Ambac Financial Group Inc (AMBC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ambac Financial Group 2015 second-quarter earnings call. (Operator Instructions). As a reminder, this call may be recorded. I would now like to introduce the host for today's conference, Abbe Goldstein, Head of Investor Relations and Corporate Communications. You may begin your conference.

Thank you. Good morning and thank you all for joining us for today's conference call to discuss Ambac Financial Group's second-quarter 2015 financial results.

We'd like to remind you that today's presentation may contain forward-looking statements which are based on management's current expectations and are subject to uncertainty and changes in circumstances. Any forward-looking statements are not guarantees of future performance or events.

Actual performance and events may differ possibly materially from such forward-looking statements. Factors that could cause this include the factors described in our most recent SEC filed quarterly or annual report under Management's Discussion and Analysis of Financial Condition and Results of Operations and under Risk Factors.

Ambac is not under any obligation and expressly disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Today's presentation contains non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release which is available on our website at Ambac.com.

Please note we have posted slides on our website to accompany this call. Our speakers today are Nader Tavakoli, Interim President and CEO, and David Trick, our CFO. At the conclusion of their prepared remarks we will open the call for your questions. I would now like to turn the call over to Mr. Tavakoli.

Good morning. Thanks, Abbe, and thank you all for joining us for today's call. We're pleased to report another very successful quarter for Ambac. The quarter benefited from the active management of our risk exposures and investment portfolios across the firm, including at Ambac UK, as well as favorable moves in interest rates in home prices.

We're actively managing our Puerto Rico exposure, about which I'll speak in detail later, and positioning the Company more efficiently and strategically for future success. Now for some specifics.

Operating earnings for the second quarter of 2015 were $266 million, or $5.70 per fully diluted share. Since emergence from bankruptcy in 2013, Ambac has now achieved cumulative operating earnings of $1.9 billion or about $40 per fully diluted share.

Importantly, we continue to manage down our risk exposures. During the quarter our insured portfolio decreased by another 5% and our adversely classified credits decreased by 8% to $23.3 billion, notwithstanding the inclusion of our Puerto Rico exposure.

I'd like to highlight a few of the most important updates for the second quarter. A substantial portion of our time is devoted to our efforts to harvest and increase the value of Ambac Assurance. Paramount among these efforts are our aggressive pursuit of our remaining RMBS rep and warranty cases, optimization of our risk portfolios, our loss mitigation efforts and active management of our investment portfolio.

With respect to our RMBS cases, in the Countrywide case Judge Branston heard oral arguments on motions for summary judgment on July 15. The court will likely render its decision in several months' time.

As many of you know, Judge Branston took about four months to render a decision in a similar case involving MBIA. And, while we have no way of predicting the timing of her decision, we suspect it might be a similar amount of time before she rules in our case.

In our JPMorgan litigation, last December JPMorgan EMC filed a motion for partial summary judgment in our second lien case related to our claims for fraudulent inducement. The court heard oral arguments on that motion on July 14, but reserved judgment and ordered the parties to mediation which is currently scheduled for this Friday, August 14.

With respect to Nomura, the court has not established the case schedule. In June we received a largely favorable ruling on Nomura's motion to dismiss our contract claims in that case. The court has not yet decided Nomura's motion to dismiss our fraud claims.

In our First Franklin case we have been engaged in discovery for the last couple of years following Justice Schweitzer's ruling in our favor on the defendant's motion to dismiss. The case was recently reassigned to Justice Singh of the commercial division following the retirement of Justice Schweitzer. No trial date has been set, but we are hopeful that Justice Singh will now begin to advance the case.

We have taken a more focused view of the potential value of our UK operations of late. To that end David Trick will shortly be joining the Board of Ambac UK. Ambac UK was a significant contributor to our results in the quarter.

Loss reserves improved by $127 million driven principally by developments associated with our loss mitigation efforts and remediation associated with Ambac UK's insurance of the Ballantyne structure and foreign currency movements.

We intend to continue to thoroughly and opportunistically develop additional sources of loss remediation and mitigation throughout our insured portfolio. As you know, we've done this successfully by [commuting] our policies and purchasing our insured exposure and this quarter was no exception, as detailed below.

In the past we have successfully moved the servicing of our RMBS portfolios to value enhancing special servicers and we continue to look for further opportunities to do so.

More recently we have begun to explore opportunities to better manage losses associated with our distressed RMBS portfolios through strategies designed to mitigate losses associated with REO sales. We've also begun to reduce the risk in our airplane lease securitizations which led to a reduction in loss reserves in this area in the second quarter.

In addition to proactively managing our risks, creating value at Ambac assurance is equally impacted by our active management of the investment portfolio. Our consolidated investment portfolio has a fair value of $5.5 billion. Our results for the quarter were positively impacted by our interest rate strategies and at the end of June our financial guarantee investment portfolio had a GAAP book yield of 5.6%.

As David will detail, during the quarter we purchased $186 million market value of distressed Ambac insured RMBS including $46 million at AFG. We now own some $946 million of our deferred amounts including interest or 28% of the total deferred amounts outstanding.

As we have previously disclosed, AAC is contemplating the possibility of entering into transactions whereby we would exchange the outstanding debt and insurance obligations of Ambac Assurance and the segregated account of Ambac Assurance with the objective of ending the rehabilitation proceedings.

We made good progress during the quarter in discussions with our regulator and various of our policyholders in furtherance of this objective. While we have not reached definitive agreements to date, we continue to dialogue with these important parties towards an acceptable outcome that will better position Ambac for the future.

As we announced early in the year, we are focused on reducing operating expenses to meet our new needs and drive profitability. To that end we started to implement a business line restructuring which includes a headcount reduction at the firm.

As David will discuss, although there are near-term expenses associated with these changes, we anticipate a decrease in expense by over $5 million, or approximately 10% of our annual compensation expense. We're reviewing every line item and vendor agreement for additional opportunities and are confident we can make the Company more efficient operationally.

On June 30, 2015 our Board of Directors authorized establishment of a warrant repurchase program that permits the repurchase of up to $10 million of our outstanding warrants. As of August 7 we have repurchased over 500,000 warrants for a total of $4.7 million.

As previously discussed, the common stock repurchase program is challenging for us to implement because of potential negative tax implications. As we carefully considered cash deployment at the holding company, we believe the warrant repurchase program is an excellent use of our capital.

As it relates to Puerto Rico, our net par exposure remains at about $2.4 billion and you can find details of this exposure on our website. In this quarter we increased our reserves for our Puerto Rico exposure in order to reflect our updated views on probability weighted potential outcomes.

Remember that Ambac was early in recognizing the fiscal issues of Puerto Rico as we downgraded our Puerto Rico exposures and took appropriate reserves long before others. We have previously detailed our specific exposures to Puerto Rico and our views thereon in past calls and we remain confident of those views.

Today I'd like to speak to our views of the current macro developments around Puerto Rico's overall needs. Given the long duration of much of our guaranteed Puerto Rico exposure, Ambac's interests are very much aligned with the long-term best interests of the Commonwealth and its people. We are advocating for comprehensive and sustainable solutions that mitigate our long dated risk.

In our assessment Puerto Rico needs near-term liquidity help, fiscal discipline, structural reform and some relief from Washington, but not Chapter 9. The choice that you're either for Chapter 9 or you're against Puerto Rico is a false choice mistakenly propagated by politicians and bankruptcy advisors.

We're very much for supporting Puerto Rico, but we're adamantly opposed to Chapter 9 for print Rico at this time. More than anything else Puerto Rico needs private investment and private sector job creation. Unfortunately the government's current path of selective default in its campaign for Chapter 9 is counterproductive to and completely inconsistent with these needs.

The discussion of Chapter 9 is already diverting attention away from fiscal and structural reforms urgently needed to attract those investments, create jobs and grow the economy. The discussion of Chapter 9 is hurting investor confidence and reducing demand for private investment and exacerbating an already weak economy.

The Chapter 9 discussion is also hampering discussions with creditors and financial institutions that could provide liquidity and support the Commonwealth. Moreover Chapter 9 is an ineffective tool for Puerto Rico.

A significant amount of litigation will start even before a Chapter 9 can be filed and will not be subject to any automatic stay upon the filing of a bankruptcy. The application of Chapter 9 itself will be highly Much of the Commonwealth's debt will not qualify for Chapter 9.

Moreover, the principle haircuts and litigation costs of Chapter 9 and the damage being caused by the talk of it are completely unnecessary. We believe the government can support its debt and that the debt problem is a liquidity issue and not a leverage or a solvency issue.

The often quoted $72 billion of total debt actually comprises debt of 18 different issuing entities and is exaggerated by the debt of the Commonwealth's electric and water utilities and that of the Government Development Bank. We also think the general portrayal of Puerto Rico's leverage is totally misleading.

Puerto Rico and its citizens to not share in the obligations for the federal government debt of the United States. And accordingly, relative to population and GDP, and properly adjusting for federal debt, the Commonwealth's total debt is in fact lower than that of all states of the United States.

Relative to personal income and [properly] adjusted for federal debt and Puerto Rico's un-guaranteed debt of public utilities and the GDB, Puerto Rico is total debt is lower than all states within the United States.

Relative to GDP and properly adjusting for federal taxes, Puerto Rico's total tax burden is lower than all the states of the United States. Most observers neglect the fact that Puerto Rico's reported debt also includes a significant amount of municipal debt while debt figures generally do not include municipal and county debt.

If these local numbers were included in state debt figures, as they are in Puerto Rico's often quoted $72 billion number, states would appear even more leveraged than they already do vis-a-vis Puerto Rico.

As stated, we believe Puerto Rico should focus on fixing its near-term liquidity problem and structural and fiscal reforms -- not seek Chapter 9. The Commonwealth could eliminate billions of dollars of debt and generate billions of dollars of cost savings in incremental revenues through such reforms without resorting to significant employee reductions or much feared austerity measures.

For instance, we estimate that by increasing sales and use tax collection rates from 56% to 70% the government could increase annual revenue by over $500 million. The Commonwealth could generate significant cost savings by rationalizing and consolidating its organizational structures which employ approximately 200,000 employees across 140 different agencies.

Regionalization of the Commonwealth's 78 municipalities with their attendant independent governments and agencies would save an additional hundreds of millions of dollars. Public-private partnerships, or PREPA, [PROSA] and other public assets could eliminate billions of dollars of debt from the government's balance sheet, reduce costs and improve services to customers.

These are just a few examples of the opportunities available to Puerto Rico if it selected to go down that path. By honoring its contractual obligations and committing to fiscal and structural reforms the Commonwealth could quickly gain support from its creditors for bridge financing that could be repaid by low-cost permanent financings in the capital markets as the reforms take effect.

These initiatives would also help the Commonwealth negotiate with the US government for parity with states with respect to certain federal programs.

Ambac stands ready to help Puerto Rico resolve its debt problem. We've organized creditor meetings in New York and are actively engaged with policymakers in Puerto Rico and Washington. We've assembled a world-class team of professionals in Washington, New York and Puerto Rico to change the narrative around Puerto Rico from default and Chapter 9 to comprehensive and sustainable solutions that are in the best interest of Puerto Rico.

With that I'll turn the call over to David for a financial review before returning to answer your questions and some closing comments.

Thank you, Nader. Net income for the second quarter of 2015 was $282.7 million, or $6.05 per diluted share compared to $214.7 million, or $4.57 per diluted share for the first quarter of 2015.

Operating earnings for the second quarter of 2015 were $266 million or $5.70 per diluted share compared to $247.6 million or $5.27 per diluted share in the first quarter of 2015.

Net income and operating earnings in the second quarter were positively impacted by favorable loss development in RMBS in Ambac UK and income from derivative products.

Adjusted book value was $741.9 million, or $16.49 per diluted share, as of June 30, 2015 as compared to $479 million, or $10.64 a share as of March 31, 2015. The $262.9 million adjusted book value increase was driven by operating earnings.

For the second quarter of 2015 net premiums earned were $60.9 million as compared to $65.7 million in the first quarter including accelerations of $13.7 million and $22.9 million respectively.

Normal premiums earned were impacted by the runoff of the insured portfolio as well as pre-refundings of insured securities. Excluded premiums earned primarily related to public finance activity.

The decline in accelerated premiums from the first quarter reflects the impact of one large exposure that was called in the first quarter and the mix of bonds called. The majority of calls are related to bonds underwritten in 2004 and 2005.

Net investment income for the second quarter of 2015 was $64.8 million as compared to $73 million for the first quarter of 2015. Net investment income was lower as a result of trading portfolio performance.

Included in financial guarantee net investment income were mark-to-market gains on investments classified as trading of $1.4 million in the second quarter of 2015 compared to $8.6 million in the first quarter. The decline resulted primarily from the relative performance of equity and leverage loan markets.

Excluding trading securities net investment income from the financial guarantee investment portfolio was lower due to decreased income resulting from the sale of Ambac insured student loan bonds and lower cash flows from Ambac insured RMBS.

Net gains reported in derivative products revenue for the second quarter of 2015 were $51 million versus $37.8 million loss in the first quarter. The derivative products portfolio, which includes a macro hedge and other swaps, is positioned to generate gains in a rising interest rate environment in order to provide an economic hedge against the impact of rising rates within the financial guarantee insurance and investment portfolios.

Derivative products revenue for the second quarter of 2015 reflects gains caused by rising interest rates and an increase in the Ambac CVA on un-collateralized derivative liabilities partially offset by a $12.3 million charge related to the downgrade of a counterparty to un-collateralized swap.

The net loss for the first quarter resulted from falling interest rates partially offset by the impact of the Ambac CVA. Inclusion of the Ambac CVA in the valuation of financial services derivatives resulted in gains within derivative product revenue of $3 million for the second quarter of 2015 compared with gains of $12.6 million for the first quarter.

With regards to loss and loss expenses, Ambac experienced a net benefit of $147.5 million in the second quarter of 2015 driven by lower estimated losses in RMBS and structured finance at Ambac UK, which were partially offset by net adverse developments in domestic public finance and $39.6 million of interest expense on deferred amounts.

The RMBS loss benefit of $72.1 million in the second quarter of 2015 was driven by a decrease in first and second lien projected losses. The lower projected RMBS losses included improvements in projected deal performance driven primarily by HPA, partially offset by the impact of higher interest rates.

The Ambac UK loss benefit of $126.8 million primarily resulted from a reduction in expected future claims resulting from remediation efforts on a structured insurance transaction as well as a benefit from foreign exchange given that this policy is denominated in a currency other than Ambac UK's functional currency.

As for domestic public finance, losses incurred were $37.9 million in the second quarter of 2015, including a net increase in reserves for Puerto Rico and net changes in other exposures.

During the second quarter of 2015 net claim and loss expenses recovered net of reinsurance were $15.8 million which included $52.6 million of losses paid and $80.4 million of subrogation received. The bulk of subrogation received related to RMBS which exceeded RMBS claims presented for the quarter by nearly $10 million.

Gross loss and loss expense reserves, [cost] of reinsurance and net of subrogation recoveries were $3.4 billion at June 30, 2015 and $3.5 billion at March 31, 2015. The decline in loss and loss expense reserves resulted primarily from Ambac UK.

Gross loss and loss expense reserves as of June 30, 2015 and March 31, 2015 were net of $2.6 billion of estimated rep and warranty subrogation recoveries. Estimated rep and warranty subrogation recoveries declined slightly as a result of the reduction in estimated lifetime RMBS losses during the second quarter of 2015. Gross reserves as of June 30, 2015 included approximately $3.4 billion of deferred amounts including accrued interest payable of $409 million.

Underwriting and operating expenses for the second quarter of 2015 were $25.9 million compared to $24.5 million for the first quarter of 2015. Expenses increased primarily due to postemployment benefits and legal and other costs associated with our efforts to exit rehabilitation, partially offset by a reduction in consulting fees and premium taxes.

As part of our ongoing expense management efforts we recently made some difficult decisions regarding staff reductions. As a result of these reductions we incurred additional severance costs and accruals for postemployment costs during the second quarter and anticipate additional costs in the third quarter as certain reductions are implemented.

Annual savings of about $5 million are anticipated from staffing actions. We expect the majority of these expense savings to begin to be realized in the fourth quarter.

Interest expense was $28.2 million for the second quarter of 2015 compared to $27.9 million in the first quarter.

During the second quarter of 2015 Ambac acquired $11.8 million of Ambac surplus notes and recognized related losses on the extinguishment of debt of $1.2 million representing the accelerated recognition of the unamortized discount on the acquired surplus notes. The acquisition reduced interest expense in the second quarter by $300,000.

Income tax expense for the second quarter of 2015 was $3.9 million versus $1.7 million for the first quarter. Alternative minimum taxes accounted for the majority of income tax expense for both periods.

Future taxable income of AEC will be subject to annual payments to Ambac by NOL usage tier after certain credits and any additional [posted termination] date NOLs under its NOL tolling agreement with Ambac. A credit is available to offset the first $5 million of payments due under each of the NOL usage tiers A, B and C.

TAC has fully utilized its tier A credit and has accrued approximately $11.4 million of tolling payments including $10.1 million in the second quarter of 2015. Tolling payments, if any, accrue quarterly and are paid to Ambac in the second quarter following the year in which they are generated.

Although AEC has utilized all but the posted termination date NOL, additional post termination date NOLs may be generated in the future. At June 30, 2015 the Company had $4.7 billion of US federal NOLs including $1.4 billion at AFG and $3.3 billion at AAC.

The fair value of the consolidated investment portfolio as of June 30, 2015 was $5.5 billion, virtually unchanged compared to the value at March 31, 2015.

During the second quarter Ambac purchased $186 million of insured RMBS, $46 million of which was acquired at AFG. The fair value of Ambac insured RMBS in our consolidated portfolio was approximately $1.9 billion, or 35%.

Notably, the majority of the purchases in the second quarter of 2015 were through privately negotiated transactions versus dealer activity, a trend we have mentioned before. As the market for insured RMBS has shrunk, direct purchases of securities have allowed us to achieve the scale needed to fill our portfolio objectives.

Of the $3.4 billion of segregated account deferred amounts at the end of the second quarter we now own a total of approximately $945 million, or 28.3% including accrued interest.

To help facilitate AEC insured RMBS purchases and other asset liability management activity, in July 2015 we executed a re-securitization of Ambac insured RMBS through which we raised gross cash proceeds of $146 million at LIBOR plus 2.8%. Through the re-securitization we have monetized a portion of the intrinsic value for certain insured RMBS while retaining the rights to any associated financial guarantee payments.

That concludes my prepared remarks and now I'll return the call to Nader.

We'll open the call up to Q&A now. Thank you, David.

(Operator Instructions). Andrew Gadlin, Odeon Capital.

The first question is on the NOL tiers that we're in right now. Where are we within tier A where there's a 15% (inaudible)?

We're about two-thirds of the way through the first tier, Andrew.

So it was about $300 or so?

About $312 million.

Okay. And how much has been received from tolling payments until now?

AFG, the holding company, hasn't received any tolling payment. The first tolling payment if we continue on this path would be in the second quarter of next year.

Okay. Does it hold back for a year or so?

No. You have to open a tolling calculation work (technical difficulty) taxable year. So we're generating on a quarterly basis tolling accruals (technical difficulty) 2015 complete annualized tax position and effectively file a tax return. At that time is when we would make the tolling payment.

Got it. And then in terms of the RMBS that were bought back this quarter, if the Company is up to about 20% of accrued claim, what's a fair estimate for the percentage of the future RMBS losses that are already owned by the Company?

Sorry, Andrew, I didn't hear the beginning of that. You broke up a little bit.

I think the Company bought back $186 million of its own RMBS this quarter including, it sounds like, about $180 million of just accrued claim. You went from $766 million last quarter to $946 million this quarter.

Including interest, right.

Including interest. So my question is, when the Company presents in the operating supplement a go forward estimate of future RMBS claims, what percentage of those claims roughly are already owned by the Company?

It's about the same relationship, Andrew. It's about 28% to 30% of future claims.

Got it. Okay. And then in terms of the re-REMIC, [0 plus] 2.8% is pretty cheap. Is there a possibility to do more of that going forward?

I think there is some possibility. (Technical difficulty) nuanced and customized, so not every RMBS position that we own neatly fits into them. So we did mine the portfolio for those positions that were the most appropriate for that type of structure.

So I think part of what will drive future transactions like that will be: one, of course asset liability management needs; but also the nature of the collateral as it develops on the balance sheet and our future purchase activity.

Okay. And then in terms of the exchange efforts that have been going on for some time, I was wondering with everything happening in Puerto Rico, there's speculation about whether or not it could still be going forward. And I was wondering if there's anything you could share with us on that effort?

Obviously Puerto Rico is having some influence on the conversations, but I wouldn't characterize the influence of Puerto Rico as being either particularly positive or negative. I think that it, as you can appreciate, it probably increases motivations all around.

We had some disclosure with regard to the current status of the conversations in our Q and I can't really go much beyond those disclosures. The conversations are multiparty, multifaceted and we have to balance the interests of a variety of people including of stakeholders including policyholders and shareholders.

So, it's taking the time that these kinds of complex negotiations often do, but I would say that while Puerto Rico has -- is certainly a factor in the conversations, it hasn't materially affected the conversations either positively or negatively.

And I think you mentioned that you're in conversation with the regulator on the exchange concept, or were in this past quarter. So presumably -- without putting words in your mouth -- the regulator is on board with the efforts proceeding?

Yes, I'm hesitant to characterize the regulators posture on this. But I think as we've said in the past, we are happy with the current status of our relationship with both the rehabilitator of the segregated account and our regulator, our commissioner in Madison -- very constructive relationship.

We have frequent ongoing conversations about all aspects of the business including the possibilities relating to potentially exchanging out the obligations of the segregated account. And so that relationship continues. Those conversations continue and we are continuing with those conversations unabated. So you can deduce from that that we have regulatory support for it.

Okay, great. Thanks so much, guys.

Alex Klipper, Bank of America.

Just on the repurchase of the surplus notes in the second quarter, obviously that came at a much higher price than where the current surplus notes are trading. So A, did you guys get regulatory approval to repurchase those notes? And B, have you repurchased any notes in the third quarter?

One, we didn't get regulatory approval, the acquisition was made at the holding company and therefore it's not subject to regulatory approval -- strict regulatory approval, I should say. And secondly, in the third quarter we did not make any additional purchases as we so far have been in blackout since the beginning of the third quarter.

Got it. So that did not require regulatory approval. Is that part of the discussion you're having with the regulator is also to just be able to purchase surplus notes at the insurance company? Or is that something that interferes with the broader discussion?

Well, it certainly would require approval by the regulator and I can't really comment too much on the nature of those conversations. But as you know, we are pretty active in the acquisition of our own insured RMBS and think ultimately that's an important part of the -- our efforts to exit rehabilitation and manage our exposure.

So, whether it's surplus notes or our own insured RMBS it's -- overall it's had the same effective outcome given the nature of the surplus notes in terms of their priority within the balance sheet.

Got it. And then how much cash is at the holding company today?

We have about $255 million or so of cash and securities at the holdco.

Got it. Okay, great.

(Operator Instructions). [Nancy Stowe], Gabelli.

You had some positive trends at both Ambac UK and with the adversely classifieds and I was just wondering if those trends are going to continue through this year?

We certainly hope so. I think all of that is obviously a function of a few things, both of course the active management of the portfolio as well as just general trends within the economy.

So I think at this point given the sort of seasoning of our portfolio, I think it's safe to say that we have a fairly good handle around all the risks in the book and believe we've identified all those exposures that should be problematic at this point.

Everything is of course subject to change, but the book is pretty well seasoned having written our last real insurance policy in 2008 -- and any real material policy since 2007.

Thanks. And on the rep and warranty, I know you had said that you had made your arguments and that it's going to be a few months. Is there a chance that this happens before the MBIA timeframe or there's no indication from the judge?

Yes, Nancy, as you know having been there, the judge did not give us an indication of her intention as to the timing of the ruling. It's a relatively complicated matter. There are a number of motions on both sides on a variety of issues.

And so, while we have no idea and she could surprise us pleasantly, I would think that it would be hard to imagine being earlier than the fall.

On the number of motions, is this different than how MBIA proceeded? Is Bank of America using just different tactics, or is this just what happened last time and it's just going to take that amount of time?

Sitting here right now my recollection of how many different issues were present before her on the MBIA motion -- on the motions for summary judgment in that case, is not -- I'm not completely sure of the complexity of that situation versus ours. I've read it but it's been a while.

And so, I can't really draw any comparisons in terms of the number of issues or the complexity of the issues. I guess if you wanted to look at the silver lining, she's obviously got significant familiarity with a lot of the issues having grappled with them and ruled on them in that case. And it's possible that that will streamline her thinking and decision-making.

So from that perspective I guess there certainly is a possibility that she can come to conclusions more quickly. But again, I don't want to get in the guessing game as to a judge's calendars and I have no idea what else she's got on her docket and what her clerks are busy writing up before this one.

So, I just can't get into the predicting business. Obviously we would like her to rule as quickly as possible. We feel very good about our case before Judge Branston.

Thank you.

[Jatin Juanawala], [Met Capital].

My question is related to the domestic public finance exposure. I'm having a hard time reconciling your reserves versus where uninsured Puerto Rico debt is trading in the muni markets. So for instance [hybrid] that is trading in the $0.20 to $0.30 on the dollar ZIP Code, similarly at (inaudible).

And you, for your entire book of public finance exposure, have only $400 million reserved. Not everything of the $400 million would be linked to Puerto Rico.

So it would seem that your reserves, even if we were to assume that the entire $400 million is related to Puerto Rico, which it isn't, would translate into a haircut of $0.16, whereas the market haircut on non-COFINA debt -- weren't even talking about COFINA high rate and convention center and room tax debt, it's an order of magnitude higher. So was just curious if you have any views on that.

Sure. There's a couple factors that go into that. Certainly we do monitor the trading prices of securities in the marketplace, but strictly from an accounting standpoint and reserving process standpoint that is not what drives reserves.

What drives reserves is our internal house view, credit view of each and every exposure and that is based on a, as we've talked about in prior calls, probability weighted scenarios of potential outcomes.

And so while reserves in the worst case could potentially be worse, and we fully disclose that in our disclosures in the Q, what is presented is a probability weighted view of the world that considers a whole host of potential outcomes on a transaction by transaction basis.

And what we have observed in past experiences with similar type of situations is that -- and as you probably know better than we do -- often times what you see in the marketplace is a much quicker reaction in bond prices than you see relative to fundamentals, which includes often times significant liquidity premiums being placed on the bonds.

All of those factors, which don't really reflect or impact I should say our view of loss reserves. So there are some fundamental differences between market pricing for securities and our ultimate view of what losses are embedded in the portfolio.

Got it. The recoveries that you're budgeting for versus where the market is a different ballpark altogether. Because now probably you could say that the market may be more severe versus what you are.

But if you take like $1.3 billion, $1.4 billion of that debt and even apply a 50% haircut, that's like a $650 million hit. The market is obviously applying a 70% haircut, [not] higher. So overall I see your point. It just seems like the two are in Congress with respect to each other.

Yes, Jatin let me add, having done this for a long time I think that those people who trade in the distressed debt markets know that liquidity and non-fundamental factors often drive pricing. And I think here in Puerto Rico we have probably some examples of that.

I think rate of return expectations in distressed securities are not necessarily the same discount rates that you would find in an insurance portfolio. And I go back to everything that David said.

I think if you look at Ambac's history and the history of its reserving you'll see that we have a very good history. And so I think that puts us in good stead in terms of our approach to these things.

And again, not that this drives our thinking at all, but if you look at us from a relative perspective relative to our monoline sisters, I think that you have to walk away in terms of our reserving on these things, feeling that we are pretty well reserved.

I think that it's fairly public knowledge that our monoline brethren have twice or more of the current exposure to Puerto Rico that we have. And I think people have tried to back into their reserves versus our reserves and come out fairly favorably in terms of our reserving versus theirs.

So, I think that we feel that, based on everything we know about Puerto Rico right now, putting all the factors into the accounting conventions that drive these things, we're pretty well reserved.

[Michael Cohen], Opportunistic Research.

I have a rep and warranty litigation question. I'm just curious, obviously guys have stated in the past a desire to defend and represent Ambac's interest most fully and to maximize the amount of recovery.

I'm just curious if at any point you guys -- what the sort of impediment is to potentially looking at settlement activity. Is the bid and the ask too wide between you and the counterparties? Or is it the fact that the counterparties just don't believe that the ultimately have any liability?

I can't get into the counterparties' heads. And look, we are fully aware of the value of a dollar today versus the value of a dollar down the road, particularly when you impose the risks and uncertainties of litigation.

So we are fully aware of the risks and the benefits. We are also fully aware of the value of our cases. As I've said in the past, I think we have the two leading firms in the sector advising us.

We have said publicly that Patterson is litigating the cases for the most part but we brought in Quinn Emanuel as well to give us additional advice on these things so that we would have additional comfort and confidence around our judgments and decisions on these matters.

And so, I can't tell you what the other side is thinking. I think it's pretty evident from various settlements, including settlements with the government, that it can't possibly be that they don't think they have liability associated with these matters. And so, I think it backs into your other hypotheses as to why we have not yet reached settlement.

And so, if I follow from that, how frequent or often are the discussions around that gap? Is the gap so wide that there's not really a forum to have the discussion? How do you view this upcoming Friday's potential mediation activity as mandated by Judge Ramos in that context?

Michael, it's just as frustrating for me not to be able to talk about that stuff as it is for the stakeholders. But I really think that it's in everybody's interest for us not to try to speculate or to lend color on those kinds of issues.

And quite frankly, it would be just pure speculation if I tried to conjecture as to the possibilities of any particular mediation or meetings. So I just really can't comment on that in any way.

Okay, great. And last question, regarding your RMBS exposures and those where you are estimating future losses, as David implied, HPA has played a role in adjusting your estimates.

Are there specific securities that you can give us an example where perhaps loan to value has improved such that the potential future reserves have come down significantly? Or exactly how you expect this to play out for lack of a better way of saying it?

Yes, I don't think I can give you a specific security off the top of my head, but generally speaking look back to effectively loan to values. Psychologically that's very helpful in the transactions in terms of a homeowner's willingness to stay in their homes and potentially their ability to refinance their mortgages.

So from a historical or a current loan-to-value standpoint, that's one of the main ways it impacts the economics of our transactions. On a sort of going-forward standpoint, you have all those dynamics as well as the fact that increasing HPAs in the transactions help reduce severities. So HPA affects the transactions both from a current standpoint, as well as our forecast of the ultimate impact of potential embedded losses in the transactions.

Understood. Are you guys looking at this from a perspective almost like from the way the MIs might look at it in terms of a cure rate? Have you seen inflection in the cure rate, in particular bonds, where you've seen benefit from HPA; meaning mortgages that were delinquent have somehow exhibited properties that would not have been expected 12 or 18 months ago?

Yes. I think overall, we've seen a general across-the-board improvement in performance in our transactions, to the point where claims presented on a monthly basis have consistently come down. And certainly on a net basis, second-lien transactions in particular, we're effectively experiencing no claims at this point for HELOC transactions, for example.

So overall, I would just comment that the impact of these dynamics have been pretty consistent across the board and reflected in the deal performance, both from a claims standpoint as well as the amount of general delinquencies and severe delinquencies that are being experienced in each of the transactions.

Great. Thank you for taking my questions.

Charles Post, Sterling Grace.

I'm not overly familiar with the lawsuit against JPMorgan Investment Management. Can you provide a little more detail on that? I did look through their 10-Q this quarter, and they talk about $1 billion in claims there between you and Assured Guaranty. So can you give me a little more color on that?

Yes, the lawsuit emanates from JPMorgan Investment Management's management, or mismanagement as the case might be, of assets held against Ambac UK's insurance of Ballantyne transactions. I don't really -- the suit is public and I refer folks to the public filings. So I'd prefer not to try to characterize the specific aspects of the lawsuit, but it really just emanates from our assertion and Ballantyne's assertion that JPMorgan willfully mismanaged the funds.

Okay. Is there a way to tell within the lawsuits, that $1 billion that's in the JPMorgan 10-Q, how much of that's Assured, how much of that is Ambac?

I am -- go ahead, David.

Sorry, did you say JP Morgan's Q?

Yes. In the Q it talks about the two lawsuits -- I guess it's Ambac and Assured Guaranty and the claim is that JPMorgan Investment Management is liable for $1 billion in market value-based securities -- losses.

Yes, to clarify, we insured about 55% of the Ballantyne transaction at AUK and Assured -- insured a portion of the transaction as well. And then there's an uninsured piece of the transaction.

So ultimately the potential benefit of that lawsuit in terms of any recoveries that we would experience would flow through the waterfall of the Ballantyne transactions and ultimately accrue to the benefit of those three tranches, i.e. the unsecured, Ambac insured and the Assured insured components of the transaction as well.

And similarly, Assured Guaranty, they have a sister lawsuit related to a transaction called Orkney, which is a very similar transaction to Ballantyne that we're not involved in.

Okay. And then is there any benefit within your reserves or some kind of R&W -- I know it's not R&W, but built in for that lawsuit?

Yes, when we look at our reserving against a Ballantyne transaction, similar to all the other reserves within our portfolio, we look at a whole host of different scenarios. And we have probability weighted in, various different outcomes with regards to that lawsuit and the effect potential recoveries would have as it flows -- those items flow through the waterfall and get divvied up according to the structure, as I just mentioned.

All right, switching topics -- in the operating supplement, the claims paying resources, there was a change to the way you calculate that, which is a significantly higher number. Can you walk me through the change there?

Sure. The change was effectively to back out or gross up the claims paying resources by the amount of subrogation recoveries. I think there was a fundamental misunderstanding of that -- of our claims paying resources and how we presented it.

While we had disclosure around that I think it just wasn't blatantly obvious from looking at the nominal numbers how rep and warranties, for example, as part of the subrogation number were affecting those claims paying resources.

So while -- simply put -- while subrogation recoveries, including rep and warranty, were included in our surplus numbers that are a component of the claims paying resources, since they are accounted for as a contra-liability, they were offsetting the loss reserve component of claims paying resources.

So, while certainly obvious to us here, it became apparent to us that readers of that presentation weren't -- it wasn't clear to the readers of that presentation that the amounts had to be adjusted for that. So we changed the presentation to make that more clear.

Great. Then lastly, are you able to buy any of your insured Puerto Rican debt? And if so, have you done so so far?

We haven't done that so far and we are able to buy it. Similar to any other purchase of our insured securities, it would be subject to limitations within the investment portfolio. So we would have to allocate the portfolio in a particular way to make room or capacity for those purchases.

But similar to the purchase of insured RMBS, or student loan bonds that we've done in the past, we could certainly acquire insured RMBS securities -- Puerto Rico securities.

Okay, great. Thanks, guys.

Chad Flick, Deutsche Bank.

(Inaudible) ask a question on the RMBS re-securitization commentary that you gave a few minutes ago. I just wanted to see if you could give us any more narrative around future pipeline there. Is that just kind of a one-off development this last quarter based on what you had in inventory, or is that something that we should expect to see more of going forward?

That was certainly based on what we had in inventory. This is actually the second transaction that we've done. It's been a little while since we've done one. And so, it will depend -- so I think I commented earlier on what purchases and sales we make within the insured portfolio with regards to RMBS securities, but we are certainly open to doing additional transactions in the future if the economics make sense for us.

Great, thank you.

Thank you. And now I'm showing no more questions. I'd like to turn the call back over to Mr. Nader Tavakoli.

Thank you, operator. This has been an incredibly busy time at Ambac. We continue to focus and take action related to managing our risks, optimizing our portfolio, improving efficiencies in our operations and affecting a successful rehabilitation of the segregated account. In short, we're working hard to find and create at Ambac for our shareholders everywhere possible.

I want to thank all of our employees for their dedication, hard work and sacrifice through this time. And I want to thank all of our stakeholders for their support and patience as well. Please feel free to call Abbe Goldstein with any further questions related to the court or any other matter. We look for to speaking with you in the future. Thank you.

Thank you. Ladies and gentlemen this does conclude the program. You may now disconnect.