Syncora Holdings, Ltd. Q2 2008 Earnings Call Transcript

Syncora Holdings, Ltd. (SCA)

Q2 2008 Earnings Call Transcript

August 12, 2008 8:30 am ET

Executives

Frank Constantinople – Group Managing Director and Head of IR

Paul Giordano – President and CEO

Beth Keys – SVP and CFO

Ed Hubbard – EVP

Michael Esposito – Chairman

Susan Comparato – Acting CEO, President and General Counsel

Analysts

Darin Arita – Deutsche Bank

Gary Ransom – Fox-Pitt Kelton

Jay Leopold – Legg Mason

Greg Soares [ph] – Evercore Asset Management [ph]

Jonathan Hecht [ph] – Logan Circle Partners [ph]

Jeff Galloway [ph] – Smith Breeden [ph]

Kent Collier [ph] – Catalyst Investment Management

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Syncora Holdings, Ltd. Second Quarter 2008 Earnings Conference Call. As a reminder, this call is being recorded. At this time all the line are in a listen-only mode to prevent any background noise. After the prepared remarks there will be a question-and-answer session. (Operator instructions)

It is now my pleasure to introduce Mr. Frank Constantinople, Senior Managing Director and Head of Investor Relations for Syncora. Mr. Constantinople, you may begin.

Frank Constantinople

Thank you, Rich. Good morning and welcome to Syncora Holdings, Ltd.’s second quarter 2008 earnings conference call. I am Frank Constantinople, Group Managing Director and Head of Investor Relations at Syncora. With me today are Paul Giordano, Syncora’s President and Chief Executive Officer; Beth Keys, Syncora’s Chief Financial Officer; and Ed Hubbard, Executive Vice President and President of Syncora’s primary insurance subsidiary, Syncora Guarantee Inc. Also joining us today are Michael Esposito, Syncora’s Chairman and Susan Comparato, Syncora’s General Counsel and soon to be Acting President and CEO.

On today’s call Paul will focus on the progress we’ve made to date in restructuring our Company. Beth will then provide you with an overview of our financial results and financial condition. Ed will follow with a discussion of the insured portfolio, and at the conclusion of Ed’s prepared remarks we will open the call for questions. Afterwards, following the question-and-answer portion of the call, Mike will provide information pertaining to management succession in his prepared remarks and will introduce Susan who will briefly comment about the key short-term objectives she is targeting to complete over the next several months.

I now want to spend a moment to briefly highlight our recent name change. When we closed our initial public offering in August of 2006 we (inaudible) to stop using XL in our name within two years. As such on August 4, 2008, XL Capital Assurance Inc., the primary insurance arm of SCA legally changed its name to Syncora Guarantee Inc. Similarly XL Financial Assurance Ltd.’s name was changed to Syncora Guarantee Re Ltd. Lastly, Security Capital Assurance, Ltd. changed its name to Syncora Holdings, Ltd. Our ticker symbol remains unchanged, SCA.

This call is also being broadcast online and can be accessed through the ‘Investor Relations’ page on SCA’s website, www.syncora.com. Also on Syncora’s website are our earnings press release, quarterly operating supplement, and a brief slide presentation that summarizes Syncora’s 2008 second quarter results.

We also have updated the disclosure of our CDO and RMBS supplements and these supplements were posted to the ‘Investor Relations’ section of our website concurrent with the filing of our Form 10-Q with the Securities and Exchange Commission.

Before I turn the call over to Paul I would like to remind everyone that certain matters that will be discussed here today are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current plans, estimates, and expectations. Forward-looking statements involve inherent risks and uncertainties and a number of the factors could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements are sensitive to many factors, including those identified in our most recent report on Form 10-K and other documents on file with the SEC that could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements speak only as of the date on which they are made and we undertake no obligation publicly to revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.

The presentation includes non-GAAP measures such as operating and core income, which under SEC Regulation G we are required to reconcile with GAAP. The reconciliations of these measures to GAAP financial measures are included in our earnings press release and operating supplement, which are available on our website.

I’ll now turn the call over to Paul.

Paul Giordano

Thank you, Frank. Good morning and welcome to our second quarter 2008 earnings conference call. Today, I will focus my remarks on the progress we have made to date in the restructuring of our Company. As you can imagine, our restructuring negotiations were lengthy and extremely complex. These negotiations were facilitated by the New York state Insurance Department and involved numerous parties with many different perspectives and interests. We had been with discussions with our regulators, XL, Merrill Lynch, and our CES bank counterparty group, among others, for several months regarding our restructuring plan. As we announced last week, we have now completed major elements of our plan.

Please note that our second quarter 2008 financial results do not reflect last week’s closing of the restructuring transactions that we had previously announced. Beth will briefly review on a pro forma basis the financial impact these transactions would have had on our June 30 2008 capital and liquidity position.

Let me now summarize where we are in the restructuring process. On August 5, XL Capital paid Syncora $1.775 billion in cash and contributed eight million XL Capital common shares to Syncora. At the current market price the XL shares are worth approximately $157 million. XL also agreed to contribute its 46% ownership interest in Syncora to a special purpose trust for the benefit of credit default swap counterparties that agreed to transaction with XL and Merrill Lynch.

In exchange for this approximately $1.9 billion of total consideration, Syncora’s primary insurance operating subsidiary, Syncora Guarantee, will no longer benefit from XL’s guarantee of pre-IPO business. With the exception of a few relatively smaller arrangements the consideration transferred from XL to Syncora also served to commute all of the outstanding reinsurance exposures XL has to Syncora’s financial guarantee business. Various service level agreements between our two companies also have been terminated.

The next part of the restructuring plan involves the termination of Syncora Guarantee’s eight CDS contract with Merrill Lynch. The notional amount of these eight contracts aggregated $3.74 billion gross. As of the end of the first quarter of 2008, the gross credit impairment associated with these contracts approximated $505 million. Syncora Guarantee paid Merrill Lynch $500 million in cash to terminate its obligations under these contracts. As a result of these CDS contract terminations, Syncora Guarantee’s credit impairment and the net insured par associated with these contracts expired when the transaction closed.

Lastly, Syncora Guarantee and Merrill Lynch agreed to dismiss the litigation related to seven of the Merrill swaps.

Another component of our plan involved trying to commute, terminate, or restructure exposures we have to the remaining credit default swap bank counterparties. We now have a total of 22 bank counterparties holding $59.4 billion in notional CDS exposure to Syncora Guarantee. 19 of these banks formed a group and participated via their representatives in the restructuring negotiations in July. 17 of these banks, representing $52.9 billion, or 89% of our total exposure, agreed to the transactions with XL and Merrill Lynch.

In return for their consent, Syncora Guarantee will segregate and hold an aggregate amount of $820 million in cash for the purpose of commuting, terminating, amending or otherwise restructuring existing agreements with the CDS counterparties subject to an agreement to be negotiated and reached by October 15, 2008. The 46% ownership of Syncora contributed by XL to the special purpose trust that I had mentioned earlier also will (inaudible) to the benefit of these consenting CDS counterparties. Should we be unable to reach an agreement by October 15, the $820 million that has been set aside will be returned to the general account assets of Syncora Guarantee, but will be used to pay claims under the credit default swaps with the swap counterparties. We are committed to trying to reach a final agreement with the swap counterparties by the October target date.

We have also worked with our ceding companies and (inaudible) reinsurers to commute certain other exposures. Concurrent with the execution of the Master Transaction Agreement with XL, Syncora Re entered into an agreement with Financial Security Assurance, our largest reinsurance customer, for the commutation of all reinsurance ceded by FSA and its subsidiaries to Syncora Re. The commutation of this business with FSA was a condition precedent under the Master Transaction Agreement. All existing sessions to Syncora Re by FSA were commuted in return for a payment by Syncora Re of approximately $165.4 million, which represented the statutory reserves less a ceding commission and a commutation premium.

Simultaneously, FSA then ceded a portion of the commuted risk to Syncora Guarantee in return for a payment of approximately $88.6 million, which represented the statutory unearned premium reserve for such risks, less a ceding commission. A total of $104.1 million will be held in trust for FSA as collateral for Syncora Guarantee’s obligations under the reinsurance agreement. FSA will use its best efforts to reassume such reinsurance from Syncora for a period of nine months from the closing. Syncora also purchased for approximately $2.9 million all of the Class A preferred shares of Syncora Re held by FSA in having a liquidation preference of $39 million.

Syncora Re also commuted $3.5 billion of risk that was reinsured with RAM Re. The consideration paid to Syncora Re by RAM Re for this commutation was $94.4 million. We also commuted for $80 million our reinsurance of approximately $1.6 billion in par exposure ceded to Assured Guaranty.

Such commutations were an important part of the corporate restructuring that ultimately is expected to result in Syncora Re merging into Syncora Guarantee later this month. Unfortunately, with the redomestication of Syncora Re from Bermuda to the United States, we have closed our Bermuda-based Syncora Re office effective August 1. Our Bermuda staff have been extremely dedicated and professional, led by Michael Rego, and we wish the best of success to all of them in their future endeavors.

In the final component of our restructuring plan that we have completed to date, we reached an agreement with the Company’s bank lenders to reduce the availability under the Company’s combined $500 million revolving credit and letter of credit facilities. Availability under the $250 million revolving credit facility was reduced to zero and the letter of credit facility has been capped at the current level of outstandings, all of which are now fully collateralized, a total of about $24 million.

As you know, today represents my last earnings call as CEO of Syncora. Before I step down, I would like to thank our Board of Directors, management, and employees for their dedication and hard work during these most challenging times. We have been working within a dynamic and difficult environment since late last year that has required everyone to remain focused and committed. Your support, sacrifice, and professionalism are very much appreciated by me and I wish Susan, the Board, and everyone at Syncora the best of success in the future.

I will now turn the call over to Beth.

Beth Keys

Thank you, Paul. Good morning. Today, I will briefly review the key drivers of our second quarter financial results and the performance of our investment portfolio. Then, I will walk you through the impact of the announced restructuring transactions and Syncora Guarantee’s statutory capital and claims paying resources, Holding Company liquidity, and rating agency capital.

Turning to the second quarter results, net loss available to common shareholders for the three months ended June 30, 2008, was $492.9 million, or $7.67 per share. This compares with $25.9 million in net income for the comparable period in 2007. Our net operating loss, which adjust for the net realized gains and losses on investments and the unrealized change in fair value of credit derivatives, net of the credit impairment adjustments, for the second quarter, was $1.3 billion, or $20.05 per share, a decline from the second quarter of 2007 when the Company’s operating income was $46.4 million.

The results for the 2008 second quarter were primarily attributable to the following four factors – higher net losses and loss adjustment expenses; a decrease in the fair value of derivatives; and increase in operating expenses; and an increase in earned premiums. As stated, the first factor that impacted the second quarter was higher-than-expected net losses and loss adjustment expenses. During the second quarter we recorded provisions for net case reserves on our RMBS portfolio, which consists of HELOCS, closed-end second, and Alt-A transactions of $476.1 million. This increase is partially due to a rise in observed 60 plus day delinquencies and higher than expected claims experienced.

Syncora Guarantee has made gross claim payments of $130.4 million on the RMBS portfolio in the second quarter of 2008, bringing total RMBS gross claims paid to approximately $193.7 million on a year-to-date basis. We expect to pay approximately $300 million of gross claims on our RMBS portfolio in the second half of the year as we project deterioration in this portfolio. As shown on chart three, the net loss provision on ABS CDOs is higher than the gross because of the reduction in the value of (inaudible) excessive loss agreement with XLI.

Pursuant to the transaction with XL Capital, the excessive loss agreement was canceled, resulting in a reduction in the value recognized as of June 30, 2008. In a few minutes, Ed Hubbard will spend some more time discussing our portfolio and the associated reserving in greater detail.

Looking at the net change in the fair value of derivatives, we recognized a $125.7 million charge related to the decrease [ph] in fair value derivatives during the second quarter as compared to a charge of $13.9 million recorded in the prior year period. The charge includes net credit impairments on our ABS CDO transactions totaling $944.9 million. The CDO of ABS credit impairments were largely offset in the second quarter by an adjustment related to Syncora Guarantee’s own credit spreads. FASB No. 157 requires the Company to adjust the estimated fair value of derivative liabilities to incorporate the risk of the Company’s own non-performance. Consequently, we have applied a market-derived discount rate, which includes an adjustment for the Company’s credit spreads. Such spreads nearly doubled [ph] during the second quarter primarily due to further downgrades by all three rating agencies.

As you are aware, following the close of the second quarter there was a significant narrowing in our credit spreads, which occurred when we announced the restructuring transactions on July 28. While we have not yet quantified our July 31 mark-to-market, we anticipate a decrease in the fair value of derivatives because of the recent tightening in our Company’s credit spreads. Stated differently, if our credit spreads remain at current levels, we anticipate a higher mark-to-market charge in the third quarter.

Further, as part of our restructuring efforts, we have commuted certain reinsurance agreements in the third quarter. If we had commuted such agreements in the second quarter this would have had an unfavorable impact of approximately $141.8 million on the current quarter’s net change in the fair value of derivatives.

Finally, the net derivative liability totaled $1.8 billion as of June 30, 2008. The portion of the net derivative liability associated with ABS CDOs was $1.4 billion, or 77% of the total liabilities. Including in the net derivative liability is $400 million associated with the eight Merrill Lynch CDS contracts which were terminated in connection with our restructuring transaction, which closed on August 5.

Turning now to chart six, our results in the 2008 second quarter were also impacted by an expected increase in operating expenses, which totaled $51.4 million compared to $26.6 million reported in the prior year period. The $24.8 million increase was primarily attributable to the following factors – a non-cash $11.5 million write-off related to Syncora Guarantee’s business licenses deemed to be an impaired asset and $9.7 million increase in legal and advisory fees related to Syncora’s restructuring efforts.

It is important to note that compensation costs in the 2008 second quarter declined by $4.7 million compared to the 2007 second quarter due to staff reductions in the first quarter of 2008. Additionally, no costs were deferred in the second quarter as the Company has substantially ceased writing new business since late 2007 and can no longer defer new business expenses as it has in the past.

As we move into the next phase of our restructuring effort, we will continue to examine our cost structure to ensure that it is in line with the Company’s evolving business model and organizational structure. As a result, we expect third quarter legal and advisory fees to be greater than levels recorded in the 2008 second quarter. In addition, we anticipate taking severance charges in the third quarter resulting from more cost reductions, including the terminations that recently occurred due to the redomestication of Syncora’s reinsurance business to Delaware from Bermuda, which resulted in the elimination of 10 positions.

In addition, as a result of the transferred XL Capital’s common shares of Syncora Holdings, change in control provision under certain of the Company’s compensation plans have been triggered, which require a immediate vesting of awards granted to employees under such plans. Accordingly, the Company expects to record a charge in the third quarter of 2008 of approximately $19.5 million to recognize the accelerated vesting of such grants for employees at original cost.

Lastly, core net premiums earned were $59.5 million for the second quarter representing an increase of $11 million compared to $48.5 million in the comparable period in 2007. The increase was primarily due to the $7.6 million reversal of the accrual of the net present value of premiums to be paid on the excessive loss agreement. As previously mentioned, the excessive loss agreement with XL Capital was cancelled as part of the restructuring and therefore the accrual was reversed.

Earned premiums from refundings, which improves our statutory capital position and decreases our Company’s exposure, increased more than ten-folds since the 2007 second quarter to $77.9 million in the second quarter of 2008. The increased level of refundings was mainly driven by terminations of insurance policies associated with auction rate securities in the U.S. public finance market, coupled with the deterioration of our credit rating. We expect to see a higher than normal level of accelerated premiums throughout the remainder of 2008, however, not at the levels we experienced in the second quarter as many of our auction rate securities policies have already refunded.

Turning to our investment portfolio, our net investment income for the quarter was $31.5 million, a 4% increase from $30.3 million in the second quarter of 2007. This increase is largely due to higher average invested assets. Our average invested assets for the quarter were $2.8 billion compared to $2.5 billion for the second quarter of 2007. Our average yield decreased to 4.6% from 4.9% due to a slight decrease in duration from 3.4 years as of June 30, 2007 to 3.2 years as of June 30, 2008, and lower short term interest rates.

Our portfolio’s average credit quality rating is AA+ and remains well diversified with an acceptable level of mortgage related exposure. As of June 30, 2008, the investment portfolio contained $22.6 million of Alt-A RMBS securities rated AA+ with a weighted average life of two years; $6.3 million of subprime home equity securities rated AAA with a weighted average life of six months; $128 million of U.S. government agency debentures at market value; and $425.9 million of U.S. government agency mortgage backed securities.

While we are unable to provide complete pro forma financial statements, I would now like to briefly discuss the financial impact of the restructuring transactions as described earlier by Paul had on the following – Syncora Guarantee’s pro forma statutory capital and claims paying resources, Holding Company liquidity, and rating agency capital.

On a pro forma basis, these transactions have translated into an estimated statutory capital position for Syncora of approximately $1 billion and have increased total cash and invested assets to $4 billion. Of the $1.3 billion increase in cash, $820 million is restricted for the purpose of commuting, terminating, amending or otherwise restructuring existing agreements with the Company’s remaining credit default swap counterparties. And an additional $128 million has been set aside as collateral to primarily back exposures assumed from third parties.

You will see on chart nine a summary of Syncora Guarantee’s current claims paying resources. As of June 30, 2008, our claims paying resources were approximately $3.5 billion, a 6% decrease from December 31, 2007, due primarily to the payment of $194 million in claims associated with HELOCs and closed-end second lien residential mortgage backed securities. If we take into account the impact of the restructuring transactions, Syncora Guarantee’s pro forma claims paying number will increase to approximately $4.9 billion.

Turning now to Holding Company liquidity. As part of the restructuring agreement, we agreed with our credit facility to eliminate our $250 million line of credit, to permanently reduce our letter of credit facility by $226 million, and to fully collateralize the remaining $24 million of outstanding letters of credit. In addition, pursuant to an agreement with the New York Insurance Department, we have agreed not to pay dividends to common and preferred shareholders for 18 months beginning on August 5, 2008, the closing date of the transaction.

With the closing of the transaction, the Holding Company will have approximately $40 million in cash and importantly there continues to be no debt at the Holding Company level. We believe that this is sufficient to fund obligations over the next 12 months based on current projections.

Turning now to rating agency capital. Under the current rating agency models, which are subject to frequent change, restructuring transactions that we closed on August 5 resulted in meaningful rating agency capital relief and significant improvement in available capital for Syncora’s business operation. At a single A rating level, the commutation of the eight Merrill Lynch CDS contracts resulted in gross capital relief ranging from approximately $600 million to almost $2.3 billion, depending on the specific rating agency. After completing all of the restructuring transactions to date, we estimate our current rating agency capital position to support ratings between BBB and single A for all three rating agencies, with a significant cushion, and excessive minimum amount. Each agency is taking into consideration the next phase of our restructuring before they ultimately opine on our ratings and specific capital level.

On July 28, 2008, we announced that there was substantial doubt about the Company’s ability to continue as a going concern because Syncora Guarantee Inc. and Syncora Guarantee Re were expected to report negative statutory surplus at June 30, 2008 making it likely that in the absence of the closing of the transactions contemplated by the Master Transaction Agreement, the Merrill agreement, and other related agreements, they would be subject to action by their primary regulators. At that time we also announced that we would reassess whether substantial doubt exists about the Company’s ability to continue as a going concern subsequent to the closing date.

Despite the overall favorable impact of the restructuring agreements, we have concluded that there is substantial doubt at the present time about our ability to continue as a going concern primarily because of the potential for future material adverse loss development, and because the accounting requirements for assessing whether there is substantial doubt preclude the consideration of transactions that have not yet been completed with the Company’s remaining credit default swap counterparties despite their commitment to work to do so under the Master Transaction Agreement. The Company will again reassess its going concern status in the event agreements with the Company’s remaining credit default swap counterparties are reached, although there can be no assurance it will do so.

In summary, as we move forward to the third quarter we will be focusing of further stabilizing the Company’s capital position and liquidity by continuing to reduce our exposure and realigning the cost structure to reflect the Company’s evolving business model and organizational structure.

Lastly, to reiterate Paul’s comments, I would like to take a minute and thank the entire Syncora team for their efforts over the course of the last nine months. Their dedication and hard work were instrumental in ensuring that the first phase of the restructuring was completed.

I would now turn the call over to Ed ho will discuss our portfolio and recent developments in more detail.

Ed Hubbard

Thanks Beth. Now, I would like to provide you with an update on our insured portfolio and our loss reserve activity during the second quarter. As a result of continued stress in the real estate markets, we suffered significant adverse loss development in our insured portfolio and I plan to give you more background on how we assess the (inaudible) development with a focus on our exposure to residential mortgage backed securities, or RMBS, and our exposure to CDOs of asset backed securities, or ABS CDOs.

First, however, let me start with some high level comments about our total insured portfolio. At June 30, the net par amount of Syncora's total insured portfolio was $140.3 billion, down from $165 billion at year end 2007. On a pro forma basis, after taking into consideration the transaction with XL Capital, Merrill Lynch, and certain third party reinsurers, Syncora's net par outstanding approximated $149.3 billion as of June 30.

The reduction from year end largely reflects the termination of insurance policies associated with auction rate securities and variable rate finance obligations within our public finance portfolio. The exposure associated with such policy terminations in the second quarter was $14.5 billion and as Beth had noted, as a result of this activity, we converted $77.9 million of earned [ph] premium reserves into immediately recognized earned premium.

With respect to loss activity during the second quarter, we (inaudible) significant charges for both our exposure to residential mortgage backed securities and also our exposure to ABS CDOs. The adverse development in estimated losses associated with our exposure to RMBS and ABS CDOs is reflected in (inaudible) in our financial statements. Because the majority of credit protection we have sold for RMBS credits is in the form of financial guarantee insurance policies, our provision for estimated losses in our RMBS (inaudible) is reflected in case reserve and associated loss adjustment expenses.

By comparison, substantially all of the credit protection we have sold for ABS CDOs is in the form of credit swap default swaps. While GAAP accounting requires that these contracts be measured at fair value we analyze and disclose the credit impairments (inaudible) operating performance.

So, let me summarize where we stand with respect to our RMBS case reserves and our ABS CDO credit impairment and I will then provide you with some additional background. For the second quarter the gross provision on our income statement for RMBS case reserves was $525 million or $476 million net of reinsurance. With respect to our balance sheet, as of June 30, the net case reserved for our RMBS exposure stand at $524 million on net par outstanding of $8.6 billion. Gross paid claims on RMBS transactions for the quarter were approximately $130 million.

Also in the second quarter, we recorded net credit impairments on our ABS CDOs of $944.9 million, which resulted in a net credit impairment liability of $1.6 billion as of June 30, which was included as a component of net derivative liabilities on our balance sheet. These amounts include $481 million related to the eight Merrill Lynch ABS CDOs. Excluding this amount the remaining net liabilities of $1.1 billion relates to ABS CDO exposures with a net notional par amount outstanding of $13.1 billion as of June 30. Our ABS CDO net par outstanding approximated $14.4 billion on a pro forma basis taking into account the recent transactions with XL Capital, Merrill Lynch, and certain third party reinsurers.

Let me now give you some backgrounds on this adverse loss development. As you may recall, during the fourth quarter of 2007 we performed an expensive analysis of our ABS CDO and RMBS portfolios and established substantial gross case loss reserve and credit impairment charges on derivatives totaling $1.1 billion. At that time, we attempted to capture the anticipated further deterioration of collateral supporting such securities due to the ongoing decline in the real estate markets. And as of the first quarter our observations of the performance of our ABS CDOs and our direct RMBS generally supported that view. However, as this year has progressed, the real estate markets have continued to fall and economic conditions have worsened.

The trends have caused us to push out into later in 2009 by when which we believe we will see a meaningful improvement in the residential real estate mortgage sector. As a result, compared to year end 2007, our loss models are forecasting higher cumulative losses with collateral call supporting residential mortgage backed securities. These higher cumulative loss estimates in turn directly affect our expectation of losses on HELOCs and other residential mortgage backed securities guaranteed by Syncora.

To give you some sense for this, at year end 2007 we forecasted an average cumulative loss of 20% for our HELOC yield against which we had established case loss reserves. In the second quarter, we increased the estimated average cumulative loss for these HELOCs to nearly 26%. In the same vein, at year end 2007 we forecasted an average cumulative collateral (inaudible) loss of 35% for the closed-end second lien RMBS against which we had booked the reserves. For the second quarter this estimate increased to 45%.

There are several reasons why we are increasing our cumulative loss forecast. With increased seasoning [ph] it is becoming clear that early stage delinquencies in particular 30-day delinquencies are not abating. In addition, the rate of realized losses on mortgage pools and paid claims is higher than we anticipated at year end. As a result, compared to year end 2007 we have revised our assumptions in two key respects. On average we are now forecasting higher peak default rates for mortgage pools supporting RMBS in our portfolio, and we are also pushing out further into 2009 a forecast recovery from these peak default rates. The higher default rates we are now assuming combined with the slower ramp down of such default rates over time directly lead to our increased cumulative loss estimates, which I described just a minute ago. The higher cumulative loss forecast, in turn, directly affect our estimates of expected losses on tranches of RMBS guaranteed by Syncora as well as expected losses on RMBS held within ABS CDOs guaranteed by Syncora.

While our loss estimates are based upon data provided to us (inaudible) employee trustee and remittance reports, our view of expected trends and mortgage default rates is also informed by various macro factors, which can be observed in the market. First and foremost is the protracted decline in home prices with the Case-Shiller nationwide home price index off by 18% from the July 2006 peak and by continued deterioration in mortgage loan delinquency rates. The continued decline in home prices is only going to increase the number of the borrowers with negative equity in their homes. As we see currently see in the case of our HELOC portfolio, such negative equity puts pressure even on prime quality borrowers. In addition, our work with mortgage servicers continues to indicate a high incidence of borrower fraud or misrepresentation particularly with respect to stated income.

As I mentioned a few moments ago, for the second quarter we have recorded provisions for our gross loss reserve on our direct RMBS exposure of $525 million. This provision can be broken out as follows – $354 million relates to six HELOC transactions. Our total HELOC net par exposure at June 30 was $2.8 billion, or $3.1 billion pro forma after giving effect to the recent transactions with XL Capital and certain third party reinsurers.

$135 million relates to four closed-end second lien transactions with three transactions representing newly established reserves. Our total closed-end second lien exposure at June 30 was $1.8 billion or $2 billion pro forma with an average subordination amount of 19%. Excluding the one prime [ph] deal from our closed-end second lien exposure raises the average subordination level to 24%.

Finally, $36 million relates to newly established reserve for six alt-A first lien transactions. Our total alt-A net par exposure at June 30 was $2.9 billion or $3.1 billion pro forma with an average subordination level of 16%.

While we see clear signs of poor performance in the collateral supporting our alt-A transactions the high average subordinate level does provide us with a significant level of protection. We do have close to $1 billion of exposure to IndyMac. As you are aware, IndyMac suffered a run in the bank by depositors back in July and was taken over by the FDIC. Most of our IndyMac exposure is in seven alt-A rated transactions originated between 2005 and 2007, which are performing at or close to expectations. Our other IndyMac exposure is to a 2006 originated HELOC transaction totaling $300 million in exposure with a net loss provision of $46.3 million at June 30. We are currently working with other monolines to determine how best to deal with IndyMac servicing and whether a service and transfer (inaudible).

I’d like to make one final point with respect to our RMBS remediation efforts. We have seen some market discussion of the prospect for obtaining more coverage for mortgage originators and servicers by putting back loans, which breached the servicers representations and warranties. We have been very aggressive in putting back such loans and our experience is that servicers are equally aggressive in resisting such put backs. As a result, while we do expect to achieve some significant degree of success in obtaining recovery from put-backs, we have not credited our loss reserves at this time for prospective recovery as we believe it will take some time to achieve an ultimate resolution to the put back process and our ultimate success rate is highly uncertain.

Now, I’d like to turn to our ABS CDO portfolio. Key point, keep in mind with respect to ABS CDOs that the collateral which supports these securities is largely comprised of residential mortgage backed securities and a substantial portion of these securities are comprised of subprime collateral. If you look at these 17 non-Merrill ABS CDOs in our insured portfolio on average, 71% of the collateral consists of RMBS split about evenly between subprime and alt-A collateral. So it is to be expected that the market-wide severe deterioration in residential mortgage backed securities is driving the adverse development of estimated losses in our ABS CDO portfolio.

Within our ABS CDOs, we observed that the mortgage pools that collateralized the RMBS securities experienced large increases in later stage, meaning 60+ day delinquency, which translated to a 20% increase in our expected loss on the mortgage pools compared to our earlier review. This naturally translated into a higher expectation of loss at the RMBS level as well and is consistent with the trends I described for our direct RMBS exposure.

To give you a feel for this adverse development, at year end 2007 for individual subprime mortgage securities from the 2006 and 2007 vintages contained within our ABS CDOs our loss modeling forecast a range of cumulative losses from a low of 6% to high of 25%. Based on our current modeling work the range of forecast cumulative losses now expands from 9% to 30%.

This higher expectation of loss was further magnified at the inner CDO level given the high degree of leverage associated with these securities. During the second quarter we observed an increase in the number of inner CDOs that either experienced events of default or where rates (inaudible) to the extent such positions were forced synthetically by the CDO manager. Our loss modeling reduced the forecast cash flow associated with such defaulted securities. And as one indication of the deterioration of inner CDO collateral within our ABS CDOs, at June 30, 35% of the inner CDOs contained in our ABS CDOs had tripped an even of default compared to 7% at year end 2007.

During our fourth quarter 2007 earnings call I provided a detailed description of the loss modeling process we use to estimate potential losses on our ABS CDO portfolio. Our loss modeling process remains substantially unchanged, so I will not repeat this description.

For the second quarter the potential future claims we estimated were discounted using a discount rate of 4.83%, which corresponds to the average yield on the Company’s investment portfolio. Our loss modeling continues to suggest that our ABS CDO claims payments will occur over a long time horizon. As of June 30, the weighted average life associated with our estimated claims payments is 33 years with 17 non-Merrill ABS CDOs. Our loss models indicate we may have to take claims of up to $25 million on CDOs in the next two years although we expect to be reimbursed for such payments within 12 months from excess cash flow from the CDOs in subsequent periods. Of course, we cannot provide any assurance that short-term payments will not exceed $25 million.

As we noted in our fourth quarter earnings call, potential losses on our ABS CDOs are long dated for two principal reasons. First, our ABS CDO guarantees are structured such that we are only responsible for scheduled interest and ultimate principal payments. That means we are committed to cover principal shortfalls only (inaudible) of maturity, which is typically 35 to 45 years from deal inception. Our obligation to pay current interest and ultimate principal is further supported by the (inaudible) gains with respect to a CDO event of default. Such rates give us the ability to block the liquidation of the CDOs collateral without our consent. And we can best force the CDO to run through its legal final maturity.

The second significant reason losses are long dated is because ABS CDOs are typically structured to apply principal collections from their collateral pools to paying interest obligation on their senior tranches combined with various rules which serve to pay cash sequentially to senior tranches and shut off cash to junior tranches once the finalization triggers are attracted [ph].

Let me spend just a moment on the structure of our credit default swaps. As I have just noted all of our credit default swaps for ABS CDOs provide for the timely payment of interest and ultimate payment of principal. However, for other types of CDOs, typically synthetic CDOs which reference either a basket of corporate credits or commercial mortgage backed securities, we have written credit default swaps, which will cover individual collateral losses within a pool of collateral once the deal’s deductible amount has been exhausted. At June 30, we have guaranteed $10.4 billion of such synthetic CDOs. We have not seen any material credit deteriorations within the synthetic CDO book.

With respect to the rest of our CDO portfolio, which includes $14.3 billion of CLOs, we likewise have not seen material deteriorations in the performance of the underlying collateral.

Syncora also ran $4.5 billion of commercial real estate CDOs comprised of eight deals with a collateral consisted entirely of AAA-rated CMBS securities and we have not seen any significant credit deterioration within these securities.

The $1.5 billion CDOs – CDO squared portfolio continues to perform well. CLOs make up the majority of the CDO squared collateral at 52% on average. The deals have no 2006 and 2007 vintage ABS CDOs or a direct RMBS holding and the average subordination of our CDO squared deals is 31.9%. We have, however, downgraded one CDO squared to non-investment grade due to downward ratings migration within its collateral pool, so we do not expect at this time that the deal will incur any losses.

Let me turn now to an update on our exposure to Jefferson County. As of June 30, we insured $809 million net of reinsurance to a revenue debt issued by Jefferson County, Alabama. On June 3, we paid a claim of $10.6 million in connection with this exposure and we paid a second claim of $35.4 million on August 4. in exchange for partial debt to repayment by Jefferson County, Syncora has agreed to forebear from exercising remedies against the county until November 17, 2008, in order to provide sufficient time for the county to work at a restructuring plan.

At this point the county is assessing a few alternative plans and while we believe the county hopes to avoid a bankruptcy there are no certainties that a offer [ph] or a resolution will be worked out. Discussion are currently taking place among both county and state officials and their advisors and the outcome is highly uncertain. As a result, at this time we have no basis for concluding that losses are either probable are estimable, and we have, therefore, not booked any case reserves against this exposure. We remain with the view that our primary securities is applied to all the county’s net sewer revenues. The net sewer revenues as required under the indenture need to be set at a level sufficient to meet all of the county’s sewer debt service obligations.

We continue to monitor the situation and will reassess the need to (inaudible) a case loss reserve as more specific information becomes available. If the current forbearance period expires on November 17 without some further resolutions and the county defaults on its obligations, we would owe a principal payment of approximately $46 million on that date, followed by another principal payment of approximately $46 million on January 1, 2009.

Finally, I would like to comment on trends in our watch list. At June 30, our total watch list credits amounted to $23.5 billion of net par exposure, which includes net par of $3.1 billion associated with the eight Merrill Lynch CDS contracts, or 17% of our total insured portfolio. This is up from a watch list total net par amount of $20.3 billion for the first quarter. The increase for the second quarter relates primarily to the addition of six RMBS and three ABS CDO deals to our watch list during the quarter. The non-investment grade portion, based upon S&P ratings of our insured portfolio was $10.5 billion at June 30 or 7.5% of our total insured portfolio. This is up from $8.4 billion or about 5% of our insured portfolio at the end of the second quarter.

That concludes my prepared remarks, so I would now like to turn the call over the operator for a question-and-answer session. Rich?

Question-and-Answer Session

Operator

(Operator instructions) Your first question is coming from Darin Arita of Deutsche Bank.

Darin Arita –Deutsche Bank

Hi, good morning. First, I just wanted to wish Paul best of luck with everything.

Paul Giordano

Thank you very much, Darin.

Darin Arita –Deutsche Bank

I am sure, Paul. I guess the first question is on the pro forma, the book values that’s listed in the press release, can you walk us through how we get from the June 30 book value to the pro forma book value number?

Beth Keys

Okay, that’s a kind of a complicated question, but I will try to simplify it to the best of my ability. We took a look at the total value of the proceeds that we received from XL Capital, which included $1.775 billion cash as well as eight million shares of XL Capital. We then allocated both total proceeds to the book value of various reinsurance treaties in place and to the XL of approximately $100 million. We also included the RAM Re settlements and other third party commutations, again applying the proceeds that we received to the statutory book value of those transactions, which resulted in a pro forma common shareholders’ equity position of about $900 million and a total equity position of about $1.1 billion.

Darin Arita –Deutsche Bank

And I guess just if you wouldn’t mind just giving us some of the numbers there starting with the – what the ending – is what the beginning shareholders’ equity was and what we should add and subtract, that would be helpful.

Beth Keys

The common shareholders’ equity as published on the balance sheet was a deficit of $428.7 million. We recorded for related to FSA a total loss of approximately $19 million on a GAAP basis. For the RAM Re settlement, approximately $106 million on a GAAP basis of a loss. And the other third parties a loss of approximately $5 million. And the XL Re America commutation on a GAAP basis, again, a loss of about $58 million. And we recorded the other key element with the Merrill Lynch settlement, which is a loss of about $94 million on a GAAP basis.

Darin Arita –Deutsche Bank

And then added to that the $1.8 billion plus the shares that should get us to the $900 million?

Beth Keys

Yes.

Darin Arita –Deutsche Bank

Okay. And then just so I am clear with respect to this commutation of the XL Capital or excessive loss agreement, the $500 million agreement and also the facultative reinsurance, was that factored into – is that factored into the second quarter results, or that’s factored in – that will be factored into the third quarter results?

Beth Keys

The value of the excessive loss agreement, the $500 million was factored into the second quarter results at an applied value of $100 million. The commutations of the reinsurance treaties will be factored into the third quarter results.

Darin Arita –Deutsche Bank

Okay. Great. That’s helpful. Alright, great, thanks very much.

Paul Giordano

Thank you, Darin.

Operator

Thank you. (Operator instructions) Your next question is coming from Gary Ransom of Fox-Pitt Kelton.

Gary Ransom – Fox-Pitt Kelton

Yes, good morning, everyone. I was wondering if there are other – or if you could outline the other things you might be working on outside of this Master Agreement. Are there other agreements that are in the works that might even improve the balance sheet further?

Frank Constantinople

Gary, it’s Frank. Mike and Susan have prepared remarks discussing strategy and succession. And Susan will address that after the Q&A.

Gary Ransom – Fox-Pitt Kelton

Okay. I guess that’s it for now. Thank you very much.

Paul Giordano

Thank you, Gary.

Operator

Thank you. Your next question is coming from Jay Leopold of Legg Mason.

Jay Leopold – Legg Mason

Hi, good morning. I just wanted to talk a little bit about the $820 million that’s set aside for the commutation of other counterparty obligations. If you were to complete those transactions as you – as their (inaudible) is currently negotiated or close to negotiation, what would the impact be on the pro forma book value with $13.75?

Beth Keys

If your question is that we have settled the (inaudible) of the agreements for approximately $820 million, we would have a significant increase in our book value of over – about $500 million.

Jay Leopold – Legg Mason

On top of the $13.75?

Beth Keys

Yes.

Jay Leopold – Legg Mason

Okay. And what would the – I guess if you were to finalize that negotiation, $820 million goes out the door, what happens to your statutory capital levels at that point?

Beth Keys

There would be also a corresponding increase in our statutory capital levels because we already have reserves in excess of the $820 million on the balance sheet.

Jay Leopold – Legg Mason

And what are your current reserves for these particular CDO relationships?

Beth Keys

Approximately $1.3 billion.

Jay Leopold – Legg Mason

I am sorry. So the book value will go up by how much did you say?

Beth Keys

Just under $500 million.

Jay Leopold – Legg Mason

$500 million.

Beth Keys

Yes.

Jay Leopold – Legg Mason

Okay. And why did you decide to reincorporate or push you Company towards Delaware and away from Bermuda?

Paul Giordano

Hi, Jay, it’s Paul. There were several reasons. It was in part a way for the mechanics to work under the Master Transaction Agreement to the satisfaction of all the parties. There would also be some regulatory simplicity. I think if you know over the years we have had to maintain funds in a Reg 114 trust for the benefit of our New York domiciled primary insurer. So by combining the two together, we eliminate that – that sort of liquidity constraint that we have been subjected to. And the Company has also had an eye on cost savings. There were other reasons as well, but for a variety of reasons, it made sense to consolidate Syncora Re with Syncora Guarantee as part of this transaction.

Jay Leopold – Legg Mason

Got it. And I just want to be clear on the $500 million agreement with XL. Is XL still going to be giving you $500 million or they – are you guys settling up for $100 million there?

Beth Keys

No, we have completely settled with XL Capital.

Jay Leopold – Legg Mason

And are they paying you $500 million as part of that facultative?

Beth Keys

The value ascribed to the XL agreement was $100 million and that was the book value as of June 30, 2008, of that particular agreement.

Jay Leopold – Legg Mason

Okay. So and as part of the Master Agreement, instead of them paying $500 million in reinsurance, they are only going to be paying you $100 million?

Beth Keys

Yes.

Jay Leopold – Legg Mason

Got it. And then I guess the final question is what are the – where are you in terms of the base ball analogy, eight inning, ninth inning, fourth inning of kind of getting all the i’s dotted and t’s crossed on the counterparties, the other – so I guess you had 17 of 19 agreeing?

Paul Giordano

Yes, we are certainly actively in discussions with all of them, Jay. We certainly assure it’s also well advanced in terms of the overall restructuring plan. It’s a little hard to say exactly where we are with the bank counterparties in that discussion. Everyone understands that October 15 is the target date for reaching an agreement and there is strong incentives, we believe, for both ourselves and for the counterparty group to come to an agreement by then. But we are probably still in kind of early to middle phase of discussions with the CDS counterparties.

Jay Leopold – Legg Mason

Thank you.

Paul Giordano

Thank you, Jay.

Operator

Thank you. Your next question is coming from Greg Soares [ph] of Evercore Asset Management [ph].

Greg Soares – Evercore Asset Management

Hi. I just wanted to follow up a little bit more on these counterparty discussions. I think the 10-Q, correct me if I am wrong, but it talks about some kind of minimum level of participation that’s needed for the agreement to go forward. I guess I am wondering if you could kind of just maybe provide a little bit of color on that and sort of realistically if there is – I guess there is 19 different counterparties out there, if you get 15 of them where does that leave you, how much of the exposure is actually wiped off the books? Just some of the balance I guess on this.

Paul Giordano

Yes, I think I will defer that to Susan if I can because Susan’s very familiar with this process and I think she can provide a good answer to that in a few minutes.

Greg Soares – Evercore Asset Management

Okay. I will wait till then. Thanks.

Paul Giordano

Okay. Thank you.

Operator

Thank you. Your next question is coming from Jonathan Hecht [ph] of Logan Circle Partners [ph].

Jonathan Hecht – Logan Circle Partners

Good morning, gentlemen and lady. Appreciate just a confirmation on subsequent to the restructuring transactions exactly where will the Twin Reef’s security sit, and I guess it’s my understanding that it would be at the Syncora Guarantee and that – and also what is the status of current payments on that security? Thank you.

Beth Keys

The Twin Reef’s securities will be held at Syncora Guarantee post the merger and the current – the dividends have been paid currently. However, any future dividends, as we will be not in – we are no longer in compliance with the New York Insurance Department dividend distribution rules, would be subject to New York Insurance Department approval.

Jonathan Hecht – Logan Circle Partners

Okay. Thank you.

Operator

Thank you. Your next question is coming from Jeff Galloway [ph] of Smith Breeden [ph].

Jeff Galloway – Smith Breeden

Hi. Can you discuss what implications that the going concern language in your 10-Q might have on your business aside from the fact that you can only consider completed commutations?

Paul Giordano

Well, let me take it. I will start with that Jeff. As I think maybe if you know we stopped writing new business very early on in 2008 for a variety of factors. But – so we don’t see the going concern as having inability or restricting our ability to – in a meaningful way to do business going forward since we are not doing very much. The going concern issue also would have impacted, I think, our credit facilities had we not amended them in the way that we had. So, I think the main impact or the main conclusion to be reached is that’s really where we are today given our inability to assume that we will be able to complete the transactions with the CDS counterparties. Now, obviously, we feel we have made significant progress with the CDS bank counterparties, getting 17 of the 19 with which we have been in discussions over the past months to sign on to the Master Transaction Agreement. But nevertheless as we understand the accounting requirements we are – despite that progress we are not at this stage able to take that into account in making the assessment.

Jeff Galloway – Smith Breeden

Thank you.

Operator

(Operator instructions) Your next question is coming from Kent Collier of [ph] Catalyst Investment Management.

Kent Collier – Catalyst Investment Management

Good morning, guys. Just a few quick clean-up items. I know you mentioned you moved your HELOC loss assumption from 20 to 26, is that a cum loss across the pool or is that what you expect to pay on your notional exposure?

Paul Giordano

That’s a cumulative loss average for the HELOCs against the case loss reserve, so it’s not a direct syndication of the losses. We expect other deals.

Kent Collier – Catalyst Investment Management

Okay. And can you give a sense where that is for the alt-A exposure?

Ed Hubbard

For the alt-A, I don’t have a cum loss figure for you for the alt-A. It would be substantially less than that amount.

Kent Collier – Catalyst Investment Management

Okay. Something like 10%, any idea?

Ed Hubbard

At this point I don’t want to hazard a guess, I’d have to do some research on that.

Kent Collier – Catalyst Investment Management

Okay. Can you also explain – I know you talked about the weighted average life of your payouts and your CDO book being at 37 years. Does that change at all as the CDO experiences events of default? Are those claims accelerated or how does that work?

Ed Hubbard

I think we indicated the weighted average life of approximately 33 years—

Kent Collier – Catalyst Investment Management

Okay.

Ed Hubbard

On the payments but I – take the point of your question, the modeling that we undertake with respect to our ABS CDOs take into account expected defaults and the triggering of various triggers. So to the extent the cash flow is redirected within a CDO, we are (inaudible) indenture that’s taken into account for our modeling. So the 33-year weighted average life takes all that into account.

Kent Collier – Catalyst Investment Management

Okay. And then finally I mean I know you guys are in significant discussions with a lot of your counterparties but this $820 million, the cash you earmarked for commuting these relationships, so I think you talked about your pro forma claims paying resources is $4.9 billion after the Merrill Lynch and XL transactions. Should we assume that would be $5.4 billion after you get – let’s say you pay the $820 million out to offset the $1.3 billion of reserves. So would claims paying resources be $5.4 billion at that point?

Beth Keys

Yes, interesting you did that question. Yes, that would be correct.

Kent Collier – Catalyst Investment Management

Okay. How does this discussions work? Do you – are the banks holding these assets, are you talking with the trustees, how does the discussion go through?

Paul Giordano

No, the assets are still held by us. We have just agreed to use them to settle claims or commutations with the CDS bank counterparties. So the actual assets have not been segregated or placed into a trust at this stage. That it remains to be determined in this next phase to a goal of trying an agreement with them by October 15 to determine how the assets would be dealt with. They are sort of segregated or earmarked but not outside of our Company at this point.

Kent Collier – Catalyst Investment Management

I guess the question was more from the banks’ standpoint. Who you guys are actually in discussion with? Are they – are these banks that are holding these assets directly on their books? Have they securitized these alts [ph], so you are talking with the trustees? How does that discussion go?

Paul Giordano

No, I apologize for not understanding your question they way you asked it, but no we are in direct discussion with the banks themselves.

Kent Collier – Catalyst Investment Management

Okay.

Paul Giordano

It’s not always clear to us to what extent the banks or how they have managed their exposures to either the assets or to us. but our discussions are with the banks and their advisors.

Kent Collier – Catalyst Investment Management

Okay.

Frank Constantinople

Rich, we would like to take two more questions, so I could pass it over to the Chairman and Susan, and then respond to the questions from Fox-Pitt and Evercore as well. So, two more questions, and then we will move on to the Chairman.

Operator

There appear to be no further questions at this time.

Frank Constantinople

Okay. Thanks, Rich. As I indicated in my opening remarks, I’d now like to introduce Syncora's Chairman Michael Esposito. Mike will spend a few minutes discussing the management succession you read about recently. Mike?

Michael Esposito

Frank, thank you, and good morning to all. First off, on behalf of the Board of Directors I’d like to thank Paul Giordano for his contributions to the Company during his tenure as Chief Executive Officer and President. His leadership and dedication have been important for the Company over the past several years, and in particular during the past 12 months as the Company has had to manage through some very difficult challenges.

Now that we have concluded the first phase of restructuring, which really culminated with the closing of the transactions with XL Capital, and Merrill Lynch, the Board thought it was an appropriate time to transition the Company to a new leadership. With this in mind, we have appointed our General Counsel, Susan Comparato as Acting Chief Executive Officer and President of the Company. Susan has played an instrumental role in helping navigate the Company during these challenging times. Her leadership and insight have been critical in terms of stabilizing the Company and working constructively with the regulators and third parties to execute the first phase of restructuring process.

Susan brings a deep knowledge of our industry, significant business acumen, a hands-on management style, a very dedicated work ethic, and, importantly, a steady hand to help guide Syncora and its employees as we work towards completing the next phase of the Company’s restructuring plan.

To lead this space, the Board has decided to engage Claude Leblanc as a special advisor to the Board for the development and execution of the next phase of the restructuring process. As Executive Vice President of Strategy and Corporate Development, Claude played a critical leadership role in the first phase of the restructuring and we are pleased to continue working with him in this new role as the Company moves forward. I am confident that the Company is in goods hands with Susan Comparato at the helm.

And now, I invite Susan to conclude the call with a few remarks of her own. Susan?

Susan Comparato

Thank you, Mr. Chairman and good morning everyone. First of all, I would like to echo your comments with respect to Paul’s leadership of the Company since our IPO and especially over the last several months. The transactions we announced and closed with XL Capital and Merrill Lynch in the last two weeks were very significant in terms of the Company’s plans for the future and Paul’s leadership was a crucial factor in achieving this first stage of our reorganization.

I also want to say that I am now looking forward to working with the Board and the management team to successfully execute the next phase of the restructuring effort. The successful completion of this phase is Syncora's primary objective in the near term. In particular, Claude LeBlanc will be leading negotiations with our bank counterparties as we continue to seek the most effective ways to managing our remaining CDS exposure.

I will also be ensuring that the Company continues to its efforts on capital preservation, overall risk reduction, and expense management. This latter point is going to require us to take a long and hard look at what the next 12 to 18 months brings and ensure that our staffing and expense base is consistent with our operational needs and our obligations and commitments to best serve our shareholders and policyholders.

I would like to address two of the questions that came up during the call. First, we were asked whether there were other initiatives we were working on. To be fair here, I think that really the restructuring effort with the bank counterparties is the primary effort here.

I also would like to note, as Ed noted in his comments, we are aggressively surveilling the rest of our portfolio and looking for opportunities to mitigate exposures to commutation or other means.

I also would like to note that a primary goal that we have and a key objective of the New York Insurance Department is to protect the municipal finance book. There are various ways to achieve this goal. We look forward to working with the Department to create a workable solution.

There were also interesting questions about how we are going to negotiate with the banks and I think that we are breaking ground here. We have got 17 banks signed up, almost all of our CDO of ABS exposure represented. And I think that we are looking to work with these banks who all have different objectives, different needs, and different exposures. So I think it’s important to note that this will not be a pro rata reduction of our entire CDS book, rather we’ll be looking at specific risks. Some will remain, some we’ll be partially commuting, and other perhaps completely commuted in addition to the voting process in the documents that verify the number of parties, the percentage of ABS exposure, and then the percentage of total CDS exposure. So, it should be an interesting process and we are dedicated to moving forward with that over the next 60 days.

I would like to conclude to say that I have been very fortunate over the last seven years I have been with this Company to work with some very talented, dedicated, and professional people. As we enter this next stage of our restructuring, we are going to have to demonstrate an even greater commitment to the future and I firmly believe that we have an employee base that will help the Company achieve its goals.

Thank you, again, everyone, and I look forward to meeting with you over the coming weeks. If you have follow-up questions, please do not hesitate to call Frank or Beth. Thank you.

Frank Constantinople

Okay, Rich, back to you.

Operator

Thank you. This concludes today’s Syncora Holdings, Ltd. second quarter 2008 earnings conference call. You may now disconnect.

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