is refined by product. In the case of neg-am collateral we included an additional stress at the time of payment resets.

In summary, our analysis, much like mortgage analytics across major mortgage market players, is based on a combination of embedded losses and an expectation about the behavior of the mortgage borrowers who are still current. I can summarize our analysis by saying that on average our analysis assumes that slightly less than half of the remaining borrowers will default. This analysis supports our theory that deterioration due to fraud and investor-owned properties has largely worked through the system as the portfolio has seasoned.

In the prior quarter we mentioned some deterioration in older vintage subprime collateral. The pre-2005 portfolio comprises approximately 15% in net par outstanding, and has been responsible for 1% of the aggregate claims to date, and less than 8% of the total reserves.

Please turn to slide 15 for the second-lien collateral trends. We have spoken about closed-end seconds, especially the piggyback seconds. These continue to represent the majority of our claims payments. The second-lien trend that particularly concerns us relates to loss severity. In some cases we are seeing loss severities as high as 107%.

The HELOC deals are still bifurcated by origination channel. The broker-originated HELOCs have dramatically higher loss rates than the bank-originated deals. This quarter, however, we started to see the general stress of the economy affecting these borrowers too. We will continue to monitor this portfolio closely.

Ambac has not changed its loss reserving methodology as it relates to second-liens. Our analysis is based on the assumption that home prices will not hit bottom until September 2010.

On slide 16, you will notice that to date we have recorded approximately $882 million in remediation offsets, with a three-year expected recovery period. Adjustments to this value during the quarter were not significant. The remediation efforts have shifted from loan reunderwritings to aggressive put backs of these loans to two counterparties. The litigation we commenced during the fourth quarter continues to advance, with the defendants motion to dismiss denied in the quarter.

Let me remind you of a startling statistic. The recoveries that are reflected in our results are based on reunderwriting of only 8,500 loans and 11 transactions. Of these loans, approximately 90% represent breaches of reps and warranties.

Please turn to slide 17. The quality of RMBS servicing is an area of concern. Servicer's economic alignment of interests in these securities has deteriorated, along with the risk deterioration in residential mortgage performance. If servicers do not perform to contractual obligations, this may result in servicing transfers and potential legal action.

Another area of focus are the proposed government actions to protect homeowners. Ambac is actively involved in these programs, but the potential impact of loan modifications and buyback on mortgage performance is currently unclear. Stabilization of the housing market will likely have a positive effect on our insured portfolio.

Turn to slide 19. The ABS CDO impairment for the quarter remains relatively unchanged. We have $3.7 billion in impairments against 24 transactions. 22 of the 24 are now related below investment grade, down from Triple-A at inception. The profile of these transactions remained unchanged. The majority of the near-term stress is expected in some of the synthetic high-grade ABS CDOs, as well as one of our mezzanine ABS CDO transactions.

Slide 20. We are actively exploring portfolio solutions that eliminate our exposure, cut off leakage of cash flows to junior tranches, or that otherwise repackage our exposure to reduce risk.

There has been a disappointing lack of progress in CDO derisk solutions in the monoline space. This is a function of the transaction complexity, document ambiguity and the number of direct and indirect parties in these transactions. We believe momentum is building now, and we are cautiously optimistic about our own efforts currently underway.

For the remainder of the insured portfolio, please turn to slide 21. We have seen a keen appreciation for all the credit sectors, and we are monitoring them closely. We have provided portfolio updates for our corporate CDOs, our auto-related exposures, and our student loan exposures in the slide deck and in the appendix.

We have approximately $445 million in reserves against the remainder of our portfolio. The largest non-RMBS reserve relates to a closed block structured insurance transaction, which is suffering from a poorly performing investment portfolio. This is largely invested in RMBS securities. This transaction did not incur any significant additional reserves in the quarter. We did, however, commence legal action against one of closed block's investment managers.

With that, I would like to hand it back over to Sean.

At this point we would now like to open up the conference call to questions.

(Operator Instructions). Darin Arita, Deutsche Bank.

I was wondering if you could share some of your macro assumptions underlying your loss reserves estimates? I think, Greg, you shared one, saying that home prices -- you don't expect that to stop declining until September 2010. I was wondering if you could share how much do you think they will decline from peak to trough. What is your unemployment rate expectations, and any other assumptions that you have?

No specific assumptions by group, other than to say we do expect the housing prices to decline. The one encouraging note that I think gives us some reason to believe that we may be bottoming out soon is that the current -- the roll to the 30 day bucket and the 60 day bucket in all these pools seem to be leveling out. The percentage decline is pretty much flat. And the dollar amount going from current into these buckets definitely seems to be declining. So the default rates seem to be slowing. There is still quite a bit in the late-stage delinquencies, but we took pretty big haircuts on those loans.

With respect to the remediation efforts, you mentioned the 11 insurance actions, the 8,500 loans underlying those. Can you remind us what sort of transactions those are?

Predominantly second-liens. And we are going to do the same on the first-lien side. It is pretty startling the number of breaches in reps and warranties we are seeing. We will continue to do reunderwriting, particularly on the pools that we expect the highest losses on.

It is Sean. A couple of other things there. Greg is right, it is HELOCs and closed-end seconds, particularly to the more financially viable sponsors, obviously. But we have targeted an additional six deals in the second-lien space, and nine of the Alt-A, kind of mid-prime/affordability, which is about $5.2 billion of par. So that is the next phase, if you will, as well as all the other litigation that we are working on relating to the first batch, if you will.

Of the $882 million of recoveries that have been booked, how much has actually been realized?

Very small amounts have actually been realized. Our assumption is that this will take a while. And built into the assumptions is a slightly less than a three-year timeframe to bring these aground.

Greg mentioned in his comments that one of the motions to dismiss from one of the defendants in the action -- one of the actions transacted in the quarter. So we have more of a holistic approach, rather than a loan by loan type approach. Even though there has been some of that, it has been on a very small scale.

Arun Kumar, JPMorgan.

A couple of quick questions. The first one relates to the tax refund. I think you mentioned the $280 million tax refund coming in the second quarter. I wanted to check if the amount goes to the holding company and then gets passed on to the opcos, or do you retain it at holdco? If you could just walk us through that.

The second question is related to slide 33, where you have the affiliate support information, and you have to $2.9 billion of assets purchased, and then the unsecured and the secured amounts of $1 billion. Could you tell us what the carrying value of those assets are on the statutory balance sheet -- the admitted assets -- and what haircuts have you taken to those numbers? Thank you.

Sure. The first question is very simple. Tax refund is received by the holding company, then passed down to the operating company through an intercompany tax sharing agreement. So that is pretty simple.

Slide 33, the purchases of assets by Ambac Assurance at statutory value, that has created an issue in the first quarter relating to the downgrades of those -- most of those securities. The Alt-A RMBS securities was part of that $2.9 billion. So that has created the carrying value we wrote down about, as I mentioned in my script, around $1.3 billion worth of value there.

The unsecured lending from AAC, we are carrying that at 70% of the value. So we are carrying that at $800 million minus a reserve of 30%, $240 million, so we are carrying that approximately at $560 million.

Secured lending is carried at its value, because it is covered by market value of assets.

Just to follow up, the $2.9 billion, is that after the $1.3 billion adjustment or is that pre-$1.3 billion?

That is pre the adjustment. And then we have adjusted -- so those were the gross volume of purchases -- so that the cash that went out. And then when we brought those on at the end of the year and through the first quarter, we've then -- there is multiple downgrades in the portfolio. There is some impairments, and we then wrote those securities down by $1.3 billion.

(Operator Instructions). [Albert Farin], private investor.

Any more comments regarding what I have read about Everspan and raising capital over the lock-step from the third quarter?

Let me take that. I couldn't quite hear your question, but I think it was regarding Everspan, and where are we and so on and so forth. Let me try and take that.

Following discussions with the rating agencies it became clear, rightly or wrongly, that additional separateness was required, i.e., all the measures that are currently in place in terms of separate governance, separate Board, separate staff and so on and so forth, wasn't sufficient necessarily at a rating level that we desire to generate the rating that we need to get into business. Therefore, we require external capital in order to fully augment and demonstrate separateness.

So obviously, over the last couple of months or so we have been out there busily engaged in explaining the business proposition to would-be investors into Everspan.

As we all know, and as I commented upon, this isn't an easy environment to raise capital. It is an extremely difficult environment to raise capital. That said, we are still right now in discussions with a number of counterparties, who I think are very interested in the proposition. The question is, are the return levels on a risk-adjusted basis satisfactory to those entities and equally satisfactory to ourselves.

Clearly we will not be taking forward the proposition if, in effect, we have to give away the store. That is not to say that will be the case, but we are continuing to look at the opportunity, and we remain positive that it is a good one on the right terms.

Alistair Lumsden, CQS.

Can you just give us some guidance? I seem to remember in other quarters you used to give an idea about what marks you have taken against the HELOC position. If we were to look at that as a percentage of total exposure that you have, what sort of level would you be providing at now?

I think the question -- I didn't quite catch it all -- but I think the question was what type of marks do we have against our HELOC portfolio?

That's right.

Actually, our HELOC portfolio, we do not own invest -- own very little investments that are backed by second-liens, so that is really not an issue in our investment portfolio. It is not -- it is largely not an issue in our credit default swap contracts. Those two areas are where we mark-to-market under US GAAP.

Now our exposures that we have been talking about, and Greg Raab mentioned, are under insurance policies where we have guaranteed RMBS securities that are backed by second-lien collateral. So we are not marking that portfolio to market. What we are doing is estimating what we think future claim payments would be and discounting those back to present value.

So what we do with is ground-up approach that looks at all the problematic transactions, it looks at the collateral performance, projects out the collateral performance, run that through the deal structure to calculate what potential for claim payments we have. And that is what shows up on our balance sheet as loss reserves. And changes versus payments runs through our income statement as losses incurred or loss and loss adjustment expenses. So it is not a mark-to-market portfolio.

I understand that. But if you looked at the wrap bonds and you express your provisioning as a percentage of total notional, what sort of percentage are you expecting to actually have written down?

Just hold on for a second. Let me see if we have that -- I don't have that information right at my fingertips. But let me see.

Unfortunately, we haven't got that precisely to hand. If we find it during the course of the questions, we will come back to you and declare that.

Okay. Can I ask one more question? In terms of the drop in the surplus this quarter, I'm guessing if you have another quarter like this you are actually below -- be below the required minimum. What sort of action are you taking to avoid that?

I will take that. Actually, if you have access -- I'm going to answer your previous question, because I found the data while I was hunting through the mounds of paper I have here.

On page 19 of our operating supplement, so if you have access to that, page 19 has three tables on it. The table at the bottom of the page shows net particularly outstanding by kind of broad classification, if you will. Then it shows total impairment losses.

So if you were to look at that for our second-lien exposures, we have $1.17 billion of reserves -- total impairment reserves against a net par outstanding of $8.8 billion. So that answers. And there is a variety of other classifications that we show on that page. So that answers that question.

The required minimum, what would we potentially do, we could potentially petition the Wisconsin OCI for what is considered to be a redundant reserve in our contingency reserves relating to expired municipal policies. That number is a pretty sizable number, probably in the neighborhood of approximately $700 million. So that would be one item.

The statutory -- the NAIC, which is the National Association of Insurance Commissioners, is looking at this latest GAAP guidance as it relates to valuation of securities in inactive markets, that you may have seen out in the press. That that is something that we are also required to look at and adopt in the second quarter. We have not adopted that accounting standard in the first quarter. So we will look at that. The statutory rule makers are also looking at that as well.

The write-down that I mentioned of approximately $1.3 billion was related to these Alt-A securities that some indications would lead you to believe that the values are perhaps low that we are getting from the pricing service. But we are looking into that, and we'll have more to report on that in the second quarter.

Conrad Meyer, UBS.

On page 46 of your slide presentation you reflect the claims paying projection. As of three years out, you seem to project a very serious RMBS-related recovery of perhaps $500 million. Could you explain what that number is?

It is the remediation again in relation to the mortgage loss net that we have been talking about.

That was the $880 million that we were discussing earlier.

What we have done is we have re-underwritten pools. We anticipate, due to the high level of breaches of reps and warranties in those pools, and our legal actions in pursuing the sponsors of these trusts that we will be collecting some recoveries relating to those problematic assets. That is what that is.

So we expect that kind of in a -- we made a broad assumption of a lump sum in a little bit less than three years' time. So what you see that bar is payments less the recovery. The recovery is quite large, so that is why you see it negative.

What is the relative confidence level of the remediation recovery though?

It is good.

Yes, we think we have done a great deal of work. I think it is pretty extraordinary when on a decent sized sample, 8,500 loans that were re-underwritten, and that is a real detailed process underwriting each loan, when you get something like 80% or more of those loans breaking at least a couple of major representations, then it tells you that something bad is going on.

We have taken care to consider these gains only against creditworthy counterparties. And we will be pursuing these, and are pursuing these, very actively. So these are contractual claims, and we think we've got good evidence for them, and we expect to collect.

The last point I would make is certain financial sponsors have disclosed in their own financial statements that they have established liabilities for just these types of things.

Patrick Dennis, DK Partners.

One quick follow-up on the conversation of the breaches of reps and warranties. Have any recoveries actually been -- has Ambac actually recovered any claims on these breaches to date?

It is relatively small but, yes.

Having said that, obviously the strategy here is a bigger, more all-encompassing one than a loan-by-loan flog. And if that is what we end up doing, then that is fine. But clearly what we are aiming to do is to demonstrate a major level of almost systemic breach -- contractual breach of reps and warranties, and taking it through the appropriate overall process. That is what we will be doing.

One quick question on the statutory capital. You mentioned that there is an additional $2 billion in contingency reserve, is that correct? Did I hear that correctly?

Yes, that's correct.

So the way we should be looking at this is there is $394 million in surplus, and then an additional $2 billion in contingency reserve?

Yes, I think the way to look at that is that under the statutory rules, under certain situations you could petition the regulators to release that reserve. The reserve is a formulaic reserve that is established over long periods of time, and it is there to provide some level of conservatism. But when it relates to policies in which you already are booking losses, or for policies that no longer exist, then there is a mechanism to petition and request relief from that kind of conservative accounting.

So I wouldn't look at it as the entire amount. I would look at it -- at the subset that relates to the expired policies or the piece that we can potentially petition our regulators to release.

Scott Frost, HSBC.

I just want to make sure I understand. On slide 8 you're saying that -- let me go here -- you've got BIG investments not impaired, in addition to the net loss. The net loss includes realized losses, and then you have other below investment grade, I guess, investments that you haven't impaired. Is that -- am I double counting there or is that --?

No, that's right. The number I quoted, the $1.3 billion, $992 million relates to Moody's downgraded securities below investment grade.

Those were mortgage-backed and asset-backed that you showing kind of the difference between on slide 24 -- is that the MBS impairment, or whatever it is, or is that how to read that?

Yes, it is. And just to finish the point, the $1.3 billion -- so $992 million relates to downgraded securities, but that we don't consider to be impaired based upon our detailed cash flow modeling. We do consider some of the balance -- to get you up to the $1.3 billion is considered impaired, so that ran through the net loss line.

So some ran through, some did not.

That's correct.

Tony Dalapenia, John Hancock.

I have a similar question. I am trying to tie that into page 40. I guess on page 40, when you talk about your home investment portfolio, on the front that is amortized costs. So I assume that is a GAAP number or a stat number you are referring to on page 40.

That would be GAAP.

I guess the issue, those below investment grades there on page 40, where you say 17%, you describe what some of those things are. And I guess the issue is for stat purposes, how much of that 17% has been impaired, if anything?

I believe most of the below investment grade securities relate to the Alt-A portfolio that we brought over. So that would be the lion's share of that number. What shows up -- the accounting -- most of those slides in the back relating to the investment portfolio are GAAP slides. So what we do when we impair securities, we write-down the amortized cost. We kind of reset the cost value, if you will. So we squeeze some of the unrealized loss out and ran through the income statement.

As it relates to the statutory numbers, I think of the downgrade -- here it is right here. Out of the securities that we purchased over approximately $2.9 billion, $2.3 billion of the Alt-A portfolio is known by Ambac Assurance. So $2.3 billion of the securities were Alt-A securities, of which $2 billion is below investment grade. So $2 billion out of the $2.3 billion.

The securities that are below investment grade, we took the mark down to fair value through our surplus section. So we took the lion's share of that portfolio, we have already taken the hit for it, if you will.

Once again, I know you said it, I got on a little late. Of that $2 billion below investment rate how much have you taken hits through that through the stat numbers?

$2 billion of the $2.3 billion that we purchased.

Have already gone through the stat numbers?

That's correct.

Stat loss impairment.

That's right. Either -- as I just described to the previous questioner, a piece of it goes as a direct adjustment to surplus. And for those that we consider to be impaired, those that we do not think will collect all cash flow, principle or interest, those would run through the income statement. But either way, the entire -- that entire number, below investment grade, would be picked up as an adjustment to the surplus accounts.

Of your total Alt-A, $2 billion below investment grade, and you have $2.3 billion, I think you said, in total, or that was just of the purchase? I guess, what is the current mark on that stuff that has gone through the stat books?

I don't have that specific split, but generally the portfolio, between the entire portfolio of Alt-A securities, so we are talking about 65 positions and about $2.9 billion of par. I think the average price that we have is about $0.26.

Aline van Duyn, Financial Times.

I wanted to ask, in light of the court filing against J.P. Morgan Investment Management, related to the quality of the mortgage-backed securities or the information that they gave to you, around that, I wondered if these types of legal actions, what your expectations are in those, and whether you are considering similar actions in the CDO area?

There seemed to be more and more of these cases emerging in the sector, and I just wondered if you could give some context as to how important this issue is for you?

Thank you for the question. Obviously, it is a very important issue. I don't want to get into individual cases, as it were, for all the obvious reasons. Let's be clear though that we don't believe -- we are not in the practice of bringing forward frivolous cases.

We are unusual as a security holder in one sense, because we have the economies of scale in relation to the hold that we have of each security. We take down big units of risk. We also here, and obviously through various folks that we know in the legal fraternity, have a real expertise in terms of mining the documents and getting all sorts of forensic review of a legal or other motion to really understand, with the benefit of hindsight, how certain transactions were put together. And frankly, look at them aggressively where we think that people have acted inappropriately.

In terms of the kind of remediation and its importance to us, it is highly important. We are highly incentive to be diligent and aggressive as necessary. And I think, yes, it will be surprising to me if you didn't see more of these sorts of cases, both potentially from ourselves and others.

I think it is evident that -- to all -- that there was an awful lot of bad behavior. We're a repository of that risk. And we are fighting and will fight very hard on behalf of our stakeholders to do the right thing.

Thanks. And that is in the mortgage-backed securities and also could apply in the CDO area?

It could apply in every area in our portfolio. In fact, it does apply in every area in our portfolio.

There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you for everyone's attention and good quality questions on today's call. Thanks for attending. And we are available to answer any additional questions, so please call us here. Thank you.

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