Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Sean Leonard - Senior Vice President and Chief Financial Officer

Michael Callen - Chairman and Chief Executive Officer

David Wallace - Chief Risk Officer

Bob Shoback - Head of US Public Finance

Analysts

Andrew Wessel - J.P. Morgan

Tamara Kravec - Bank of America Securities

Darin Arita - Deutsche Bank

Avery Son - Ivory Capital

Scott Frost - HSBC

Ken Zuckerberg - Fontana Capital

Eleanor Chan - Orilles Capital

Joseph Femoreno - Piper Jaffray

Kim Bond - JPMorgan

Steven Lesco - Credit Suisse

Ben Kedem - Kedem Capital Corporation

Steve Lund - Morgan Stanley

Jo Oft - Harvard Management

Ambac Financial Group, Inc. (ABK) Q1 2008 Earnings Call April 23, 2008 11:00 AM ET

Operator

Greetings and welcome to the Ambac Financial Group First Quarter Fiscal Year 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

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

Sean Leonard - Senior Vice President and Chief Financial Officer

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

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

I will also like to remind you before we get started that during this conference call, we may make statements that would be regarded as forward-looking statements. These statements may relate to, among other things, management’s current expectations on 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 inherent risk that actual results, performance or achievements could differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

These differences could arise from a number of factors. Information concerning factors that could actually cause results to differ materially from the information we will give you is available in our press release and our most recent Form 10-K and subsequently filed 8-Ks. You should review these materials for a complete discussions of these factors and other risks. Copies of these documents maybe obtained from the SEC website.

I would now like to turn it over to Mike Callen, who will comment on the current market environment and Ambac’s prospects.

Michael Callen - Chairman and Chief Executive Officer

Thanks, Sean, and thank you, ladies and gentlemen, for joining us. The first quarter was indeed another tough one for Ambac. Earlier expectations have turned out to be optimistic and the environment continue to deteriorate. As you know, we raised 1.5 billion of additional capital under what I would consider to be near impossible conditions and were awarded affirmations or AAA ratings by Moody’s and S&P. We also strengthened our risk management and refocused our business, and we can’t dismiss the serious impact market events have had on Ambac during this quarter. But, the current environment highlights some key strengths of the business model. In fact, I think the business model is more relevant than it’s ever been.

Until now, this guarantee model has not been seriously tested. Ambac founded the financial guarantee industry over 37 years ago, and since then we have experienced variable claims and they were easily met from operating earnings.

Our considerable claims paying resources were maintained the guard against unexpected losses, but were never drawn upon. We are now experiencing an environment that many, and certainly myself, considered highly improbable. Given this, it should not be too surprised that Ambac will pay sizable claims and need to draw on those claims and resources. Yet, I can say that I am highly confident that we will be a stronger company for having managed through this period.

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

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

Mortgage market has deteriorated significantly. We expect loss rates to eventually plateau and ultimately burn out, but it’s impossible to say when that will happen. Our CDO-squareds continue to fall in value and as expected some of our hybrid CDOs of ABS are under pressure. A real disappointment during the quarter has been in segments of our direct RMBS book particularly Closed-End Seconds. On a few deals, as David Wallace will discuss a little later, losses could reach as high impossibly as 80%; that is truly extraordinary.

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

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

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

Sean Leonard - Senior Vice President and Chief Financial Officer

Thank you, Mike. First, I would like to start off with a brief discussion about the capital raise that was priced on March 6 and completed on March 12. In total, we raised 1.5 billion of capital that was comprised of 1.25 billion offering, a more than 181 million shares of common stock at 6.75 per share. Concurrent with that sale, we raised 250 million through an offering of 5 million equity units at a price of %50 per unit.

All of the net proceeds from the capital raised were contributed to Ambac Assurance with the exceptional of 100 million, which was maintained at the holding company to provide incremental holding company liquidity to pay debt service to cover operating expenses and to pay dividends on common stock.

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

Now, I’ll turn to our financial results for the quarter.

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

Normal earned premium amounted to 172.9 million in the quarter, declining 3.4 million primarily due to December 2007 Assured Guaranty [seed]. If not for the seed to Assured, normal earned premium would have increased. Given that we wrote very little business during the quarter, this demonstrates the value of our embedded book of business.

Accelerated premiums declined 25.7 million or 65% to 14 million, on a significant decline and refundings in the municipal market combined with pure refundings in our structured finance and international businesses. However, we have seen refundings pickup in the first couple weeks in April, particularly in our healthcare book.

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

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

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

As was the case last quarter, the losses resulted and prior to an estimate and the fair value of mark-to-market adjustment for our credit derivative portfolio, which in the quarter amounted to an estimated loss of 1.7 billion pretax. In addition, we recorded the loss provision amounting to 1.04 billion pretax related primarily to home equity line of credit and Closed-End Second lien transactions within our RMBS portfolio.

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

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

I will provide some additional detail on each of the credit related amounts and David Wallace will further discuss the impairment losses and how these losses were derived.

Mark-to-market adjustments reflect third party market value inputs, as you know, the housing market turmoil has started in mid 2007 continued full force in to 2008. Liquidity across all segments of the MBS market is at historical lows. The values that we’ve received from independent third parties on our CDO-square transactions attribute almost no value to these transactions. Though these deals are now sincerely written off from an undiscounted cash flow perspective.

The $940.4 million related credit impairment is primarily for the CDO-squared deals that also includes some impairment on certain high grade CDO of asset backed security transactions which we have internally downgraded to the low investment grade.

Today, we’ve reported impairments amounting to nearly 100% of the notional value of the two $500 million single A CDO-squared deals and approximately 60% of the notional of the $1.4 billion AA’s CDO-squared deal. In total, the CDO-squared deals are now more than 70% reserved. We expect to start paying claims on those single A CDO-squared transactions this quarter, but the projected cash outlays for those transactions for all of 2008 are not significant.

The credit impairment reserves represent our opinion as to assumable economic losses inherent in those CDO of ABS exposures. Any mark-to-market reserve above and beyond that remains unrealized and continues to be backed out of our reported operating results to the extent of the mark-to-market reserves in that result in actual impairment they will reverse in the earnings over the remaining lines of the related exposures.

Now I would like to take you through the loss provision and core transactions executed as insurance contracts. In the first quarter our loss provisioning relates solely to our direct guarantees of senior securities of RMBS transactions.

Loss provisioning amounted to $1.04 billion in the quarter. Total net loss reserves on March 31, 2008, amounted to $1.48 billion up from $473 million at December 31, 2007. Total loss reserves included case basis reserves, which are reported for guaranteed bond as defaulted and active credit reserves or ACR for probable and assumable losses due to credit deterioration on certain adversely classified insured transactions. Generally, transactions are internally rated below investment grade.

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

As we repeated stress reserves and impairment charges do not represent immediate cash outlays, but are estimates of future potential claim payments. During the quarter, actual net claims paid amounted to approximately $34 million purchase all of which related the second lien RMBS transactions. ACR of $1.13 billion on March 31, are up $767.9 million from year end 2007. Again driven primarily by unfavorable credit activity within the HELOC and Closed-End Second lien RMBS portfolio.

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

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

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

As mentioned earlier, the majority of the capital raised in March approximately $1.3 billion, which contributed to Ambac Assurance, that amount plus an estimated $390 million of capital generated organically during the quarter under the Moody’s capital model, an estimate of the Moody’s capital model.

Primarily the net business run off improved our capital position, we currently exceed SMP’s AAA level of capital by approximately $700 million and we believe that we will exceed Moody’s AAA target in the second quarter of 2008. Our capital position estimates assume no significant changes and need the rating agencies periodical losses.

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

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

So, as one can easily say our liquidity position is quite strong. From an earnings perspective, our deferred earnings representing future earnings on premiums already collected and the future value of installment premiums will carry us through periods of low CEP. These deferred earnings amounting to $6.2 billion will be recognized as earned premium and realized gains from credit derivatives for those transactions executed and credit driven in format in the future of the related exposures. $2 billion represents cash already collected and invested in our conservative investments portfolio, well $3.7 billion is cash that is contractually due to be paid as installment premiums over the life of the transaction.

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

Just quick comment on our credit facility, Ambac recently amended its $400 million credit facility to exclude mark-to-market adjustments on credit derivatives and total return swaps but, excluding credit in impairment.

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

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

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

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

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

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

These two impairment charges once again reflect the turmoil noted throughout the ABS markets. A final discussion point regarding financial services is collateral posting, we had provided information in our 10-K filing about our collateral posting requirements under various scenarios including downgrade as low as A minus by both Moody’s and SMP.

You can see in our updated disclosures and our presentation which is on page 73 but the amounts haven’t changed materially do now become significant and will downgrade below AA minus. Please keep in mind that any collateral needed for posting would primarily come from the investment agreement investment portfolio. Also keep in mind that our financial guaranteed business never requires collateral posting.

Final comments on our operating expenses before I turn it over to Dave Wallace, gross financing guarantee underwriting and operating expenses for the first quarter 2008, amounts to $38.7 million down 21% compared to first quarter of ’07 an 18% from last quarter. The reduction mainly reflects reduced compensation expense primarily from prior year bonus accrual reversal, lower stock compensation and lower premium taxes.

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

That concludes my prepared remarks on the financial results. David Wallace will now talk to you some detailed elements of the portfolio.

David Wallace - Chief Risk Officer

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

Direct RMBS book has seen some $5.3 million of amortization in the last quarter. The majority of this has come form international deals and to a lesser extent domestic HELOC book, which declined by around 600 million.

The focus of discussion of the direct book will be Closed-End Second segment, HELOCs, and midprime or Alt-A, as it’s Alternative. These are the sectors, which have experienced most degradation and where we have taken reserves. The 8.1 billion subprime element of the portfolio continues to perform satisfactorily in the market context and we will briefly review this too.

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

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

Finally, the RMBS component pieces of the high grade transactions are not subject to the possibility of liquidation by higher tranches within their own structure, although, the same cannot be said for some CDO exposures within the CDO buckets of these high grade transactions. With that all my introduction, let me now move to page 11, which is the snapshot of our direct RMBS book. Of most concern are select exposures within the 2006 to 2007 origination vintages particularly Closed-End Seconds, HELOCs and to a lesser extent mid-prime. The 2006 to 2007 originated balance of these products is around 14.7 billion of which 11.3 billion comprises the two secondly product types.

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

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

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

The next several pages give us an overview and then a drill down to the transaction level of select on the performing transactions within the relevant product sectors. Page 15 summarizes the first and second position. On back house reserves, again seven transactions, which themselves comprise 41% of the CES portfolio. As illustrated earlier, most of the CS book is 2006-2007 exposure and the remainder of the book is more granular, incorporating a total of 26 transactions. Given the recent degradation, the CS book is now BBB plus on average compared to single-A conception.

No claims have yet been paid on the existing CS book. Page 16 shows 60-day delinquencies with the worst performing deals been Bear and First Franklin, which is shown a very early pickup in delinquencies. Page 17 shows cumulative loss, again the Bear and First Franklin deals are outliers in terms of that early and rapid build up of cumulative loss. As an approximate benchmark, reasonable whole life losses for these deals might be around 10 to 12%. Yet the two transactions combined, average around these numbers in just 11 months. As the slide notes, Ownit and Terwin rated AAA and AA conception, a little unusual in that Ambac’s guarantee is to legal final and not on a priority basis.

Page 18 moves on to summarize the HELOC opposition. Ambac has reserves against seven transactions, which themselves comprise 20% of the HELOC portfolio. As illustrated earlier, most of the HELOC book is 2006 or 07 but the HELOC does have a less of interest concentration then the CS book and there is a clear segmentation of tight credit quality and vintage. Given the recent degradation, the HELOC book is now triple-B on average compared to triple-B plus conception. Pages 19 and 20 show delinquency in cumulative loss data for certain select under performing HELOC transactions. Firstly, page 19 shows 60 days plus delinquencies with the outliers here being the Saco and hand transactions originated in the third quarter of 2006 and first quarter of 2007.

To give a flavor for this transaction, they have weighted average FICO to 718 and 700 weighted average sale TVs of 92% and 86% respectively and were both executed at triple-B. In the Saco transaction, Ambac benefited from a mezzanine layer of first loss provided by an independent third party, both deals were investment bank shelf deals, Bear, Saco, Credit Suisse.

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

In relation to claims, the HELOC book had had less initial benefit from a taxing point and hard credit enhancement in the form of subordinated bond over collateralization then the CS book. Correspondingly, unlike the CS book Ambac has started to pay claims in the HELOC book. As of March 31st, Ambac has paid a total of 41.2 million in claims across four transactions during their lives shown in this chart.

Page 21, summarizes the mid-prime or Alt-A position. Ambac has taken around 200 million in reserves against this portfolio with the transaction showing the greatest deterioration being originated in 2006 and 2007.

Collateral loss expectations for select transactions and now in the 20% to 25% percent range as opposed to around the quarter of this of conception, correspondingly while substantially old transactions were under written at triple-A levels, I think one was done at double-A plus, select transactions are now below investment grade. To best illustrate what maybe happening here, page 22 shows cumulative losses for select deals, most of which do not look at all troublesome. However, page 23 tells a different story with a very large build up in real estate owned and for closure.

Briefly, for illustrative purposes, let’s consider the fourth transaction from the right, NAA07001. It shows negligible cumulative loss, but around 20% of current lateral balance in REO and for closure combined plus not shown on the chart around 3% in the 60 days plus bucket. If over loans in the after mentioned buckets default and a loss severity of around 35% were applied, then this would more or less exhaust current credit announcement. Although, there has been some recent evidence of backward migration across buckets i.e., from 60 days plus delinquent with 30 days to 59 days for current et cetera on some of these deals. And additionally, the thumbnails sketch above the largely ignores the value of excess spread. The combination of bulging delinquency buckets and high pool factors clearly indicate some of these transactions are below investment grade despite the absence of material cumulative loss.

Page 24 summarizes the subprime position. Ambac has reserves against seven transactions, which themselves comprise 5% of the subprime portfolio. Approximately, $1.6 billion or 19% of Ambac’s $8.01 billion subprime portfolio was originated in 2006-2007. Very briefly, pages 25 and 26 focus on delinquency performance of Ambac’s subprime portfolio originated in 2005-2007. This being the most stressed market segment. In Ambac’s case, this segment is almost exclusively fixed rate and all deals are performing satisfactory context.

Pages 27 and 28 show loss data for the 2005-2007 vintages with performance again generally being broadly satisfactory in market counters. For example, OC over collateralization is presently fully funded, and although delinquencies and losses are written, they are on average presently tracking around the levels experienced by the 2000 vintage, which itself is likely to finish with cumulative losses of around 8%. At inception, all were 2006 to 2007 transactions showed a modeling resilience to losses in excess of that level. Thus, especially given slowing prepayment rights which adds the credit enhancement by their affect on excess spread, claims are not currently projected on these transactions. To end the direct MBS portion of this presentation, page 29 gives a summary of the methodology used to project second lien reserving amounts. So let’s briefly review that.

Ambac uses a low rate methodology, seeking to utilize appropriate historic and current patterns which betray the tendency for borrowers from the grade from one delinquency bucket to another. Once these patterns have been established and losses estimated and obviously the closed line products incorporating a 100% loss of varieties than these losses are spread over the life of the particular transaction incorporating its specific enhancement structure and projected prepayment rates.

The result of this analysis is an overall cash flow run, which encapsulates a view on the extent and timing of potential claims. Page 30 summarizes the results of this analysis for the back 2007 our one transaction that we looked at earlier. The analysis projects around 82% collateral losses as against an original expectation of circle 2 to 12 – 10 to 12, I beg your pardon. The transaction was originally rated A plus and structured to withstand around 28% to 30% cumulative losses. The transaction is approximately now 11 months old as indicated by the vertical black line.

Page 31, illustrates the projected collateral loss explicated in the present reserve. Note, the rapid escalation of losses expressed as a percentage of the original balance in the last few months. From the future claims perspective, this escalation in monthly realized loss is exacerbated by rapidly slowing voluntary prepayment states. I just presented a lot of information and I will remind you that Ambac’s RMBS exposures are listed on our website. To state the obvious, some of the performance of the direct book is extremely disappointing. While in that respect, it is clear that underwriting mistakes were made and that in common with many Ambac is being hit by a dramatic deterioration in the environment. You will no doubt be interested more active remediation steps we are taking on page 32 gives a summary of these.

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

Let me now move on to the CDO of ABS portfolio. The impairments that we took in the fourth quarter were relates to 4 deals; one mezzanine CDO of ABS and three CDO-squared transactions. I’m going to focus on two main things today, the increased impairment in the CDO-squared portfolio and the impairment on three high-grade CDO of ABS deals.

Page 34 shows a snap shot of the portfolio. As of the end of the last quarter we’ve reported $32 billion of CDO of ABS exposure. The majority of this exposure is a high-grade ABS and well one 2004 transactions, these were written from 2005 through 2007. In all cases Ambac protects the most senior CDO liability all clause. Ambac is starting to see the exposures amortized as over collateralization tests fail due to writing downgrades as tax transactions and their reinvestment period as a result of events of defaults and as it managed not to reinvest principal collections.

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

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

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

Page 36 gives basic details of Ambac’s CDO-squared transactions. As we have commented before, the main structural issue is that Ambac typically does not have control rights as regards to constituent in a CDO, as Ambac’s economic interest in the respectiveness is at the mezzanine A or double-A loan.

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

Page 37 demonstrates the continuing downgrade of RMBS assets that is the building blocks of ABS CDOs including the square transactions. This chart provides a good back drop into the summary mechanics of how these downgrades can lead to the liquidation threat highlighted earlier. Briefly, many CDOs if event of default triggers in the form of an over collateralization test, this test is a numerator/denominator calculation using assets against liabilities respectively.

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

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

Page 38 discusses the $4.1 billion in high grade deals that we have taken in terms of guidance. There are two main drivers of the deterioration, in one case a transaction had a significant BBB bucket which is somewhat atypical of most high grade deals which have a minimum requirement as single A rating. In this case, the lower collateral attachment point is like problematic in the context of the environment we are in. For the other two deals the main issue is the CDO bucket. These deals have CDO buckets of 30% to 40% versus subordination levels of 19 to 20. As previously indicated over Ambac has controlled launch in those securities which directly ensures, that this is not the case that ingredients CDOs such as those in the CDO bucket and therefore the acceleration liquidation threat can come into play.

Page 39, shows the breakdown of cumulative impairment against deal types within the CDO ABS book folio. The relatively high numbers pertaining to the CDO-squared portfolio reflect the severity dynamics previously discussed. Page 40, briefly reiterates methodologies for the being used to evaluate the portfolio. We continue to use a variety of techniques to view this portfolio. As discussed on prior calls, our thinking has developed and our assumptions have become way more severe than those used at underwriting and we are not alone in either case.

Page 41, concludes the CDO section of these remarks with a few comments from remediation. As for earlier comments in relation to the direct RMBS book, the portfolio is being aggressively and actively managed. We are exploring a variety of options aim to reduce in Ambac’s ultimate exposure and/or capping the tail risk.

Acceleration and liquidation possibilities are been evaluated as is for potential to mitigate loss by taking advantage of current high asset spread as against the much low locked in liability costs of these structures. Finally I’ll comment briefly that the remainder of the portfolio is performing satisfactorily under the appendix and to the charts provide some supplementary material on particular sectors that maybe of interest.

With that, I’ll hand it back over to Mike.

Michael Callen - Chairman and Chief Executive Officer

Thanks David, and thank you, Sean. The worst maybe behind us, but rest assured that we recognize we are working through a crisis of confidence. With a passage of entire world will clarify that in the meantime we only have projections. There has been a number of published estimates concerning Ambac’s ultimate losses. We don’t endorse any of these analyses but they do provide other data points even if we feel that there are sometimes excessively pessimistic. So, in an effort to increase the transparency of our company, we intend to post some of these analyses on our website and we will provide other relevant information that we hope will be informative and helpful. Recently, we announce the large scale effort to deal with the high cost of auction rate and variable rate demand bonds to carry or guarantee.

I want to assure our clients that we are dedicated to resolving these issues, as aggressively as possible. I’m personally committed to see in that this matter is carried through to on early resolution. Our success in the competitive big municipal sector has been improving and new business production on the secondary market during the first two weeks of the April. It will be entire production in the first quarter. So well early signs are encouraging we realize that Ambac is a long way from this trajectory at needs to be return to the market and in full strength. The competitive environment has improved considerably spreads are wide at about 25% of the moral line capacity as exited the market.

I believe that investors a year from now will look back and conclude that our company survives the worst case. But about this I am absolutely certain investor and Ambac wrap paper will not have missed a single principle or interest payment. So before we open for questions I want to briefly mention the proxy that was filed in April 21, we are asking share holders to book on increase on the authorize shares from $350 million to $650 million. As most of you know the capital raised in March substantially decreased the number of un-issued shares this increase is reflective our prior un-issued share position and that will provide flexibility to meet future business and financial needs. The board has no current plans to issue or utilize these additional shares and now we would welcome your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Our first question comes from Andrew Wessel with J.P. Morgan. Please state your question

Andrew Wessel

Hey guys. Good morning. I just had two questions. One I guess the first will be for Sean. What is the conversations been like recently with the rating agencies in light of obviously specifications having to pickup our you feel like the way your losses are tracking or and where you modeling going forward or someone in line with what the radiance she is going to expecting or if you like there is a delayed surprise here?

Sean Leonard

Yeah, Andrew, it’s Sean. Thanks for the question that we have had discussions with the agencies normal course of businesses to get them a preview of the quarter and discuss some of the events in the portfolio. You know we have been talking about is that fact of some of the deterioration is clearly well within in the stress losses that the agencies have published the fact that they reserves they were taking that David mentioned on the CDO side of portfolio, transactions that are ready heavily stressed apart from the rating agencies, so there is somewhat of an expectation there they already included some additional severity stresses so those are ready in the numbers if you will.

We have had discussions relating to the remediation efforts that are ongoing that are not built into the reserved estimates at this time until we can move those further along, but there are active remediation efforts, some of the cumulative loss numbers that David mentioned upwards 70 to 80% is indicative obviously a very interesting performance and we are looking into very diligently, so that's part of the discussions that we’ve had.

We are not aware of any additional efforts that they are going to undertake at this time to update their stress modeling exercises that they have just recently done. I think they made some statements that they wanted those analyses to have some staying power and the levels a lot they were indicating in those analyses were indicative of that. With that said, I’m sure though, why I have continuing discussions with them as we go along and perhaps as they gather data from others in our industry and others out in the marketplace. But at this time, we are not aware of any additional plans that they have.

Michael Callen

And I am Callen, I would just like to say that there is any good news here is the fact that our internal capital generation has resulted run-off as it succeeded our expectations. We are currently running at first quarter rate that exceeds billion sign for the year and I’m talking about the Moody’s model. You had another question.

Andrew Wessel

Yeah great, thank you. That’s a helpful point. And then the other questions which just resolves around staffing. I assume, first there has obviously been soon the steps on underwriting there has been as recently has five to six month ago, I think again also told that there is no expectation of loss across any CDOs and then of course in the fourth quarter happened and now some mortgage losses are ticking up. You have talked about changes you made from actually on a staffing level was then the credit risk or the underwriting group kind of deal with this and statements have been made and that also as kind of pair on that question. Your current staffing levels, what kind of assumption are you making in terms of when you will be back up in underwriting business or is that not part of the decision?

Michael Callen

If you were to look at those responsible for these underwriting decisions, you frankly would not find them here any longer, so I think appropriate accountability has been put in place. People ask where is the accountability across the board and back as I think most people are aware Andrew has for a long time loaded up there compensation structure with equity. The last time, I looked I think the senior management has had decline in their network, which is appropriate of some $70 million or $80 million, so everybody is feeling this pain. I will also tell you that we just recently because the staffing that we currently have which is down about -- this is a guess, I couldn’t get back for them exact numbers, something in the neighborhood of 50 people. We have now internal staff that we want to keep in place and in fact have we initiated recently a bonus guarantee for the year because you have to manage the psychology going on and we have great faith in the staff that we have been placed now. Our assumption in terms of new business generation is that we have to demonstrate a quarter or two of losses having been recognized and I want to control on having plateaus. So I would say that the way I look at this the first of next year we will back up and running or their above.

Andrew Wessel

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Tamara Kravec with Bank of America Securities. Please state your question.

Tamara Kravec

Thank you. Good morning. I had a couple of questions and David drew out a lot of numbers, but I was hoping just to get a broad brush of your thought on the Closed-End Second Portfolio versus the HELOC because you clearly asked five transactions that are accounting for the majority of reserve on the Closed-End than you have of 7 transactions on the HELOC side. Are you seeing -- you don’t seem like you reserved this much of that portfolio, so I will be curious if you could just talk about the assumptions you have made in your reserving of HELOC versus Closed-End and in light of that maybe bring in my comment about the Closed-End Second reaching 80% losses that at some point. And then my other question is, there was some talk of acceleration and liquidation, I think on the CDO side and if you can give us an idea of the criteria for liquidations and you would consider and how that would impact your portfolio, your cash flow of the financials? That would be very helpful. Thank you.

Sean Leonard

Sure. Happy to help on both those question. So the first one is talking about Closed-End Seconds and the HELOC and you are right. In general it’s a Closed-End Seconds that hurting the most. I think specifically, I think you are looking at these things differently and the answer has been not. You know, we are looking and using the same type of methodology in either case. I think we talked about this as a little bit before, there was kind of theoretical differences I think between HELOC which is also a revolving credit potentially and a Closed-End Second which isn’t it just it’s a fixed right line that you got allow to fixed rate lending you have got an outside you are confident all way, is that in some HELOC structures there is the potential for once a trigger is breached for further droves on the HELOC to be in effect beneficial to the guarantor about specific HELOC. We don’t give a lot of grievance to that theory, because what is happening, I mean there is no doubt about this. Is that many of the large HELOC providers are basically saying and then sent out 100’s of thousands of letters saying well look I’m sorry HELOC borrower, we recognize that you have an un-drawn balance on our HELOC, but we don’t think that you fulfill the representation that you made in terms of LTV and therefore, you can longer draw on that HELOC. So this helpful revolving feature which can in some circumstances provide enhancement to the HELOC, we think is probably gone by the buy; therefore we take the view that we look at them both similarly. And that is you know looking at past history and there is not a lot of history here I will be first to say that, of a 100% LTV products where you know prices have been selectively on a regional basis obviously declining. And what happens what is historically happened in terms of delinquency buckets and migration between them, and escalating those buckets up obviously into loss of 100% severity thinking about repayments rolling this all through infects and doing the analysis work in terms of Closed-End and HELOC.

The HELOC portfolio and you are right and there is a lot of data, we are just trying to get this much as we can to you all. The HELOC portfolio is you know very segmented along the lines that I tried to tease out. We have some you know I think excellent I mean really very, very strongly performing a HELOC’s which are they been the prime bank HELOC. So these are the color Wachovia, Morgan Stanley deals to give you the sense there itself that portfolio which comprises $4.8 billion as a weighted average loan life of 22 months cumulative losses of 0.16 very, very low and we have some very old HELOC’s and pre 2005 they are performing just fine. So if this needle fallings of HELOC those have been on performing well and that is the non-prime tend to be bank shelf type HELOC’s that are underperforming.

In relation to the Closed-End Seconds book, it’s again it’s concentrated and we have two or three deals and we highlighted through them for you, and then first Franklin that really do account and absolute math of the reserves. So I think I gave you a statistic that the top five deals across the whole portfolio takes 61% of the reserves. Well I can tell you that the top two are responsible for 43% of the total.

Michael Callen

That why I referred you to 80%.

Sean Leonard

Yeah, so we are very focused, very disturbing deals. Obliviously, we are active on those deals they are, let’s put it honestly they are very surprisingly poor, I will just leave it at night. In relation to your second question, which was you know, acceleration what was it to do when we will do it and when we wouldn’t we do it? Obviously the math in is we will do it when it’s in our interest to do it. Let’s just be clear what it is. What acceleration does is to make a class of debt payable so it up fronts the debt. It all comes due. What that means is that any debts tranch below that debt doesn’t gets any cash because nothing seeks through the water fall. So it’s face value you think well this is the thing that you should do every time when you get the chance. The difficulty there is all the write that’s about general statement. Really there are two, one is that sometimes it doesn’t get even anything that haven’t already got. So for example, if the OC ratios deteriorate then cash begin as to get cuts off and some time, you don’t get anything extra the cash is already cut off by operation of the OC ratio.

At different circumstance is within some deals particularly deals with big synthetic element and sometimes if you accelerate that can have adverse consequences and some of the synthetic elements becomes due. And that becomes due at par and someone wouldn’t in those circumstances want to accelerate the generative the deal because in effects you could be out of pocket in respects of the derivative that might itself be accelerated and that would hurt you. So, yes, we are in a very cognizant of what acceleration and liquidation can do for you. It demands, I will say a real fine legal tooth gum because these transactions are very complicated and candidly there are disagreements at times about how these documents work. We are having a number of discussions right now, but pretend to some disagreement of one status or another and to exactly how they were. Just to give you some numbers we have around, I think its 13 deals I mentioned which have events of default. And I think somewhere else I am going to handle, I’m afraid. I could actually, only its two deals that have been accelerated. I’ll come back; it is different from that, it thinks it’s two.

Tamara Kravec

Okay. That’s a very helpful. Thank you. And just a quick a follow up. There was a to our profits that there were some letters going out on HELOC’s where they were actually producing the credit line and forcing a payout. Would that have any effect on your cash flow and reserving? Is that something that you thought about in your assumptions or not?

Sean Leonard

I am not sure, I understand the question. I am not familiar what is going on from the banks.

Tamara Kravec

Yeah, the letters going out from the banks that actually not only said you can’t drive down on it anymore but you are, actually we are taking your line down and requiring a payment?

Sean Leonard

I haven’t heard that, I would have to think that one too, I’m afraid that.

Tamara Kravec

Okay. Later I can follow up with you too and then yesterday assured guarantee issued at press release about somewhat classification on new industry accounting rules and for PDS. Is that anything that affects you or not?

Sean Leonard

Yes, that’s, as what I mentioned in some of my comments we had with the SEC has an end industry our participants have been discussing with the SEC is a consistent method of financial reporting for the elements of credit default swaps both on the balance sheet and the income statements. So, it’s not relating to fair value calculation its just presentation of the amounts.

Tamara Kravec

Okay.

Sean Leonard

Also with there press release was trying to give folks heads up that the on the various changes that are going to be apparent in their income statement and balance sheet. From Ambac’s prospective, it’s pretty simple. We have never included credit derivative items as premiums certainly so over the last couple of years. We have always been in a separate line item code other credit enhancement fees and we haven’t had the need to record or haven’t segregated out any specific loss reserved amounts for those in our incomes statement. That wasn’t our financial reporting construct that we followed. So we have a pretty simple situation, as you going to see you are just going to see the other credit enhancement fee revenue line move down and down with the derivative mark. So you will see the same number, but it will be labeled something different a little bit lower in the revenue section of the income statements.

Tamara Kravec

Okay. Thank you so much for all this information.

Sean Leonard

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

Tamara Kravec

Okay, thanks.

Operator

Thank you. Our next question comes from, Darin Arita with Deutsche Bank. Please state your question.

Darin Arita

Thank you , just turning to the CDOs at ABS could you talk a little bit about each quarter, we are seeing the rating high grade downwards and what is developing work than your assumption of each quarter. Can you be a little more specific there?

Sean Leonard

Sure, I am happy to. There are several elements for this, I think you know the big one, you know, and it kind of makes sense both in macroeconomic way, common sense way and also a modeling ways is just the correlation things. So correlations have shot ups so got two things, you got all deals most constituent RMBS transactions are suffering odd ones and also obviously you know within the CDOs that generates a leverage effects. So I think the correlation is pretty helpful. To give you some history on this at inception I think agency correlations were around 15% they are selectively 50 through 80 depending on what the deal is now. So, I think that’s been a major factor and it continues.

I think the other factor and I gave you some statistics on this is it just continued right rating migration and obviously the two are related. You got lots immigration all at once that not his correlation. And the final thing I would point to is severity, we’ve got a mortgage market, which clearly is in tremendous disarray and when you hit the sorts of triggers that I talked about in relation to CDOs for sure then liquidation is a factor and unexpectedly with the benefits of a year or two as hindsight but even over the last six months, I think its fair to say that the market has absolutely tanked and therefore the liquidation proceeds are very low and hence severities have increased. So, it’s correlation, it’s rate immigration and it’s severities.

Darin Arita

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

Sean Leonard

I think that it’s not that we are trying to announce, the time will tell. I mean we’ve commented before that the math of what’s going on is getting pretty stretched in some circumstances. There was a article out I think yesterday published by a hedge fund which again just did some math similar to that which I believe will coveted a while ago looking at the balance of subprime that’s outstanding that the losses that have been taken so far, the pipeline delinquencies and what might one expect for loss given those pipelines, you have the whole thing up on any kind of prepayment rate and its just getting difficult to hit some of the numbers that have been talked about. So, I think my view is that increasingly more times will perhaps make the math work.

Michael Callen

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

Darin Arita

All right, that’s helpful and if I’d may ask one more question.

Sean Leonard

Sure.

Darin Arita

I guess assuming the rating agencies provides their stress test models and increase the capital requirements again you know at what point would it be un-economic for Ambac to raise capitals to preserve it’s AAA ratings?

Sean Leonard

Well, Callen I will take a shot at that. I think the business models that we run internally given our internal capital generation and given the market developments with the amount of capacity reduced in the pricing that’s currently available. The idea of getting back to market and bridging this confidence gap is in fact from a business point of view very attractive one. The question is how do you do that as quickly as possible and that’s pretty much where we spend a lot of our time, nobody here likes these first quarter loss numbers, we thought there would be a disappointment, it was a disappointment to us when we finally came up with them and the early part of April. We’d like the hope that maybe we’ve seen the bottom of this that’s not a forward-looking statement no matter what it sounds like. And there is a good business out there because there is a lot of injured capacity and we are looking at every opportunity to go back. So, we think by the end of the year, if we use the stress models in place now we are well in excess of their AAA target and if they were to redo that which they have a right to do, we could find ourselves conceivably in a deficit position such as we were right after our capital raise and it just means that generating the capital we do internally it would be a little more time before we cover that. I don’t know how helpful that is but I don’t think we’re -- there were too many variables here to say that we were anything close to uneconomic in that respect.

Darin Arita

All right, thank you.

Operator

Thank you. Our next question comes from Avery Son with Ivory Capital. Please state your question.

Avery Son

Okay. Hi, good morning. Can you clarify for the home equity in the Alt-A reserves ranks it in. Are the credit reserves there now kind of reflective of estimated lifetime losses and if so that’s my understanding of how it works for quarter kind of what’s it changed if you look at kind of Q1 where we are versus Q4 and what could move us further down that pass in terms of changes as we look forward through the year?

Sean Leonard

Sure. Let me take the go on that that. And just, first thing yes. The notion is that we are taking a present value of the losses of the claims that we expect to pay over the life of the deal. Just to relate that, people always like to relate it to cumulative loss because that’s specifically statistics that people finally around. Let me just give you a bit more insights on to that. I think in the presentation, we talked about -- in fact it’s the most gracious example the best terms deal where we are expecting or remodeling at least around 82% of collateral loss. So, you got a 100 people in the room that’s all got Closed-End Second in this deal 8.2 of them have walked out, 82 have walked out and not paid you whole lot back of 100% severity. Just in relation to two other transactions just give you some more data and just they open with what we are looking at here. I mentioned that in mid prime we got a 20 to 25 percent collateral loss, in HELOC’s they vary the ones we preserved for from I think about a low mid 20s to a high of just more than 50. So, that’s a collateral loss.

In terms of what’s happened and where does it go from here you know probably a good thing to do is to look at the chart on page 31 and you get a pretty good sense of what’s happened in the last few months. Basically losses have taken off in that transaction. Sometimes you get perplexing movements, I will draw your attention to one. If you look at the first Franklin deal which is also in the charts that I presented. You will see four months ago I think it was a kind of marked flattening in delinquencies, that proved to be a false dorm because although delinquencies that trajectory there has flattened actually losses have continued to escalate.

So, you know the data is difficult. You get very odd data. To give you a sense of how odd the data is the remix is beginning to come in some what late because sometimes people don’t believe the detour that’s been presented and when it send it back and say whether it can’t be right. But in fact unfortunately some of them is right and then on that a huge. Where can it go? Again, look at page 31 and I admit this is the extreme example and a criticism it might be well look at the very sharp diminution in monthly realized loss that is being projected here through the roll right methodology. And it’s true. It’s a fairly sharp diminution from where it has to be because if it didn’t, you end up with more than a 100 percents of collateral loss which doesn’t make any sense either. So, I think further discussion that Mike just had in relation for sub-prime and what’s outstanding and what does that imply about future default and severity rights to get to the given collateral loss, we are seeing some of the same things certainly in relation to almost dressed transactions, you know how bad can it get. 81 people and 100 walking away sounds pretty bad to me.

Avery Son

Okay. And then thanks for that answer. Given that dynamic if we kind of looked forward into the next few quarters, I mean what’s showed the right run rate loss the -- or provision be on a quarterly basis assuming that the charge that you guys have forecast on page 31 are kind of accurate going forward?

Sean Leonard

Well if the forecast was accurate going forward and let’s face it, it may could be plus it could be minus and there would be no impact really I mean that’s what we are setting up. So, the only thing that would happen would be some teething, but some what we are trying to do you know getting back to I think the first question is you know put it out there in terms of that’s the expectations through life. I think where you know moving aside from this one specific case know and this gets into the methodology that we use and its just important that everybody captures this I think that you know we use this probable and estimable notion for posting these impairments or reserves and the probable demarcation is investment grade. By definition therefore you know other things being equal you are closer to a reserve if your portfolio degrades and gets closer to that BBB demarcation line if you will, and that’s happened, I think you know I gave some statistics on high the grade deals, we think we’ve beaten them up pretty heavily and the future is unknowable but yes we see some degradation that is I was trying to point out.

Michael Callen

Yeah just going to point out to and maybe David, you can discuss the kind of the breakout of some of the HELOC portfolio being that big portion of the portfolio, It is related to a large bank transactions versus short transactions.

David Wallace

Yeah, I mean I think that’s what.

Sean Leonard

Even I think that’s the demarcation in the portfolio that David talked about where you have the bank, the non-bank in certain vintages and then you have older vintage transactions and obviously most of this stress coming from the recent vintages and the investment bank shelf transactions.

Michael Callen

Yeah, very striking, you know, has various hypothesis about this, and we are investigating this hypothesis, but it is very striking how concentrated, very concentrated some of before performers and all sorts of obvious questions, I mean, you know, I mentioned that we have diagnostic and forensic people working on some of these deals, you know, we are beginning to see stuff back from that, you know, the diagnostic is basically running takes looking at delinquencies and trying to figure out given what you now know, what you knew then, would you have expected that delinquency are not and if the answer is not, well that’s interesting, so in other words, you know, you have incredibly low FICO within a pool and it’s delinquent, well maybe you’ve expected that but if it’s incredibly high and the LTV was incredibly low that maybe you wouldn’t expect that. So that what you do is to take an adverse samples so you know run the tape through the program taken adverse sample and looking for the suspicious one and that’s what you do is to go and look at the files.

That’s a very difficult loan process, but you look at the files, you like at the transcripts of servicing records and you see, what you see. And all I will say is that some pretty amazing stuff to see. So you know, very concentrated adverse exposures that’s really the message here.

Sean Leonard

Let me add one thing Callen, we are trying in terms of rebuilding confidence in the coming months to - one step in that process is to be is absolutely transparent as legally possible and none other things, we are going to try to provide you with tools on our website, so that you in trying to project the future can incorporate, whichever variables on ratings and things like that that you would wish to do and out of this tool will come -- this calculation will come to loss that would result from those assumptions. So, I don’t know if anything on hand that we can provide in terms of information that we are not endeavoring to do in the coming weeks.

Avery Son

Got it. Thanks.

Operator

Thank you. Our next question comes from Scott Frost with HSBC. Please state your question.

Scott Frost

Thanks. Just a couple of questions. Could you go over again how much business you have written since your downgrade by Fitch and I guess mid March. And also for your credit facilities, has the bank at anytime stopped you from borrowing on the facility?

Sean Leonard

The answer on the second part is no. On the Fitch downgrade for us came back in January, in fact, if I remember it was January 16th that was about a day after I got here.

Scott Frost

Okay.

Sean Leonard

Give us just a couple of minutes before the end of the call, we will come back and tell you what the business volume has been since that particular date.

Scott Frost

Okay. Thank you.

Sean Leonard

Yeah just a little bit more on the credit facility, the credit facility we never joined on, we have had discussions with the banks to talk about the minimum net asset test that I mentioned in my comments. The liquidity in the financial guarantee business for the reasons that we mentioned relating to guarantees that principal and interest and the fact that we’re setting lifetime reserves over the entire transaction, the cash outlay for those items that we have either cash reserves or impairment for CDOs is relatively modest compared to the total size of the reserve that was posted at the end of March. So, from a liquidity perspective, we have a very high quality investment portfolio and good cash flow. So, there’s never been a need. We don’t see it at least apparently in the investment agreement portfolio, we have a portfolio of asset backed securities. Clearly the market for those securities has been under stress and the values indicate that -- in that portfolio, however, we do have identified securities that we think will be more liquid and we have been turning -- we have a fairly sizable cash position in our portfolio about 300 million, so that provides what we think is the appropriate liquidity going into considering many potential drawls that we would consider in our guaranteed investment contract business.

Scott Frost

Okay, thanks. I’m sorry, I misspoke. I mean since your rating was taken off Watch and double AA by Fitch, that’s what happened in mid month right?

Sean Leonard

You are talking about since capital raise I think?

Scott Frost

Right. Yeah, okay.

Michael Callen

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

Sean Leonard

But, I know what’s your question is and before the call is over I will get it; I am in the process of getting it done.

Scott Frost

Great, thank you.

Operator

Thank you. Our next question comes from Ken Zuckerberg with Fontana Capital. Please state your question.

Ken Zuckerberg

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

David Wallace

Sure. And, maybe we’ll try and put this out in the website, we would be happy to do that. So, I'll just give you some numbers, I will start off with the bank deals, 4.8 billion, 22 months weighted average life, weighted average cumulative loss 0.16, then the next segment is essentially the shelf deals and it’s 4.5 billion, 3 points of loss, 28 months weighted average life line life and then the final segment is 2 billion or 2.1 billion I guess, cumulative loss about 1.37 on a weighted basis again, 44 months weighted average life.

Ken Zuckerberg

What's the full volume on NBAs in '08?

David Wallace

So you can see that the segments perform very differently.

Ken Zuckerberg

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

David Wallace

They are that -- that is the former, so, you know, and also HELOC by definition HELOC intend to come from banks because you need to withdraw the things, but no the point I was making on the slide and just to be clear, I call the prime HELOC if you will that much higher FICO and tend to be fraying within a relationship other whether it’s wealth management or other financial products where as the shelf deals, the aggregated deals if you will I don’t have that, and typically lower FICO still relatively high and it could be 700 very easily. And I think I have got some numbers on the chart, but the - you know the prime deals are significantly higher and framed within the relationships. So, it’s a kind of know your customer type fees.

Ken Zuckerberg

Great, great. And thanks for the helpful color. Moving on to Michael, hi Michael. With respect to your ability to I guess subrogate maybe the word, is there call back to some of the folks that provided you with these deals in the event your diagnostics find out their worry, their misstated loan to values or misstated FICO scores?

Michael Callen

There are legal remedies if you find that you have been injured and that there have been false reps and warranties. As a statement, David is working on this, I will ask him to comment. Let me just tell you that the policy the industry and certainly of Ambac as far as policyholders are concerned is to protect them at all cost that’s the franchise is all about. So, in a case like that I can tell you the CEO that even if we found ourselves injured somehow, we’re never going to be seen in the market place to failed to make the payments, there are transactions, however, where you can -- there can be failures on the other side to perform or there can be false representations and in that case you take normal steps. Did you want to say something?

David Wallace

Yeah, I will just get a little bit more, more color on the topic and really the base campus, there are kind of two ways of going about this, in sense of them seeking reparations from fraudulent deals. One is the loan by loan. So this is the macro, well, the LTV was supposed to be exit clearly one. It was supposed to be unoccupied, it clearly wasn’t, and that’s it’s empirical. It’s obviously difficult and time consuming. It’s factorized. That’s what you do and I think that a lot of folks would be doing that. I noticed there was an article in the journal yesterday in relation to some transactions.

The other theory is kind of grand theory and going back through time here at Ambac, we have had some experience of this in relation to not loan by loan but really kind of more grand scale fraudulent inducement. And also the trick is to not go down one root or another and not preclude one root or the other, but to kind of deceive both and take a choice at some future point. So, two avenues, loan by loan or a grand theory and you kind of need to work at both and take a choice later down the track.

Ken Zuckerberg

Thanks very much for the answers.

Operator

Thank you. Our next question comes from Eleanor Chan with Orilles Capital. Please state your questions.

Eleanor Chan

Hi. Thanks for taking my call. I just have a question about what you guys said about the rating agency capital cushion. I think I heard you guys said that you have cushion with respect to S&P of about 700 million and not much has been mentioned about Moody’s. So I’m just wondering what the corresponding cushion do you have with respect to Moody’s minimum AAA ratio? And also, you also mentioned that you expect to exceed Moody’s target AAA ratio by the second quarter and I’m just wondering how do you guys plan on achieving that?

Sean Leonard

Let me give you some flavor on a few numbers on that. Let’s say Moody’s first. On February 15, Moody’s under their new and more conservative model announced we were 2 billion short. We raised 1.5 billion of that and took about 1.3 billion down to the insurance company. So that left us about 700 million. Short internally through mainly through run off, we generate, we estimated at that time about 1.2 billion a year in the event and by the way the Moody’s model was as of year-end ’07, in the event and in first quarter we’ve generated about 390, let’s call it 400 in rough terms. So as we speak, we would be in deficit against their target, not against their minimum, but against Moody’s target of roughly 300. We know we have some heavy economic capital either as our users running off in the second quarter at a higher rate that we had in the first quarter. So, I’m not going to commit to this, but my sense is that we will generate well north of 400 in the second quarter by the end of June and then that would put us over the top as far as Moody’s is concerned and would put us well over $1 billion of cushion against the S&P target. So, by that time, we should be fairly in a very comfortable position. And provided we are very judicious and disciplined in underwriting, I would anticipate by the end of the year to be well in excess with S&P more than 1 billion with Moody’s probably in the neighborhood of 500 or 600 million surplus by the end of the year.

Eleanor Chan

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

Sean Leonard

Sure. I would say the average is deceived and we are not talking about our portfolio in the aggregate, we are talking about half a dozen bills of their whereabouts. But let me try and give some color to that. Really two things, as I try to indicate, no great losses in terms of some of the ’07 deals, but correspondingly, very very high pool factors 92, 93, 94% or something, so very acclimatization, very low losses, but unfortunately very high REO and for closure balances, I mean staggeringly high. So, we have got deals, I’m just looking at list now for closure, 14.29, 14.67, 14.48, 11.93, and so on and so forth. Those are very very high balances to be in that bucket at this point in the transaction slide. Obviously, what will happen is that these deals will be liquidated and then we’ve seen a little bit of evidence, I mentioned on the call of some backward migration not from the closure clearly, but from 60 plus going backwards into 30 and eventually into current. But, you know; the bulk of the closure nor he owes, it’s clearly going to be liquidated, so then it’s just a severity question as to you know, what that will produce in terms of loss. Severities, you know, anything 25 through, you know, 35% their balance. The issue with the - with the deals is that, you know, I will say was really designed to reflect, you know, the main picture of that was designed to reflect, you know, relatively higher FICO, and the way these deals work is that if you have relatively higher FICOs then you don’t have relatively higher credit notes because in theory you don’t need it. So if I give the FICO in some of these deals are, just looking at the list there, around about 700 mark. So these weighing off of subprime borrowers and enhancement levels correspondingly are somewhat slim, 4 to 5% thereabouts.

Historically, losses one or two, you feel fine about that. There isn’t that much excess spread again because the borrower is sensibly a decent borrower and doesn’t want to take out an expensive loan. So what you have got is a structure that you may be more than some other deals depends upon getting the borrower credit life because there isn't that much more protection. So in the very early days of a transaction full taxes of 90% odd, you see these slots of sums in for closure in REO, you might hope it’s a major pig in a python, that’s coming out first, or you got a problem and we are taking adjustments in the middle of that essentially, and doing the numbers along the lines that we discussed running out in text runs and the like and you get to around the source of collateral loss that we put there.

I think that clearly this portfolio is going to be a focus of remediation efforts because it does stretch credulity. I will admit that you have these sorts of borrowers who traditionally has performed pretty down well, suddenly performing incredibly poorly, and it's very very spotty. So we have got some very poor deals and we have got some very good deals. So, deals originated within weeks of each other, you can have some with apparently very very similar characteristics showing in the foreclosure bucket less than 1% as against some with 14%. Clearly strange things happen. So that’s the background. We think we are giving it a bit of hit. The reasons, the 20, 25 number is not representative of our portfolio, we have lots of deals that are performing just fine in terms of adverse characteristics but we have one or two or three or four, in fact, half of those are my guess, that are performing very poorly and we’ve taken what we believe to be the correct action, although we will see very aggressively chasing these deals.

Eleanor Chan

Thank you.

Michael Callen

Let me out break for one second, I was asked about business production and Bob Shoback would like to provide a few numbers and some flavor on that point, he’ll just take a second.

Bob Shoback

Yeah, the question was related to production since the capital raise, and what we’ve closed in terms of production since then in this EGT is about $12 million and a number of transactions has been in the new issue negotiated market, a few more in the new issue competitive, we did market and a fair amount in the secondary markets, but we have seen most activity in the secondary markets recently. In addition to that, there is a number of commitments that are outstanding for deals that have been avoided, where bonds have been issued or but they have not yet closed, so the bottom line is about 12 million in CEP since the close of the capital raise.

Operator

Thank you. Our next question comes from Joseph Femoreno with Piper Jaffray. Please state your question.

Joseph Femoreno

Thank you, could you talk about some of the assumptions used for your estimate and how much capital is created in the run off?

Sean Leonard

Sure, I can do that. It's Sean Leonard. What we do is we take an estimate of the -- we look at the portfolio and we look at the payment schedules underlying the obligations of the portfolio and schedule those out a time and look how the theoretical losses would fall as far falls away, so that’s on the loss side compared with the claims paying, resource side which has element of investment earnings payments of the expenses and is kind of cycling of the - of the premium from one bucket of claims paying resources to - to surplus but variable to kind of look at that project that out, its kind of assuming no new business and look how claims paying resources moves every time versus the movement of theoretical loss and in that it's effectively the calculation that the rating agencies undertake to determine levels of capital, AAA levels of capital.

So, that’s what we do, the pieces that are difficult to project and we given out and what we think is pretty conservative numbers of approximately 100 million for the quarter of capital that’s freed up through just portfolio run off and it’s such as difficult to predicate is the refundings, if the refunding levels and transactions that are either structured finance refunded away, prepayments speeds in the light, that helps to increase the number and during the first quarter we saw in my comments we mentioned that the calculations, our estimates is about 390 million of capital generation.

What we are seeing in the second quarter is kind of acceleration of refundings particularly in certain assets classes, but we are seeing in the public finance side particularly in healthcare, so we could see a fairly sizable - we could see a fairly sizable reduction and part in that healthcare portfolio, and we were currently looking at since some expectations perhaps in the quarter of a run off near -- near $5 billion in healthcare alone, so healthcare generally due to the nature and the risk, which we have been very successful in underwriting but nonetheless rating agencies take a course view of that particular asset class due to the potential severity due to the nature of those institutions, so I think that will add to - and I think I may have missed spoke, 100 per month is our general base assumption and I think I may just said interested 100 per quarter but 100 per month, so 300 per quarter.

Joseph Femoreno

How much capital you’re expecting is freed up?

Sean Leonard

Yes, as a conservative number and in the first quarter we freed up and look like about 390 million, and we expect at least in the second quarter you know with the - it all depends on the re refundings but its starting off at a quarter that its looking like the - the part is coming down faster than it did in the first quarter in certain asset classes, where which would be - which would be positive from a from a loss modeling prospective.

Joseph Femoreno

Thank you. And this is probably for David. Can you go into a little more detail in terms of the disagreements that you mentioned in terms of when innovative people takes place in some of the cash flows get diverted to see your charges.

David Wallace

Yeah, I don’t have to answer specific obviously but you know I guess the deals are very, very complicated and they have you know interlocking documents of one source or another and you get to you know discussions shall we say in relation to have some of the documents into relates and even in extraordinary cases about the precise nature of notification. If some of these, which you all know is that x, y and z is going to happen and then there are lots of e-mails and conversations about it. Then those that constitute note, those that doesn’t constitute note, so on so forth. Clearly we have entered into these deals, they are all synthetic and what they rely upon contractually is an obligation on behalf of our counterparty to perform in a manner in terms of giving instructions to the appropriate trustee in respect of the deal and the tranches that we insure and so that’s just a slight difference, a slight nuance from a normal insured transaction where obviously we would be in direct contact with the trustee. So again, there can be just a little bit of friction there and I don’t want to exaggerate the issues here. I think they really are about complexity and also candidly about the source of pressures that these sectors are under. There is no doubt, but global financing institutions including us obviously somewhat regret, some of the transactions that we are in and others are in and some people take a very literal line perhaps in relation to their obligation. Clearly those are things we are aware of and thoughtful about and we will take them forward as needs be.

Joseph Femoreno

Alright, thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from Tim Bond with J.P. Morgan. Please state your question.

Tim Bond

Yeah, hi guys. I have a couple of questions. First would you -- actually two parts of this. Could you step into the market and actually by HELOCs or CDO deals with your insurance investment portfolio?

Sean Leonard

I mean I would say the answer is yes, we could. I think that the rating agencies might not be terribly happy with that and that would stop us. Callen speaking purely personal opinion, it might turn out a year for not to be a very smart investment, but we shall see but the direct answer could we and is the answer is yes, would we is something else.

Michael Callen

Yeah, the issues from a financial perspective as it relates to capital and capital and the rating agencies models particularly is that transactions when they go to a rated BBB were lower receive a 100% capital charge under certain rating agency capital models. That would make it difficult for us to take risks to transactions that one could down grade into that bucket, where two exist already in that bucket. So that would be a capital user, that would be difficult one. The other point I would make is just generally liquidity of those have we generally have a very extremely liquid investment portfolio on the financial guarantee sides, of where I was see you would be and that would be something that would be of concerned make transaction under large in that type of asset class.

Sean Leonard

Its just passing that would be just from the risk perspective you know we talk a little bit about that correlation and how that sitting out with so many clearly whether the risk is on the insured side or the investment side its all risk and you know arguably we have got enough RMBS risks, so from correlation and overall enterprise risk perspective that's something that obviously we would want to be thoughtful about also.

Tim Bond

Yeah I was thinking also in context of you know actually decreasing your exposure if you are not purchasing from the market. Your collateral loss expectations to form a 80% you are able to purchase for significantly lower than that you know you could opportunistically lower your net exposure there, and then you know, if the market does recover you will some much upside but. Our second question I had was you know in regards to the statutory surplus and then you mentioned the liquidity was strong but I guess my concern is if reserves continue at this level the statutory surplus becomes important the fact that their regulators can step in and actually take control. And when will get your reviews on that?

Sean Leonard

Sure, I can answer that question, if you look on the last page of our operating supplement that’s on our website, it’s page 27. I'll just give you the numbers if you don’t have it handy but, on that page it provides March 31, 2008 statutory numbers. As you can see the qualified statutory capital and the surplus to policyholders those are two important numbers for our regulatory purposes have increased from the end of the year primarily due to the capital contribution. One thing minus any, minus the CDO reserves that were taken minus any dividends that were paid out the insurance company to the parent as I mentioned $54 million, that gets you to plus the quarter results. That gets you to the ending March number so the issues there would be you know, surplus and policy holders is our the governing constraints for dividends, then we can dividend 10% of the beginning of the year number so that 3.3 billion that’s our capacity to dividend under normal constraint not consider to be an extra ordinary dividend qualify is statutory capital is kind of a single risk unit number. Nonetheless you can also see some contingent reserve that contingency reserves are just kind of a statutory accounting concept for ACR in the sense that’s for reserves for unknown type items. So you would have to have additional CDO impairments would have to have additional complain of ACR into case you know those two items would have the affective of reducing capital. But you would also have income you had invest income you would have the earnings on the statutory basis to off set that. So at this point time you can see even though we booked some big reserves you know would be more than immediate impact from CDO side and then will be lesser of an impact that would be case I problem transactions moving from a future reserve in ACR if you will to case reserve.

Operator

Any further question, sir. Okay. Our next question comes from Steven Lesco with Credit Suisse. Please state your question.

Steven Lesco

Hi, good afternoon. First on the interest of the last question about how much you can dividend up from the operating company, isn’t there also a statutory net income restriction with dividend, minimum of 10% report neither is on or three years net income to the previous dividend?

Sean Leonard

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

Steven Lesco

Great. What’s the year-to-date that straight that income?

Sean Leonard

Actually I don’t have that number in front of me hold on a second, the statutory net income is approximately for the first quarter is a loss of about $850 million and that’s due to the reserves taken for the additional reserves CO, where transactions and the high grades that we posted and reported in our press release.

And I assume we have a number of questions on the web, I want to get through the queue of people here but I, we are going to answer everyone of those questions either at this conference or by e-mail all the questions, I’ll answer one right now and it is are you going to go bankrupt and the answer is no. And we’ll answer that one as well but there are number of others, I don’t want to be discourteous and ignore them lets continue with those in the queue here.

Steven Lesco

Okay. And just question to the David regarding the CDO disclosure. Could you give any color on the pooled ABS of less than 25%, MBS bucket of like 2.8 billion. I know MBIA they didn’t disclose what was in there and it turned out to be 20% ABS, 80% CDOs?

David Wallace

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

Steven Lesco

For the pooled ABS of less than 25% MBS?

Sean Leonard

Yes, that’s right. And so, I think in the appendix to the slides that we presented there is some pretty good material on there. So, page 43 for example splits up the book both by bond kind, predominantly high yield CLO is about 65% and by rating it's 70% odd, 74% AAA. We feel pretty good about our book. I think that the ratings indicate that corporate default rates can escalate way north of where they are now. So, if corporate master fitted default rates or any kind of reasonable severity jumps up to 10% that wouldn’t cause as great concern. I think that we have about 8.9% of that book is in market value CDOs clearly for all the obvious reasons that’s been a real focus for us. That portfolio helps, really kind of dumb on its face to do so, yes, at times different triggers have been hit and one or two things has happened without exception. Either equity has been injected or portfolio sales and de-leveraging has occurred. So, there is been some stress that the candidate you know, the idea of those deals is to be South collecting in terms of the measures with pre-built into them. So now, we are feeling pretty good we got to other focus on I am simply focused on these we are got about 4% of the Trust deals so we just see the original banks raised in insurers and you know you reach the German every day and you look at some, you know, the they extent of RMBS, this is whole line not security, RMBS holdings as percentage of assets and you know the kindly I think this is something that will be perhaps the feature of the landscape over the next six months I’m moving the way from RMBS security concerns to move it, its looking at loans which also is more difficult to value and you know you look at regional banks and you worry about that segment and the regional concentration perhaps those banks might have in lending books. So be very focused on that and we are you know, conducting a review of that time book as we speak but the initial runs seems to be yes it looks fine.

So I guess that’s a long way of answering a question that you know high yield book can take a heck of HELOC, the market value book is performing as it should I mean clearly its you know things are happen that, that the deals are performed further you know plan is that work the drops I think you know I personally focused on that’s far they look at okay. So now we are not you know experiencing you know undue concerns certainty cooperative developed writes can escalate significantly from where they are now and you know I think they are probably will but hopefully not to levels that unduly trouble us.

Steven Lesco

Okay. Great, thank you.

Sean Leonard

Thank you.

Operator

Our next question comes from Ben Kedem with Kedem Capital Corporation. Please state your question.

Ben Kedem

Hi, today in the presentation in response to a question you said the cash flow on our annual basis runs around a billion 5 to billion 6. And also when you floated the equity offering you mentioned that the cash flow of the company runs about a billion 2, so obviously you indicated an improvement. My question is assuming no way capital a mark-to-market changes assuming to big assumption off course, but assuming no changes in mark downs a all mark up in case from operation are you a profitable or is that others they business look strictly operationally?

Michael Callen

Ben I want to clarify I think you may be referring to the accretion of capital internally which is derived from a run off of the business which of course absorbs capital and from the earnings from our investment portfolio in just to clarify my answer and then I will go on and answer you. The rate of run off in the first quarter actually of Healthcare and things like that absorb a lot of capital exceeded our projections on the set of billion two and we know on the second quarter we are going to have an even larger run off of those capital expensive transactions and so I have moved up by un projection of capital increase and adding back from a million, a billion two rather 2.5 billion last year. To the answer of your question, yes, in the absence of deterioration in the portfolio almost exclusively on the mortgage side of the portfolio we had a profitable business. Most of the profit in fact as we pointed are really embedded in the balance sheet. So, we are talking about business here that generates earnings of $750 million to $800 million a year after tax. And that would include no incremental business so, we as said several times and it’s of some interest for analytical purposes it doesn’t change economic reality terribly much but the number of trouble transactions in a very a large book are remarkably few. And if one could set those aside or snip them out, add back as a good viable profitable business, yes.

Ben Kedem

And you also made a comment that the portfolio rode down about 17% so, the evaluation is not 30% of phase. What portion of the portfolio is that, that you mentioned the average is around 30% of that?

Michael Callen

I think what you are referring to is the proportion of the CDO square deals that we have preserved against and just coming through the, the that is try and find that. I think that’s what you are referring to so, that’s an intent that we have taken impairment rather than reserve because it’s quite a derivative against.

Sean Leonard

Yes, yes, yes, I think, I think the Callen sneaking you in here again. Our CDO-squares had been the most troubled part in the most visible certainly high profile. And I think what we said was of that phase value on the CDO squares we have know reserved an excess 17% of that. There were two A CDO deals which have both been fully reserved, they were 500 each and then there is another transaction of a billion 4 we called the peaceful transaction with one counter party and we have ensured but about 60% so if you take enter CDO square portfolio it is pretty much largely behind us I guess.

Ben Kedem

You are talking about total phase of about 2.4 billion of which is about average 70% reserve?

Michael Callen

That is correct.

Ben Kedem

Okay. Thank you very much.

Operator

You are welcome, sir. Thank you. Our next question comes from Steve Lund with Morgan Stanley. Please state your question.

Steve Lund

Hi. It’s Sy Lund from Morgan Stanley, is that question that comments you made about Moody’s. You said that you have to hit the Moody target in the second quarter. I mean those are targets of Moody’s as of March and obviously your outlook catching since March. Are you confident that the targets the rating agencies have won’t change in light of what happened in the market and also in the context of your expectations for the year?

Michael Callen

You know what always has to be careful trying to speak for someone else tonight. I am obliged to repeat that but when they arrived that the numbers they did using the models that they implemented after the mortgage note down begin. They incorporated some very, very, conservative assumptions. And what were seen is that the assumptions that they incorporated up pretty much what we have seen here. They anticipated stress so I can’t guarantee that they won’t come out in sales as well now we are going to changed the goal post, but the purposes we’ve set before of these conservatives assumptions more applicant times 13% above that was so the in the event that depends on pull the way they are, they wouldn’t have to do that. Which I can give a guarantee, I can only express some confidence that our capital passion even given the unhappy results we reported is adequate and getting more adequate against their targets.

Excuse me I’m sorry, I would not be surprised to see them and come to some comment at some point in connection with somebody actually results being reported to first quarter not just for us but for others, as they watch the developments of market place, but the prospect of an immediate down grade of my opinion is not high, certainly not high

Steve Lund

Can you quickly follow up as far as the operating company, you said you are taking a divided out of the, was concerned operating company, I mean, if I look at the holding company cash I can go forward and tell the second half of 2009 and given the capital position you have right now, why are you actually taking a dividend out of 2008?

Sean Leonard

Yeah, what we wanted to do was we wanted to grow that cash position at the parent company to approximately at two times level, so we want to grow at to that level and that’s what some of the rating agencies would like to see at the holding company level, so we are going to go back doing that and that once we hit that kind of target if you will, which we expect to hit close to the end of the year maybe in the first quarter of ’09 that will setback and determine what the appropriate actions would be after that.

Steve Lund

Yeah, thank you for all the detail.

Sean Leonard

Thank you.

Operator

Our next question comes from Jo Oft with Harvard Management. Please state your question.

Jo Oft

I would just like to ask a question about the GIC business in relation to ABS CDOs given that there are a number of ABS CDO’s that are the process of liquidation or that they have already liquidate, I would like to see if you guys could tell us how much exposure you guys have to take business within ABS CDOs?

Sean Leonard

Sure, sorry, if you look at the -- in the slide that we have access to that, but if not you can look at your leisure. If you look at page 71, slide 71 gives you an idea - gives detail as to where the investment agreements reside as of the end of the quarter at the end of first quarter ‘08. And that you see the various buckets, so of about 7.1 billion of investments agreements liability that is, we don’t really much on the asset side very, very limited exposure and is mostly the equipped assets not residential, but talking about the liability side that’s what the slide 71 is $2 billion of ABS CDOs across 10 DO and then we had credit link notes structures of about 1.3 billion. So, about 3.3 when you feel that back, the ABS CDOs comeback 55% relates to R&D estrange actions and then when you go back to CLNs, less than 10% relates to residential asset transactions. So, generally our exposure to RNBS estimate actions or the ABS CDO liability side, it is about 1.1 billion. In our analysis, we think that there could be potential draws on those due to credit type events in 2008, a little over 400 million; our cash position is pretty sizeable in the business right now. We have some liquid securities to handle that type of - those types of issues, so I think those - these issues are contained and hopefully at the top.

Jo Oft

Thank you.

Operator

Thank you, our next question comes from Scott Frost with HSBC. Please state your question.

Scott Frost

Hey, thanks for the follow up on the business written, you said you had 12 million since the capital raise, is that include closed and watching circle?

Sean Leonard

No, that includes just what we’ve closed so far.

Scott Frost

Could you give us an averaging circle that’s in the pipeline?

Sean Leonard

You know, I think it’s a similar number.

Scott Frost

Okay.

Sean Leonard

But, I don’t want to go into detail.

Scott Frost

Okay and did you say that this represents mostly secondary rewraps of mini bonds or is there any sort of new business?

Sean Leonard

There are couple of new trans - new issues, new market transactions on the municipal both negotiated transactions as well as those that are competitively bid. The competitively bid number is much, much larger. So, what we’ve done a couple of negotiate deals, one week, a couple of weeks ago for example we closed six competitively bid transactions. On the secondary side, those are for smaller deals and not for the entire deals that for single maturity or pieces of them and that represents a large number of transactions with a relatively small value.

Scott Frost

I’m sorry; you said that three rewraps were small sized?

Sean Leonard

Yeah, they are for - generally they are for single maturities within the transaction and one of the time, not the entire transaction and most of them are not rewraps of the transactions. We have got the quest to rewrap issues that have been insured by other monolines, but there is also secondary market business of transactions between uninsured in the primary market.

Scott Frost

Okay, okay, and just giving a sort of for a scale, could you give us an idea of, what it wasn’t for a couple of period last year or is that?

Michael Callen

Actually from a secondary market perspective since in previous year’s periods the penetration rate for insurance was much higher in the primary market. We at Ambac had done very little in the secondary markets so, our prediction in the secondary market actually is relatively high compared to what its been in past first quarters for example.

Scott Frost

But your total business written?

Michael Callen

Is really way down, but total business is way down, you know the insured penetration rate is running about 0.5% of the level but its been at in previous years and volume is down significantly as well particularly in the first two months.

Scott Frost

It is why at last, last point you let it to the capital ratio on page 27, that’s not exactly now I guess to like an RBC ratio that we would normally see on a statutory statement of the non-model like, could you sort of just give us some color or might just what, what sort of levels you have to hit for I guess company action and authorized control level capital or does that apply to you here?

Michael Callen

I think, I think these are issues I am not familiar with Bank RBC.

Scott Frost

Insurance RBC?

Michael Callen

However on insurance RBC calculations specifically these are illustrated purposes to show kind of principle and interest leverage against statutory type measures. So, these are not regulatory ratios per say we have deleted by you know, surplus levels regulated by single risks based upon qualify statutory capital levels or --

Scott Frost

Right, let me think other way, what you got to qualify to that for a capital numbers that you are total adjusted capital. What is your minimum capital requirement under statue?

Michael Callen

Well, we would need to have, I am not sure, I am not sure understand that question that you means the way we are regulated is fit from a surplus perspective, for a surplus perspective obviously did you know, you would look to a positive surplus position that contingency reserve as kind of the way to set aside surplus funds forward, potential loses so, that grows overtime.

Scott Frost

Okay, right.

Michael Callen

Yes, when you have other thing that was not an RBC type calculation so, the contingency reserve had an element of that because they are trying to take natures of exposures and build that up, and obviously that’s a draw after the capital base, so that’s the part of the regulatory scheme. There is also single risk limits, aggregate risk limits, there is with these minimum numbers, it think it’s you know $75 million up capital to be I think California might had some regulations so I can’t quote them up top of my head but around those similar type numbers, in a minimum levels of capital and then you obviously have the various capital models that we look to an adhere to maintain AAA capital level.

Scott Frost

Right, okay. Thank you.

Operator

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

Sean Leonard

Yeah, let me answer let me answer Mr. Denning's question and it if reads even if Ambac has reserves necessary to make it through the current market dislocations as not the bonds that you wrap, the brand that you have irrevocably damaged? How can you win back market share when conditions normalize?

I will give you an answer that my colleagues here will not be happy with because there is a temptation to preach from the amount here. But the truth is, one does not know the answer to that. But the facts behind that are that we have been all over the country talking to all of the various constituencies. And while I understand people say what you might want them to hear, you might hear at times there is a need for the service, there is a need for the name, there is a recognition of the name, and I feel a sense of underlying support. I do believe it will take a quarter or two of significantly attenuated losses before this process of an inch a day getting back into the market and having our name accepted as a worthy underwriter is going to work, we’ve got to put a lot of doubts to rest.

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

Mr. [Nardelli] asked about, can you comment on consolidation going forward within the financial guarantee industry. And the answer is that I think there will be consolidation. There have been some players who have dropped out, it wouldn’t be telling any secrets to say there a lot of discussion going on between various parties. There are combination that would tend to make sense and I don’t speak for Ambac I speak for industry that those types text those search compensation will continue and I would not a bit surprise with out pretending to review any confidential information would be a bit surprise to see transaction occurring this industry over the next year or so. Any time you have the kind of stress we are undergoing that is almost invariably a business outcome and thank you for the question.

So, if there are any more in the queue, we would be happy due to sit here as long as required. And I will commit to, if that is the end of our session I will commit to having all the other questions that came across the web answered in writing within certainly by the end of the day and perhaps before that.

And we thank you very much for your attention and your interest and look forward to see you all with much better news and between now and in our next telephone conference. I suspect we will see many of you. Any feedback you can give us, we absolutely are dedicated to be as transparent as possible. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ambac Financial Group, Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts