RAM Holdings Ltd. Q3 2008 Earnings Call Transcript

RAM Holdings Ltd. (RAMR)

Q3 2008 Earnings Call

November 17, 2008 11:00 am ET

Executives

Vernon M. Endo – President and Chief Executive Officer

Edward U. Gilpin – Chief Financial Officer

David Steel – Chief Risk Manager

Victoria W. Guest – General Counsel

Analysts

Michael Grasher – Piper Jaffray

Lawrence Kim – Sonic Capital

[Ernest Jacob] – [Longwood Capital Management]

Rick Sherman – Oppenheimer & Company

Presentation

Operator

Welcome to the RAM Holdings Limited third quarter 2008 results conference call. This call is being recorded. With us today from the company is the President and Chief Executive Officer Vernon Endo, Chief Financial Officer Mr. Ted Gilpin, Chief Risk Manager Mr. David Steel, and General Counsel Ms. Victoria Guest. At this time I would like to turn the call over to Victoria Guest.

Victoria Guest

Thank you for joining the third quarter 2008 earnings call of RAM Holdings Limited. I'm Victoria Guest, General Counsel and Secretary of the company. Our press release regarding third quarter 2008 results, our third quarter 2008 operating supplements and information regarding our mortgage and CDO exposures were released and are available in the investor information section at our website at www.ramre.com. We expect to file our quarterly report on Form 10-Q for the quarter later today.

This call is open to all investors, analysts and members of the media. After the presentations by Vern Endo our CEO, Ted Gilpin our CFO, and David Steel our Chief Risk Manager, there will be a Q&A portion of the call, which is intended for the professional investment community only.

Before we begin I would like to remind everyone that Vern, Ted and David may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. I would like to caution you that the company's actual results could differ materially from the results anticipated or projected in these forward-looking statements.

Additional information concerning risk factors that could cause actual results to differ materially from the information we give you today is available in our earnings release under the heading forward-looking statements and the risk factors section of our 10-K for our year ended December 31, 2007 as updated in our 10-Q.

In addition Vern and Ted may refer to some non-GAAP measures mainly operating earnings, core earnings, adjusted premiums written, adjusted book value, operating book value and credit impairment. For an explanation of these non-GAAP measures including reconciliations for the most comparable GAAP measures please also refer to our earnings release.

This call is available by live and archived web cast in the investor information section of our website. I would like to remind you that if you access the archives web cast at a later date more recent information about the company may have subsequently been released or filed with the Securities and Exchange Commission.

Now I will turn the call over to Vern Endo, Chief Executive Officer.

Vernon Endo

Welcome to the third quarter 2008 earnings call of RAM Holdings. With me is Ted Gilpin our CFO and David Steel our Chief Risk Manager. I will provide an overview of significant developments and discuss our outlook. Ted will present our financial results and David will review our insured portfolio, including the updated portfolio disclosure on our website. We will then open it up for questions.

Besides the $3.5 billion commutation with Syncora that occurred in July, the most significant development this quarter is the $38.3 million increase in loss reserves in credit impairments on '05 to '07 vintage RMBS and ABS CDOs caused by the continuing deterioration of the housing market. It should be noted that our reserves and aggregate are higher than the reserves seated to us by the primary companies. In large measure this is because we have not received sufficient data to include the benefit of their ongoing RMBS remediation efforts in our case reserves.

David will review trends in our insured portfolio and our reserve position against the troubled exposures. As you are aware no one is able to predict with certainty the ultimate losses on the troubled RMBS vintages, given the economic uncertainties now present. There are a few hopeful signs, the significant house price declines have improved affordability, the banking system is beginning to stabilize with continuing government support and significant lender efforts are underway to curtail foreclosures.

The ultimate outcome however, will be more visible over the next year as RMBS pools decline through liquidations and pay downs. As you are aware we were downgraded by Moody's in early August to A3 and by S&P to A+ in September. The downgrade gives our cedants the right to recapture their business, generally without cherry picking or to increase ceding commissions which we have accrued $23 million. Unlike other financial guarantee companies we have no collateral posting requirements arising from the downgrades. Ted will review in more detail the financial impact of our customers recapturing seated business.

As I mentioned on our call last quarter our key priority is to reduce the volatility of our insured portfolio while building rating agency capital which benefits policyholders as well as shareholders. Our strategy is to reduce our insured portfolio prudently. The $3.5 billion Syncora commutation was a key step toward achieving our objectives, as this transaction significantly reduced our exposure to the problem ABS CDO sectors.

Ted will review the financial impact of the transaction on our Q3 financials. We continue to work on other similar commutations with our ceding companies. In addition to our usual in depth due diligence process with our ceding companies, we commenced a plan this quarter to audit certain cedants to confirm that business was seated in accordance with the terms of our treaty as a result we request the re-assumption of certain seated transactions.

If we cannot reach agreements regarding the re-assumption of disputed transactions, we will commence arbitration proceedings as provided for under our treaty. Currently two such proceedings are underway and while arbitration is a long process without an assured outcome we believe that it is necessary in certain cases to protect our interests. We cannot quantify the potential benefits of these proceedings and no benefit has been reflected in our financial statement.

Last quarter I said that the financial guarantee landscape would change given the uncertainties regarding the industries insured portfolios, as well as ratings actions. Recent dramatic economic events this quarter of which we are all too familiar have certainly exacerbated the uncertainty. That said and announced new entrants and the announced consolidation of two of our customers indicates that continued demand for the municipal financial guarantee product by issuers and investors exist, particularly as LLC banks are now capital constrained, and estates and municipalities are experiencing fiscal stress.

We continue to believe that reinsurance is the most efficient means for primary insures to manage single risks and other concentrations. We expect to continue to offer financial guarantee reinsurance capacity once the market returns, as we are one of two remaining active financial guarantee reinsures. There remain significant barriers to entry for new financial guarantee reinsures and we are not aware of any new entrants.

As uncertainty continues regarding the timing and nature of the return of the financial guarantee market, we have been evaluating underwriting other credit related business lines. The key criteria include the acceptability of our current ratings to the ceding companies as well as a strong fit with the existing capabilities of our company. At a macro level diminished credit capacity should continue for several years as financial institutions globally de-lever. This should result in sustained substantial improvement in credit pricing and terms across asset classes.

Second, as a Bermuda based reinsurance company we are not constrained by the primary company business model in the US which includes triple-A, triple-A ratings, business limited on a regulatory basis to financial guarantee and state-by-state licensees.

Third, even following selected commutations and assuming no recaptures we project that earned premiums from our existing portfolio over the next five years, together with even limited new volumes from new business lines will generate very good returns. In response to our initiatives we are in the early stage of considering various proposals that have been presented to us and will report on our progress if and when it develops.

With that I will turn it over to Ted.

Edward Gilpin

RAM Holdings is reporting a net loss in the third quarter 2008 of $40.4 million or a $1.48 per diluted share, as compared to a net loss of $14.7 million or $0.54 per diluted share in the same quarter 2007. The loss is principally due to an increase in loss and loss adjustment expenses of $50 million in the quarter, and realized losses in our investment portfolio of $5 million.

The increase in losses and reserves is due to the continued deterioration in mortgage related securities. Year-to-date RAM recorded a net loss of $103.6 million or $3.8 per diluted share. RAM Holdings GAAP book value for the period ending 9/30/2008 stands at $131.0 million or $4.81 per share, down from $252.3 million on December 31, 2007. Decrease is primarily attributed to increased losses on ABS CDOs and RMBS security.

On an operating basis the company reported net income of $13 million or $0.48 per diluted share in the period ended 9/30/2008 compared to net income of $13.7 million or $0.50 per diluted share in the same period 2007. Operating income adjusts for non-operating items such as realized gains and losses on investments in the non-impairment portion of our marks on derivative. For the period ended 9/30/2008 operating book value net of temporary gains and losses was $6.91 per share and adjusted operating book value including unearned premium reserves net of deferred acquisition costs and the present value of future installments was $17.02 per share.

These are down 46.3% and 29.5% respectively from yearend 2007. RAM RE's statutory capital increased in the third quarter and now stands at $197.2 million. The increase was due to the commutation with Syncora formerly XLFA as a commutation amount paid was less than the ceded reserves.

As we mentioned in our prior conference call we were able to commute $3.5 billion of exposure with Syncora. The commutation had an impact to the financial statements in several ways. First, it reduced our gross premiums written by $11.4 million as we return unearned premium reserves. Second, it increased net premiums earned by $1.1 million. Third, the commutation increased the net fair value of credit derivatives by $26 million the difference paid for commutation $69.7 million versus the July 25, 2008 fair value of $95.8 million. Fourth, is decreased loss and loss adjustment expenses of $15.5 million, the difference between the paid commutation amount on RMBS of $16.1 million versus reserves of $31.5 million, and fifth the commutation increased acquisition expenses by $0.3 million.

The resulting net income gain of $42.3 million was offset by a net change in the fair value derivatives of $17.7 million the difference between the 6/30/2008 mark of $78.1 million and the July 25, 2008 mark of $95.8 million for an economic cap net income gain of $24.6 million similar to the number reported in the second quarter earnings call.

Loss reserves for the quarter increased by $39 million offset by a reduction in reserves due to the Syncora commutation of $30.4 million for a net increase in case reserves of $8.6 million. The current case reserves and impairments now stand at $126.9 million. In addition, the company has unallocated reserves of $35.7 million. The result is that we have $162.5 million of reserves against our existing book of business.

As Vern mentioned, as a result of our ratings downgrade our ceding companies have the right to pullback business. These rates are usually structured as all or none, meaning cedants have to pull back their whole book or none of it. If any of our ceding companies choose to recapture their business it would impact future earnings as unearned premium reserve is captured and installment premium payments would cease.

The result would not be entirely detrimental to the company as cedants are only entitled to recapture unearned premium reserve net of ceding commissions and cedant reserves. These amounts are less than the amounts currently held in regulation 114 trusts to the ceding companies as trusts include a provision for continued ceding reserve.

Therefore if a cedant recaptures their business it would free up the contingency reserve portion of the trust giving the company access to greater unrestricted cash. Currently the contingency reserve portion of RAM’s trust account stands at approximately $100 million. Ram’s investment portfolio as of 9/30/2008 is $591.4 million that remains invested in high credit quality double A+ average rating and high liquid securities. RAM has enough flexibility to meet expected claims payments and operating expenses for at least the next 12 months.

In addition the company still has access to $50 million from its Blue Water trust facility should we require additional liquidity. From a regulatory perspective under the Bermuda Insurance Act RAM is required to maintain minimum levels of solvency and liquidity. As of September 30, 2008 the estimated minimum required statutory capital and surplus amount was $24.9 million and as of September 30, 2008 estimated Bermuda statutory capital and surplus was at $193.6 million. The company, barring further dramatic deterioration in the credit markets sees not liquidation issues for the foreseeable future.

With that I will now turn it over to David Steel our Chief Risk Manager.

David Steel

I would like to focus my comments today primarily on the troubled sectors within our portfolio, U.S. residential mortgage-backed securities and asset-backed collateralized debt obligations from the ’05 to ’07 vintages. As Vernon and Ed have indicated we saw further deterioration in the performance of our troubled sectors during the past quarter, which we attribute to further deterioration in both the macroeconomic environment and the residential mortgage market.

Declining U.S. GDP, rising unemployment, falling home prices, higher mortgage rates, and the limited availability of credit all resulted in increased delinquencies and defaults during the third quarter beyond our projections as of the second quarter. With that background I’ll start by reviewing our ’05 to ’07 vintage U.S. RMBS exposure. We recently posted an update of our troubled sectors on our website under investor information and also under exposure information and updates. In this section of our website you will find a report entitled summary of mortgage and CDO exposure.

As shown on page two of this report, the par outstanding of our ’05 to ’08 vintage U.S. RMBS exposure was approximately $1.67 billion as of quarter end. You should note that this table includes $51 million of RMBS ceding to RAM in 2008 which our re-securitizations of all paid deals structured with super triple-A credit enhancements which we do not consider as part of the trouble RMBS sectors.

As Ted discussed we completed a commutation with Syncora in the third quarter, however because it was conceded early in the quarter we were able to report the effect of this commutation on our portfolio in our second quarter operating supplement and website posting, so I won’t focus much on that again here. It is worth noting as you review the table that our troubled sectors are running off through pay down and liquidation. The second lien exposure for example which are the most troubled products the HELOCs and closed-end seconds declined at a 22% analyzed rate in third quarter.

In the second quarter of this year it appeared that RMBS performance might be stabilizing due to slower growth of early stage delinquencies. However in the third quarter we experience both increasing early stage delinquencies and continued rolled a loss of later stage delinquencies particularly in the ’06 and ’07 vintages of our second lien RMBS. Short-term shifts and performance such as this can have a fairly significant impact on our loss forecast, particularly for the second lien deals at this stage of the seasoning where the ’06 and the ’07 vintages are 12 to 24 months old and default rates are at or near their peaks.

The second lien deals, the loans moved relatively quickly from performing status through delinquency to liquidation because they don’t go through the foreclosure process unlike first lien deals such as subprime and Alt-A. In our analysis the performance to date and recent performance in particular is used to forecast the ultimate performance of the life of a deal. The recent increase in both early stage delinquencies and liquidations led us to increase our ultimate loss forecast and case reserves in the third quarter primarily for our ’06 and ’07 vintage HELOCS and closed-end second.

Our paid claims on the ’05 to ’07 vintage RMBS totaled $37 million in the quarter including the commutation payment to Syncora attributable to the RMBS they commuted. Excluding the Syncora commutation, our paid losses were $19 million and related exclusively to HELOCS and closed-end second.

We increased case reserves for our troubled RMBS by $35 million in the quarter again excluding the Syncora commutation. Adding the $19 million of paid claims to the $35 million of increased case reserves results in $54 million of incurred losses for the non-Syncora troubled RMBS, 86% of these incurred losses is attributable to second line RMBS. The remaining 14% is attributable to subprime, Alt-A and prime RMBS.

We now have $92 million of case reserves established against $763 million outstanding par of '05 to ’07 vintage RMBS. Of the par outstanding against which we have case reserves 54% is HELOC, 29% is closed-end second, 14% is subprime and the remaining 3% is Alt-A and prime. Rather than transfer unallocated reserves to case reserves in the quarter to provide the needed case reserve increase, we kept a portion of our unallocated reserves estimated for potential additional adverse RMBS loss development at $21 million, about the same as the second quarter.

We did this in light of our decision to downgrade certain RMBS deals to below investment grade. As you can see from the table on page two of the website posting, our below investment grade RMBS from the ’05 to ’07 vintages totals a little more than $1 billion. This is a $177 million increase from the second quarter and is attributable primarily to the addition of closed-end second, subprime, and Alt-A deals.

We have $21 million of our total $36 million of unallocated reserve established for potential adverse loss development on these deals or further deterioration in deals with case reserve. Adding this unallocated RMBS reserve to our case reserve we now have $113 million of total reserves against our $1 billion of '05 to '07 vintage RMBS rated below investment grade.

As part of our reserving process, we had discussions with each of the primaries following the quarter end as we normally do in order to understand their concerns with each transaction and changes to their loss estimates and forecast methodology and assumptions. We also performed our own analysis of each of our exposures. In general when we find that the reserves established by the primaries are in line with our own estimates, we will typically establish the primary's reserve as our own, but when our analysis results in a higher reserve we typically use the results of our analysis, which generally results in our case reserves being higher than that of the primaries.

As I mentioned last quarter, all of the primaries are actively engaged in loan reviews to determine the potential for loss mitigation through loan repurchases by issuers due to breaches of reps and warranties. These efforts are continuing and had resulted in lawsuits being filed against the issuers in some cases. All of the primary insurers have found a very high proportion of the loans they reviewed are eligible for put back and in some cases the primaries expect issuer repurchases to fully offset the related case reserves. So, clearly there is significant upside for us in this regard.

We view this favorably and are optimistic of the success but to date we have not received sufficient data to confirm their assumptions. So, at this time we are not giving benefit to loan repurchase loss mitigation in our own modeling analysis in reserving. As a result of this and our conservative analytical approach, our case reserves are higher than our proportionate share of the aggregate case reserves established by the primaries on all our deals. We calculate that 41% of the collateral backing the '05 to '07 vintage second lien deals has paid off, liquidated or moved to late stage delinquency since original issuance leaving 59% as the portion for which we are now forecasting performance.

As we work our way through this troubled portfolio, the visibility on ultimate losses becomes clearer and over the next 12 months should become much clearer as these products decline to less than half of the original par insured. The next year will also be revealing given that evidence of bottoming of the real estate cycle and economic cycle should become apparent. We are seeing home price affordability spike upwards as home prices decline which should ultimately provide support to home prices over the coming year and this will be a key factor driving economic recovery.

Now I'd like to address our ABS CDO exposure. The table on page five of our website posting provides deal-by-deal detail on our '05 to '07 vintage ABS CDO exposures including the RAM Re rating of each of the exposures. This table is significantly smaller than it was in the first quarter of the year due to the Syncora commutation. At the end of the second quarter we engaged outside consults to assist us in evaluating the ABS CDO exposures. In the third quarter we downgraded one deal to below investment grade and established a $3 million credit impairment due to downgrades and defaults of the underlying RMBS collateral within the deal.

This is a '07 vintage transaction with no inner ABS CDOs so its performance is less volatile than other deals that do have inner ABS CDOs. The deal is structured so that claims for interest are paid when due and claims for principle are paid at maturity thus the bulk of our claims will not be payable for over 20 years. Although the total par outstanding is $36 million, it was actually structured with senior unsubordinated tranches both of which were originally super triple-A. The subordinate tranche has 16 million par outstanding and is the tranche we had rated below investment grade and established $3 million credit impairment for. We consider the senior tranche of this deal to be double-A.

There were no claims paid and no other changes in impairments or ratings on our '05 to '07 ABS CDO exposure during the quarter. We now have $27 million of total credit impairments of which we have $25 million established against three '05 to '07 vintage ABS CDOs with $175 million outstanding par excluding the senior tranche I just mentioned. The remainder of our '05 to '07 ABS CDO exposure, approximately $325 million, has mostly 2005 and earlier collateral is performing well and is still double-A or triple-A. If we combine the $25 million of ABS CDO impairments with the $113 million of total '05 to '07 RMBS reserves that I discussed earlier we now have $138 million of reserves specifically for the combined RMBS related troubled sectors. Apart from the troubled sectors I would like to briefly address the status of our remaining portfolio.

As of September 30^th, our total portfolio had $42.3 billion outstanding par which is down about $1 billion from $4.3 billion as of the end of the second quarter excluding the par commuted to Syncora. We have 51% of our total insured portfolio in low risk U.S. and international public finance exposures. Regarding credit risk in this segment, in the third quarter we established a case reserve for our Jefferson County, Alabama exposure of $4.3 million as it now appears likely that a settlement will be reached on that credit. We have $84 million par outstanding of Jefferson County. In addition we are monitoring several other credits in the portfolio and currently have $15 million of unallocated reserves available for non-RMBS exposures.

Total unallocated reserves including the $21 million provided for RMBS is now $36 million up from $32 million at the end of last quarter. Although we remain cautious with regard to our RMBS related exposures, we believe that we have been relatively conservative in our approach to determining reserve given that we have closely reviewed all of our deals on our own and with the primaries and we have not yet given credit for potential RMBS loss mitigations proceed. As we work our way through the troubled RMBS in the coming year we anticipate that the ultimate performance of this sector will become more certain.

Now we would like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mike Grasher – Piper Jaffray.

Michael Grasher – Piper Jaffray

Vernon, question to you would be with all the update and the analysis you've given us here the overview it almost sounds like we're still in a period, or we should take for granted that we're in a period of maintenance for the organization. Is that a fair characteristic to assign to it?

Vernon Endo

Well, I think it’s a little bit more than maintenance. We’re clearly monitoring the developments in the troubled sectors and at the same time we are pursuing a determination of which lines and view lines we could write going forward. So, I would characterize it as such. People here are engaged in both of those activities fully.

Michael Grasher – Piper Jaffray

Could you expand on that and the follow-up would be can you expand a little bit more. I know you talked about in the press release about new opportunities and that you touched on in the call but can you give us any indication as to what maybe you are looking at or pursuing in terms of new lines of business?

Vernon Endo

Well, we're still in the preliminary stages so I won't get specific on the lines other than to say what I said in the script, which is that in general what we're looking at are credit related lines similar to business that we currently do. It fits well within our business model here in Bermuda and which we have existing capabilities for.

Michael Grasher – Piper Jaffray

Ted, I heard your comment about liquidity issues, or there are no liquidity issues for the foreseeable future. Could you expand on that in terms of what length of time you're thinking about or you're talking about, and then what are the requirements at the holding company level?

Edward Gilpin

Sure, again what I said was that we didn't see any liquidity issues for the foreseeable future and I also think I mentioned over the next 12 months as well. Right now we have a highly liquid portfolio. We have access to other liquidity lines should we need them. We have reserves set up for all of our expected loss payments and the liquidity in the portfolio to handle those. So again, barring any further adverse changes to what we believe we see in the horizon, we don't see any liquidity issues.

Again, the holding company has, we only keep enough liquidity up there to cover our debt payment and preferred stock dividends. We generally see dividends add up slightly in advance of paying those. Right now we don't foresee any issues in that regard either.

Operator

Your next question comes from Lawrence Kim – Sonic Capital.

Lawrence Kim - Sonic Capital

Could you give me a better breakdown as to what of the reserves are allocated to the various buckets of RMBS?

David Steel

Sure, I think, let me just pull out a report here. As I mentioned, it's primarily HELOCs, and closed-end seconds, and actually of the $92 million it's 54% HELOC, 29% closed-end seconds, 14% subprime, and 3% is Alt-A and prime.

Lawrence Kim - Sonic Capital

So if the triple-B Alt-A were to go into below investment grade in future quarters that's probably not going to have a significant increase in the reserving?

David Steel

There is unallocated reserves. We do have unallocated reserves of $21 million; that is available for potential additional adverse developments as you just described, so that we could transfer from unallocated to case if the triple-B Alt-A migrates down to low investment grade and needs case reserves.

Lawrence Kim - Sonic Capital

It just looks like there's not a lot left to be downgraded on the RMBS side and it seems like you're starting to reach some level of stability on the case reserving.

David Steel

Well I think that's kind of the point I'm trying to make is that as work our way through here it becomes clearer, and the portfolio is a troubled portfolio. It was originated from '05 to '07 and it is what it is and it's paying down, it's liquidating, it's getting clearer as it goes below half of what it was originally, it becomes much clearer. So we're not adding to it.

Lawrence Kim - Sonic Capital

Could you describe a little bit more about your not taking the credits for the remediation that some of the primaries are? Could you give us some better color as to under what circumstances you would count that and what kind of significance that might be in the future?

David Steel

I think the quick answer to that is that we would need to have more specific information from the primaries to establish that it was probable and estimable, which is our criteria for reserving that we would get that remediation benefit. I think the primaries have actually done a lot of work themselves and it may be that we just need to do more work with them to build the case and satisfy ourselves. It could be fairly significant on the order of 15% to 20% reduction of our case reserves.

Lawrence Kim - Sonic Capital

Finally, with respect to the derivative liability, a significant portion of that is not credit impairment related. Is that mostly related to your ABS CDO portfolio or is it related to the other CDOs that have spread widening?

Vernon Endo

Generally speaking, the markets on the whole portfolio, which is all seen spread widening, and as David mentioned we've commuted quite a few of our ABS CDOs, so they've become a smaller portion of what's left that gets marked. Although, on a proportional basis they would have a larger mark themselves than the other positions in portfolio.

Lawrence Kim - Sonic Capital

So most of the derivative liabilities are just kind of spread throughout the portfolio, but you don't expect any real credit payments on them?

Unidentified Corporate Participant

Well again, you picked it up appropriately the first time. The impairment portion is where we would direct you, which is now at $27.3 million. That is the portion of that derivative book that we think that will be the ultimate losses on that portfolio.

Lawrence Kim – Sonic Capital

And the other $100 million or so is kind of spread throughout the rest of the portfolio?

Vernon Endo

Right.

Operator

Your next question comes from Rick Sherman – Oppenheimer.

Rick Sherman – Oppenheimer & Company

I have a couple of questions. You mentioned that last quarter ended up being worse than your previous assumptions. We're sort of at a tipping point. If unemployment goes up to 8% to 10% or wherever it's going to go as the depression scenario where this is going to start affecting prime and everything else, what have you seen, first of all, a little color on just since quarter end, things getting substantially worse, the same? That would be my first question.

David Steel

Actually, we have taken into account in our reserving what's occurred since quarter end all the way up through October to early November, and next year will be very important in whether we turn next year by mid to late next year, if we start to see bottoming of the home prices and some improving of borrower defaults, then that would be in line with what our current forecast is. You're as good a judge as I am about whether that's going to happen or how long the recession is going to last.

Rick Sherman – Oppenheimer & Company

Well I know this may – I'm not trying to be unfair about it, but how about describing what, obviously where the stock is most people are not expecting you to survive. So putting that aside for a moment, I'd like to hear what's the nightmare scenario. What could all go wrong over the next 12 months either to, I know you say you don't have a problem with liquidity, or you don't see that happening assuming certain things, but give me the nuclear option as to what goes wrong? What could go wrong or will go wrong that will wipe you out?

Edward Gilpin

This is Ted. I think that clearly when you started your question you were talking about unemployment and you were leading towards what happens if we're in a depression, and I guess so the nightmare scenario is that the recession becomes so deep and so wide that there's contagion and it spreads to other asset classes, and if that is the case then ultimately if that contagion is severe enough, then that would cause big problems.

So your real question is, is this going to spread beyond RMBS? Is it going to spread to other asset classes where the company may have significant exposure? At this point we don't foresee that, but again, that is what could go wrong.

Rick Sherman – Oppenheimer & Company

You mentioned you have Alt-A exposure. Alt-A doesn't seem to be, is deteriorating pretty rapidly. Did I hear you correctly that you don't have really much reserves against Alt-A's exposure?

David Steel

That's true, and the reason is that Alt-As were originally structured at triple-A and sometimes super triple-A attachment points, so there has been some deterioration in Alt-A. Clearly, there's been rising delinquencies and defaults in Alt-A. We're monitoring that closely, but we have more cushion on those deals against loss just built into the deal.

Rick Sherman – Oppenheimer & Company

Are they built up so that for example, the lower tranches stop getting paid and everything starts moving to the top part first?

David steel

There are features, yes that, well actually most of them are structured so all the losses are allocated to the subordinate tranches before the senior tranches, and we’re on the senior tranches.

Rick Sherman – Oppenheimer & Company

I just have one more question. I do appreciate it. What would happen for example if either RAM back or MBIA failed or worse, basically ceased by the regulators? What would happen? What if any, could you describe the affect of that on you guys?

Edward Gilpin

Well we don’t really see any direct impact on RAM should that circumstance occur.

Rick Sherman – Oppenheimer & Company

Whatever happens to them or ultimately if they get destroyed it does not necessarily have any event or doesn’t necessarily exacerbate any problems with you guys?

Edward Gilpin

No, and the only thing we would be concerned about is that both of them are very actively pursuing remediation and lawsuits against issuers and so forth, but our expectation was if that unlikely scenario were to occur in the reorganization they’d continue to dedicate significant resources toward that, and we would get whatever benefit was there.

Operator

Your next call comes from [Ernest Jacob] – [Longwood Capital Management].

[Ernest Jacob] – [Longwood Capital Management]

My question is on the credit impairments that you’re showing at the end of the quarter of $27.3 million. Is the improvement from the second quarter level due entirely to the commutation, and if maybe you can tell me what happened to credit impairments exclusive of the commutation.

Edward Gilpin

Credit impairments improved dramatically mostly due to the commutation. I believe we had approximately $116 million or so credit impairments against the folks that we commuted. So that all came down, came out. The remaining as David said, increased to about $3 million, the rest of it looks pretty flat. So again, it’s really the $27.3 million is against three deals that have about $175 million of par.

[Ernest Jacob] – [Longwood Capital Management]

The $27.3 is against three deals that have come how much par?

David Steel

Well to be more precise, the $27, out of the $27 there’s $25 million that’s against three deals with $175 million at par, and then the remaining $2 million are against a couple of three different smaller deals largest of which is an investor owned utility and that’s a credit default swap not a CDO.

[Ernest Jacob] – [Longwood Capital Management]

So the impairments were basically flat, excluding commutation.

David Steel

Up about $3 million.

Operator

We have a follow-up question from Lawrence Kim - Sonic Capital.

Lawrence Kim - Sonic Capital

Could you describe how much of your book now is FSA or assured related, and also are you pursuing commutations with [CGIC]?

Vernon Endo

Well we don’t really disclose how much of our book is with various primaries and we haven’t really disclosed what commutations are in progress because it’s still at a stage yet where we can’t make an announcement.

Lawrence Kim - Sonic Capital

Can you generally describe what your view is on further commutations?

Vernon Endo

As I said in my prepared remarks, we are working on a couple of commutations. We don’t have a huge number of customers so being able to get some of these done would be significantly material to us.

Operator

And it does appear there are no further questions at this time, so I’ll turn the call back to management for any additional or closing remarks.

Vernon Endo

Thank you for joining us on this earnings call and we look forward to speaking with you next quarter.

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