Assured Guaranty Ltd. (AGO) Q1 2008 Earnings Report, Transcript and Summary

Welcome to the first quarter 2008 Assured Guaranty earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call Sabra Purtill, Managing Director of Investor Relations.

Thank you all for joining us for Assured Guaranty’s first quarter 2008 earnings conference call. Our earnings press release and financial supplement were released yesterday evening after the market close and these materials and other information on Assured are posted in the Investor Information section of our website. I would note that this call is being webcast and is also available for replay on our website or by telephone dial in. The details for the telephone replay are available in our earnings press release. Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited and Bob Mills, Chief Financial Officer, will provide a brief overview of Assured’s first quarter on the call today after which the operator will ask the audience to poll for questions. Our call is not web enabled for Q&A so please dial into the telephone connection of this call if you would like to ask a question. Also please note that this call is being held for the benefit of analysts and investors in Assured Guaranty. Members of the media are welcome to listen but are kindly requested to please call Ashweeta Durani of Assured Guaranty at 212-408-6042 or Dawn Dover at Kekst and Company at 212-521-4817 to confirm any quotations or to request clarifications on comments made in this call prior to publishing details from this call in the media. I would also like to remind listeners on this call that management’s comments or responses to questions may contain forward-looking statements such as statements relating to our business outlook, growth prospects, market conditions, credit spreads, credit performance, pricing and other items where our outlook is subject to change. Our future results may differ materially from these statements. For those listening to the webcast, please keep in mind that more recent information on Assured may be available in future webcasts, press releases or SEC filings. We ask you to refer to the Investor Information section of our website for the most current financial information on Assured. You can also refer to our most recent SEC filings for more information on factors that could affect our forward-looking statements. I’d now like to turn the call over to Dominic for his commentary.

Thanks to all of you on the call and webcast for your interest in Assured. First quarter 2008 was a very strong quarter for new business at Assured as we continue to build our financial guaranty direct franchise particularly in the public finance sector. However mortgage markets continue to be troubled with losses experienced at levels beyond anyone’s expectations. Our operating results this quarter were heavily impacted by our decision to lower our internal ratings for our direct HELOCS and by some additional loss reserves established on select close end seconds and reinsured HELOC exposures. Of the $52.9 million in loss expenses associated with our US RMBS portfolio $44 million was for HELOCs. As we have previously stated we have been concerned about the performance of residential assets for quite some time and consequently we were very cautious in the US RMBS market in the 2005 to 2007 timeframe underwriting only triple-A deals in the prime and subprime first lien markets. However we did underwrite some triple-B rated HELOCs the largest of which were the two Countrywide transactions in the direct segment which comprised 90% of our direct HELOC exposure. HELOC experience today is an uncharted territory. The credit performance of these deals has never been worse and several of the seller’s servicers including Countrywide are under significant financial stress as ell. The extraordinarily high default rates on these deals far above any prior year was well known and was the principal factor behind our downgrade of those two transactions last quarter. This quarter’s downgrade of the two Countrywide HELOC transactions is not because of revised assumptions on delinquencies or loss severities but results from our growing concern about the availability of undrawn lines to HELOC borrowers, the rate at which these lines are drawn down and the ability of the servicers to execute their contractual responsibilities. Available lines for draw downs have not changed but recent draw rates have declined. Because the draw down credits in our deals are a major factor in evaluating the performance of a transaction once a rapid amortization trigger has been breached the potential outcomes due to the uncertainty of performance for this variable has a wide variability than the originally projected loss figures. Therefore we elected to internally lower our ratings on these deals. This resulting downgrade of our internal ratings for our HELOC exposures resulted in additional portfolio reserves this quarter under our portfolio loss reserving methodology. With respect to the two Countrywide deals we stated in our 10-K filed a little more than two months ago that we think the range of potential after-tax loss of those two transactions is between $0 and $100 million. Based on current available information we continue to believe that range is still reasonable. The estimate incorporates many factors including our roll rate assumptions, future principal payments, excess spread, draws and future foreclosures. Lastly the financial viability of the servicer is also considered. These factors are subject to change as well and if significant would impact our current evaluations. We will continue to update our analysis of these two exposures as new transaction perform statistics and market information become available. It is interesting to note however that the April report for the 2005 J transaction delinquencies actually decreased for the first time. It is too soon to draw any conclusions but this could be the first indication that the loss curve is flagging. Aside from our HELOC exposures a very modest exposure to the close end second lien transactions we still remain very comfortable with our US and UK RMBS exposure. Most of that exposure has been underwritten in the last 12 months utilizing significantly stressed underwriting assumptions and was also underwritten at triple-A and super triple-A attachment points providing us with ample over-collateralization and credit enhancement to protect against losses. Turning to our business pipeline and outlook we continue to be very pleased with the progress that we are making in building our financial guaranty franchise during very difficult market conditions. Demand by investors for credit protection from insured has remained very strong which we think is driven by our strict underwriting standards, our triple-A financial strength ratings and our continued commitment to the highest standards of disclosure and transparency. We are being offered a wide variety of business opportunities resulting in a very strong pipeline multiple of the deals and potential PVP of our pipeline a year ago but that was before we got our third triple-A stable rating. We expect the public finance business to remain very strong compared to last year. Our US public finance team generated a record new business production this quarter attaining about a 30% market share on new issue transactions. We continue to see a very strong demand for our name on new issue and secondary market transactions as we estimate that our April 2008 new issue market share in US public finance was up to about 37%. Our PVP in the first quarter of 2008 was two times the total amount that we wrote for the full year 2007 a very impressive statistic. The structured finance and asset backed security markets which have been the most affected by the market turmoil remained very difficult to predict. We underwrote a broad range of transactions in this quarter including commercial ABS, US and UK RMBS, CLOs and structured credit deals. Most of the deals however were secondary market deals which totaled $4.3 billion in the quarter. We had only three new issue transactions in the quarter of which two were public deals a $250 million Brazilian future flow transaction and a $250 million CLO deal. In the secondary markets we underwrote $2.2 billion of seasonal Alt-A deals and also did $1.7 billion of CLOs along with $123 million of commercial ABS deals. Our secondary market activity was all done at the triple-A or super triple-A level. In the international market we did several UK RMBS deals that were for prime mortgages at triple-A attachment points where we were able to opportunistically take advantage of a short term widening in spreads. We also did a handful of transactions that had been previously wrapped by other bond insurance companies about $2.6 billion in total including deals in both the US public finance and the structured finance market. We underwrite these transactions to meet our underwriting criteria on the underlying assets and do not base our underwriting decision on the other bond insurer’s guaranty. I think it’s important to note that in April we started to see some spread compression in certain asset backed security markets which will hopefully being some liquidity back to the market and lead to better new issue market conditions by year end. Our reinsurance business had a quiet first quarter from a new business standpoint which we had anticipated due to the lack of new business activity at many of our reinsurance clients. As many of you are aware our financial guaranty reinsurance business has always been focused on reinsuring triple-A rated primary financial guaranty companies so the recent downgrades have restricted the number of companies that are able to write business and therefore require reinsurance. Many of the companies in our industry are in the process of various strategic or capital alternative evaluations and we are actively providing pricing quotes or underwriting requirements for both portfolio transactions to the extent those companies are interested. I’d like to touch base on our closely monitored credit list given its large increase this quarter. We’ve been very focused on credit quality since our IPO and you should be confident that we will continue to do so. Our direct portfolio has grown rapidly over the last four years and as a young portfolio did not generate much in new closely monitored credits although we expected that to increase as those exposures became more varied by asset class and more seasoned. The increase this quarter was due to a few specific transactions most of which resulted either directly or indirectly from the deterioration in the mortgage market and then spilled over to the auction rate market due to the absence of liquidity. Our CMC list increased to $4 billion or 1.9% of net Par insured up from $2.1 billion or 1.1% of net Par insured at December 31, 2007. We have $1.4 billion at the CMC 1 level which we characterize as fundamentally sound with a low probability of loss. We added almost $1 billion in Par insured to the CMC 1 list this quarter due to downgrades by the rating agencies of two transactions related to life reinsurance deals where subprime RMBS collateral that had been included in the assets supporting the reserves and capital requirements. The ultimate risk of loss to Assured in these deals is principally the performance of the life insurance liability not the market value of the RMBS securities but the resultant impact of the surplus and available cash reserves in these deals warrants them being placed on our CMC list. The second largest increase was in our CMC Two category which we categorize as having a weakening credit profile and may result in a loss. That now totals $2.3 billion. We moved the 2007 D Countrywide HELOC from CMC 1 to CMC 2 this quarter and also added $540 million of our exposure to the Jefferson County, Alabama Sewer Enterprise which is in technical default. We expect the Jefferson County situation to be resolved without meaningful ultimate debt loss if given the current rating and the uncertainty and how the situation will be resolved we believe that CMC 2 is the appropriate category. We also added about $200 million of HELOCs from our financial guaranty reinsurance segment to the CMC 3 category which is the level where cash reserves are established due to the receipt of claims advices from our reinsurance clients on those HELOC exposures. Bob is going to cover financial results in more detail in a minute but I did want to touch on an item in our financial supplement. As you know we estimate our future installment premiums and credit derivative revenues and unearned premiums net of [BAC] to calculate adjusted book value. At March 31st, 2007 these totaled $832.7 million after tax. Today a year later that amount is up 70% to $1.4 billion an almost doubling of our deferred earnings. I think that’s an important statistic when evaluating the potential earning power of the franchise that we have built since we went public four years ago. Last but not least I’d like to invite all of you to attend our first Investor Day to be held in New York City on June 11th, 2008 to learn more about Assured, our operations, business prospects, credit profile and outlook. We will be sending our formal invitations next week although many of you should have received a Save the Date email. If you are interested in attending please do not hesitate to contact our Investor Relations Department for further details. Now I’d like to turn the call over to our CFO, Bob Mills, who will discuss the financial results of the quarter in more detail.

We understand that another company’s conference call starts at 8:30 so in order to allow enough time for questions I’m going to shorten my comments to just cover a few items of high interest. Please feel free to ask questions on any items I don’t touch on and as always I want to remind everyone to refer to our press release and financial supplement for segment level details and further explanation of our financial position and results of operation. As we previously announced we adopted a new accounting presentation for the quarter consistent with a new industry wide approach. Although this presentation caused some changes in total assets, liabilities, revenues and expenses it did not change net income, operating income and vested assets or shareholder equity. In our April 22 press release we tried to provide you with a roadmap to evaluate these changes and also have provided the various components of the change in this quarter’s financial supplement so that you can compare the old presentation to the new presentation. Operating income which we calculate as net income excluding after-tax realized gains and losses on investments and after-tax unrealized gains and losses on credit derivatives for the first quarter 2008 was $6.2 million or $0.08 per diluted share compared to $46.1 million or $0.67 per diluted share in the first quarter of 2007. The principal reason for the decline in operating income and also for the shortfall in earnings compared to analysts’ estimates was that w established $53.8 million or $0.55 after-tax per diluted share and loss and loss adjustment expenses incurred from US RMBS exposures written either in insurance or credit derivative form. In addition to loss and loss adjustment expenses in this quarter we also had higher operating expenses due to an increase in total headcount and an increase in the number of retirement eligible employees. Stock-based and other deferred incentive compensation for retirement eligible employees expense when awarded. This amount increased by $5.8 million or $0.06 per diluted share versus the first quarter of 2007. Furthermore first quarter 2007 net income and operating income included two benefits, the first was a $4.1 million or $0.06 per diluted share one time tax benefit related to the company’s tax treatment of transactions that occurred prior to our 2004 initial public offering. The second was a $4 million or $0.02 per diluted share net loss and loss adjustment recovery that related principally to aircraft transactions. Our PVP or present value of gross written premiums for insurance and credit derivatives totaled $276.6 million for the quarter, up 159% compared to $106.7 million for the first quarter of 2007. The principal driver of growth compared to the prior year was in the US public finance market but we also posted strong growth in US structured finance and international. Reinsurance was down although only by 7% reflecting the lack of new business activity in many facultative reinsurance clients. We also did not have any significant facultative transactions or portfolio transactions in the quarter. Net earned premiums and earned revenues on credit derivatives for the quarter totaled $74.4 million up 35% from the first quarter 2007 with growth in both direct and reinsurance. The increase was in line with our projections at year end 2007 that were in our financial supplement. For the full year of 2008 we expect to be able to maintain this current growth rate. Consolidated loss and loss adjustment expenses incurred including losses incurred on credit derivatives and consistent with our previous accounting for loss reserves totaled $58.3 million for the quarter compared to recoveries of $4.7 million for the first quarter 2007. The increase was largely due to reserves for our US RMBS exposures principally HELOCs which have been previously discussed. Quarterly operating expenses increased by 38% over the prior year higher than some analysts’ expectations. The principal reason was the growth in headcount over the past year. We’ve added about 28 new people since the end of the first quarter of 2007. It also reflects an increase in incentive and stock-based compensation expense for additional retirement eligible employees which is largely a first quarter expense and therefore this expense should not be annualized for full year 2008. For full year 2008 I expect operating expenses to increase by approximately 7% as we continue to increase resources to meet stronger than anticipated market demand particularly in US public finance. Our tax rate for the quarter was distorted by the US RMBS loss expenses. For the balance of 2008 I expect the rate to be approximately 13%. Finally about 40% of the after-tax unrealized losses on credit derivatives was from pooled corporate securities and the balance was spread out among US and UK RMBS and US CMBS. As we’ve stated in the past these mark-to-market losses will reduce to zero as the contracts approach maturity without credit losses. Ironically if credit spreads tighten beyond where we wrote the original contracts we would also have unrealized gains in the future. As of March 31, 2008 we had net losses on credit derivatives of about $7.70 a share which means our book value per share excluding this amount is about $26.40 a share at March 31, 2008 an increase of 7% over the last 12 months. Please note that we plan on filing our 10-K by the close of business today. Before turning the call over to the Operator I would also like to just remind everyone that we did close on the sale of $250 million in common equity to investment funds controlled by W.L. Ross & Co. on April 8th, 2008. Those shares were issued at $23.47 and hence will modestly be accretive to book value per share at mildly diluted to book value per share excluding unrealized losses on credit derivatives. With that I’d like to turn the call over to the Operator to poll for questions.

(Operator Instructions) Your first question is from Andrew Wessel – JP Morgan Andrew Wessel – JP Morgan: I just had one quick one on the Alt-A portfolio, it looks like you definitely, as Dominic had said, grew that portfolio pretty decently in the quarter but overall subordination was still down. Could you talk about the opportunity you saw there and what average subordination was on those deals you put on during the quarter?

In general terms we had been getting substantially more subordination. We’ve revised as you can imagine based on experience in the market our stress loss scenarios and now have a requirement, and to give you an idea what that means we would take default rates up to 60+% for everything in California, Nevada, Florida, Michigan, condos, everything else at 40%. We would use a very strict roll rate assumption as well as default a substantial amount of current loans and as we go through our modeling we would require a two times coverage before we would consider writing any of those deals. In a lot of cases we’ve been able to get substantially in excess of that. More importantly some of the subordination engineered into these deals are what we call fixed dollar so they never decline. So as the pool would typically have its natural pay down we find ourselves basically getting taken out of the risk in a reasonably short period of time. So that’s where we’ve found ourselves and if you look at the experience relative to those deals in terms of delinquencies and projected or even current losses charged to date, it’s extremely low. By and large we thought we saw opportunities to get into that market at very, very well protected attachments and as I said using hard dollar as part of our support or subordination package we think that there is a great chance they’ve got. Also very low LTVs and as I said we got the fixed rate collateral. Andrew Wessel – JP Morgan: If you could comment at all about business this quarter, is it as brisk last quarter? Are you seeing the same opportunities across [inaudible] structure finance namely in the secondary market and structure finance or has anything changed at all from the first quarter so far?

The big question, Mark, obviously we’re still seeing a tremendous demand in the public finance sector. We talked about our market share now increasing again. It’s been increasing virtually every month as we go through 2008. We estimate April to be 37%; it should be our highest ever. We see more activity starting to come into that market relative to issue. The big question mark always is in the structure finance area we were fortunate in the first quarter to be able to execute so many secondary deals obviously because new public issuance is not very high. We still think that transaction is still going to have a lot of flavor going through a good part of 2008 as without liquidity banks have to deal with these risks that are on their balance sheet and will look to buy further protections.

Your next question is from Mark Lane – William Blair & Company. Mark Lane – William Blair & Company, L.L.C.: Regarding the HELOC deals can you remind us what the cumulative reserve there is associated with those two transactions and what sort of assumptions or what’s your thought process on establishing the high end of your worst case scenario?

Mark, I’m glad you asked since this seems to be of the most interest. Let’s think about it. Today we’re currently carrying about $42 million of reserves in the 05J and 07D transactions and I really want you to appreciate that this was very, very detailed discussed in the company because it is a portfolio reserve and that’s important to note, it is not a cash reserve. Why, because there is still significant uncertainty over the probability of a loss. How do we look at that? We take a very clinical approach. We run it through our ratings model and the rating model says based on the uncertainty and specifically around two critical features, the draw rate and then the second thing is the servicer responsibility relative to the draw rate and other things like reps and warranties. What does that mean in terms of the probability of a loss? Remember ratings are based on probable outcomes; this is a lowering of rating. Do we change our mind in terms of where we see this ultimate risk? We can always be wrong and there are 1,000 balls in the air relative to how these things are affected. But if you step back and let’s use the 05J deal as the example, the 05J deal has today 5.1% of charge losses. If we basically default 100% of all the delinquencies that currently exist, so we say we no we had bad guys in the pool, they’ve already hit us because this is a 20 month old transaction. They’re gone, they’re 5.1%. We’ve got a build up of maybe a potential wave of bad guys and if I take all of them out of the deal that’s another 5.9%. That gets me to 11%. I’ve now got a fairly seasoned HELOC deal so somebody that’s been paying their bills for two plus years you tend to have a better feeling about whether they will further default. Now they could based on economic conditions, based on continued drop in market values of the properties for which they’re paying these balances off. So there’s still some ifs out there, but in total then I’ve got 11% of losses based on original pool balance, remember these are always based on original pool balance, based on excess spread today and the slowdown in prepayments or in effect paying off your lines of credit, we now believe we can contain somewhere in the 18% range in terms of charged losses against the original pool balance. That means I would still need to get 7% more to hit that total where I break even. Remember at that point I still do not have a loss and you say to yourself, okay I’m two years out, I’ve got a seasoned pool, the pool factor is 42% today. That means the amount of loans still outstanding relative to the original pool balance is 42%. That does include the delinquencies. With the delinquencies out you now have 30% remaining and we’ve already taken full charge offs for the delinquencies, that means I’ve got to get 7% off of only 30% so you more than triple the 7%, you would have to default one out of every four loans remaining in the pool just to get to a break even level. Which means for us you’ve got to get the second picture of the python and based on the April report where we see it for the first time at drop in delinquencies we have to say to ourselves in order for us to get to where we would be break even I’d have to have almost as much market disruption as I’ve had to date. Which means I’ve got to have a whole another huge block of bad loans out there either because of bad borrower, bad servicing, bad underwriting would still have to be out there today that if paid balances from roughly two years for me to get to even a break even number. It’s hard for me to say this is a real loss, it’s hard for me to say we’re going to move off our view that by and large because we think we’ve engineered the proper protections into these structures, that we should be able to survive even a very, very damaged case relative to the mortgage experience and remember all of that analysis I just gave you totally ignores the draw feature of the rapid amortization trigger as well as the take out of the principal balances now based on all cash flows being diverted to insured securities. And that’s just for the 05J which we thought was the worst deal that we have out there. Does that help? Mark Lane – William Blair & Company, L.L.C.: Bob, I kind of misunderstood your comment about operating expense guidance. Could you repeat that?

In the first quarter you have a blip because for any retirement eligible employee, any grant at that point in time all gets slammed through the first quarter. So your first quarter operating expenses are higher than you will see in the remaining three quarters. It’s what we expect. So in a year-on-year basis I think we can contain the expense growth to 7% to 8%, somewhere in there. Mark Lane – William Blair & Company, L.L.C.: Oh, 7% to 8% for the balance of the year?

No, on a year-to-year basis. Mark Lane – William Blair & Company, L.L.C.: Oh, for the whole year?

Yes.

Remember the accounting works against us and let’s be honest; it’s myself, Jim Michener and Bob Mills, the three old guys. Any award we get now instead of being amortized over the vesting period or the period to which you earn the compensation is now recognized immediately. You get no deferral whatsoever.

In the quarter.

Right, so anything granted at the end of or in February for year end performance gets all slammed through in the quarter which is horrible but then you say well now we don’t have to worry about a four year vested for restricted, a three year vesting for options, it’s all slammed through in the current quarter. Mark Lane – William Blair & Company, L.L.C.: And the last question is regarding the reinsurance business, you talked about portfolio transactions and providing some quotes. How many opportunities are you looking at and I understand it’s not lumpy business, etc., but given the number of opportunities do you expect to at least complete one transaction? What’s your thought process there?

I would say, Mark, and it’s hard for us to predict because remember these are very, very unique and we’re not the only people quoting them, so there is competition, if you look at the market save but for a few you can assume every one is out looking for portfolio reinsurance. Of the direct market go right through the number of companies and maybe save for one there is a submission out on every one of them. In the reinsurance market you know who the current third party players are, they’re all looking to relieve capital through some sort of a session. We’ve got a lot of irons in the fire, there is competition, we’re going to be very restrictive in terms of our underwriting and return requirements on those so we will continue to quote them, continue to review them and hopefully we’ll be successful. But there is substantial activity. Mark Lane – William Blair & Company, L.L.C.: When do you think those decisions will be made?

I think it’s a factor of both us and as well as their needs, right? I think some companies are going to look to respond to potential additional capital requirements through reinsurance and therefore as they have to take further loss recognitions and therefore pull down their in effect rating agency capital balances it obviously increases the urgency of getting the transaction done on the reinsurance side. And of course you know there are some that have to be called back by some primary companies based on downgrades of reinsurers. Obviously we’re talking to those guys that are clawing those things back in terms of reinsurance. So there is activity coming out of the companies themselves, there are activities coming out of other companies that have to claw back and there is activity coming out of the reinsurance companies but as I said typically it’s going to be led by the rating agencies or regulators because as you are obviously aware there are a lot of attention being paid to certain companies from the New York Insurance Department and the requirements that they come up with solutions on a more stringent timeframe of which reinsurance could be part of the ultimate way that they would relieve capital requirements.

Your next question is from Mike Grasher – Piper Jaffray. Mike Grasher – Piper Jaffray: Quick follow up to Mark’s question regarding the combinations and sensitivities on the exposures in the HELOCs and I hear you mention and talk about the bad borrowers, the bad underwriting and all that. Where does the bad economy or the weak economy play into your thoughts on how you think this might ultimately roll out?

Mike, great comment and the most amazing thing as we all sit back and look at this real estate disaster is the fact that in most cases if you asked anyone two years ago you’d say the only way you get a real meltdown in real estate assets is what? The economy or interest rates, right? Big spike in unemployment, huge spike in interest rates. Geez, we don’t have either of those two. You might argue the economy is not vibrant but we don’t have the unemployment issue which is typically what leads us to large defaults in real estate. Now you do have this market value decline, you had an overheated markets, a negative equity might be balancing out or creating a new condition for default. But we have not had that. If you look at the principal causes, they’re not there so the concern obviously is well geez what happens if that happens? And that’s when we can typically go back and look at this historical displacements that have happened in the past where it was really based on economy. So we think we’ve got the bad guys, maybe, maybe not, identified and out of the pools. We still have exposure to the economy or to normal delinquencies relative to economic conditions and interest rates but it seems like the government is extremely focused on that and therefore I think their position to make sure they’re putting in programs to address that, so we think that could take some of the bite ultimately out of that type of impact. We’re still concerned, that’s why we have these things on CMC and try to add in all factors. It is not really for us predictive of what we believe is the ultimate net loss. Like I said in the absence of our portfolio reserving process which I hope you guys take great comfort in how it is mechanical that we’re not here trying to manage reserves or results that I would have made the argument that I don’t need reserves in this case if I go through my argument on 2005J. Even if you look at the 2005J that 7% of original pool or 25% of existing loans would be well above anything that would have ever been experienced in a normal economic downturn as well. Remember go back on the HELOCs and the worst ever in the history of mankind is somewhere in the 2% to 4% ultimate net loss range. The losses that we would have to exceed 18% which is four and a half times the worst ever. And it goes through that fully defaulting everybody that’s delinquent today and still taking a very large charge of future delinquencies. I think we’ve got it built in there but your exactly right, this has not been achieved based on the normal terms and conditions of a mortgage meltdown and we still have that risk out there. Mike Grasher – Piper Jaffray: With that what sort of unemployment rate would you be factoring in or what are you thinking about in terms of unemployment?

We all expect a modest growth in unemployment and under that level we don’t think it as significantly to our already very heavy stress case of loss projections. We think that as we look at our, we have a thing called constant default rate, after you default everybody that’s in the delinquency pool you’re still defaulting anywhere between 1.5% and 5% of the loans still outstanding. And these are for seasoned borrowers; they’ve been paying their bills for a long time. So we think that’s in excess of what a normal economic impact would have and we’re all basing that on worsening unemployment which is built into our statistics as we look at things like market value declines. That in effect tells you that there’s not a lot of people out there able to buy homes that although you look at national projections of housing declines of say 7% to 10% and we’re looking at 65% in our model. I think we’ve got that baked in there in a fairly decent regard. Mike Grasher – Piper Jaffray: Moving on you did speak about the quality of the business that you’ve written thus far and it sounds like your pipeline is extremely full. How do you sit in terms of capital? Do you expect that you’ll need to tap the shelf that you have, that’s what I’m calling it for lack of a better term, with W.L. Ross & Co. or where do you feel like you stand on capital versus your opportunities?

We just had our Board meeting and that’s obviously one of the things that we always present to the Board is the capital view and at this point in time even with the high level of writings we believe we’re fine from a capital point of view. Why is that? Because of such a high concentration of public finance. Remember in the rating agency models for capital public finance is a very positive factor relative to both Fitch and Moody’s calculations. S&P a little bit different relative to how they do public finance as part of their model. And S&P is typically where we have the largest amount of our capital cushion so the areas where we would be the tightest are getting the benefit of the most because of that huge mix of public finance that we’re doing in the first quarter and obviously how we see future quarters rolling out.

Premiums have been higher also as well as attachment points which also helped the consumption of capital.

Remember the capital need is driven off of two things.

That’s right.

Mix of business, Par written because it keys off of Par and then premium rates. Because the premium rates in effect create capital via the unearned premium reserve for the public finance and the present value of the future installments for the structured credit. Because premium rates are up significantly if you look at that line of business a year ago, it would have a different capital need ultimately because of the credit you get on the asset side from the business being written.

Your next question is from Darin Arita – Deutsche Bank. Darin Arita – Deutsche Bank Securities: Can you talk a little bit about the pricing environments? How has pricing changed during the first quarter relative to what you’re seeing in 07 across your business segments and what the incremental returns on new business that you’re writing?

Pricing, it’s hard to make generalities but to give it the easiest way of looking at it, as we look across the board, and remember we try to go back and now we’ve added a new feature in our underwriting memo or submissions, we do now require the submitter to the Credit Committee to go back and look at historic pricing to give us an indication of where pricing would have been and we look for similar transactions or actually the same issuer type of thing going back. You do that for a lot of the structured credit as well as some of the public finance and in general I would say reading through all those memos a minimum increase is probably in the 50% range and the maximum, especially when you look at some of the structured credit areas and especially in some of the residential asset areas, you’re looking at 300% and 400% increases. That’s really related to spread so let’s understand each other as well as the availability of insurance in some cases. We monitor that pretty closely and if I try to grab an average which has never worth anything because it means nothing, but on each of the deals that’s a level of increase that we’re seeing in the 50% to 300% range. Now understand we have different stress requirements against that so as we evaluate it with loss clause we engineer into the ultimate return we’ve had to move them up in recognition of what we think the market is today in terms of volatility and we also think in terms of for us we’re holding more capital today because we want to make sure that we’re insulated from any potential disruption vis a vis rating agencies change of requirements by asset class, etc. It’s a moving calculation. If you say gee 50% to 300%, your returns must be off the charts we’d say not a bad idea, but we are taking a stronger look relative to the volatility in there for pricing that in our return models and we are looking at additional capital as part of the return model. Darin Arita – Deutsche Bank Securities: If you can just turn back to the insured portfolio, you gave a lot of helpful detail there with respect to the HELOCs. Can you give a sense of are you feeling any greater concern about other parts of the portfolio whether your other RMBS related closures or outside of the housing sensitive areas?

On terms of the other RMBS, the only area we think we’ve got some issues is the close end seconds, they’re displayed on our disclosure and obviously we’ve got smaller exposures relative to the reinsurance portfolio and you noticed that we put up some cash reserves based on cash reserves advised to us. But thank God they are not significant in terms of real large dollar value and they will be absorbed in our normal reserving process. One interesting point I want to make to give you a further indication of our internal view, what our portfolio model generates, specifically in the last quarter we had gotten advice to our reinsurance division of cash reserves being established by one of our clients on a residential asset exposed deal. As a matter of fact, there were a few of them. We look at the reserve that they were advising us to post, we ran it through the exact same model that we run our deals through, a/k/a the two HELOCs, and the reserve we posted was double the amount of the reserve that was advised to us. So the reserve advised to us in round numbers was about $4+ million. We posted $8+ million and we posted that $8 million off of our modeling, the exact same model that’s embedded in the two Countrywide deals. So A it gave us a further view that yes, I think we’re being pretty conservative, we’re really stressing these things to a very, very high level but based on the uncertainty, I think that’s justified. I think you’d be disappointed if we were trying to go this one little baby step at a time and ultimately drag you through 1,000 miles of coals to ultimately get to the reserve answer. Looking at someone else’s view that we’re not sure of how they model, we obviously don’t sit inside those companies, but it is our responsibility in taking reinsurance is we have to give it our view what we think the ultimate outcome of a loss is. We posted in the current quarter double the reserve that we were advised.

I think also when you look at, you asked about the rest of the portfolio, I think we do feel quite comfortable in the pooled corporate obligations are performing very well. The rest of the subprime portfolio as you can see from looking at the subordination looks very good. The CMBS book is performing quite strongly. When you look at the rest of the book I think we feel good about it.

I’m sorry, I didn’t get to the end of the question and I appreciate Bob stepping in. Yes, we feel incredibly comfortable over the rest of the book. If you look at the continued subordination that we built up in the other residential exposures other than HELOC and closed end seconds, that number continues to go up. In the pooled corporates you look at the subordination against parent defaults and delinquencies, it’s immaterial to the defaults and the delinquencies relative to the subordination. Although everybody expects another shoe to drop and maybe it does because of the level of protection in the current programs that we have it’s hard for us to view that shoe to be really anything meaningful to us.

Your next question is from Tamara Kravec – Banc of America. Tamara Kravec – Banc of America Securities: I wanted to ask a question about the CMC list and you moved some things down into Category 2 and when I look at the definition of Category 3 being high priority claim default probable, why isn’t more of your HELOC exposure in Category 3? You can ultimately assume you’re going to have some losses on the, the HELOCs and the close end seconds seem to be the worst performing asset classes. What would it take to get it to Category 3 or 4?

You nailed it right on the head, that probable. Category 3 for us represents a claim reserve. That means we have probable and estimatable facts and conditions relative to the claim. As we talked about 2005J, Countrywide, I can make a strong argument that we do not have a loss. Yet, if I look at the true probability around these other factors that would have an indication or have impact on our ultimate exposure the Surveillance department of our company felt strongly that they had to downgrade those transactions and although we are a democracy the Surveillance department does have say over the ultimate rating of the transaction. We don’t get the Category 3 until we put up the cash reserve; we’re not putting up cash reserves at this point in time. I told you about the April report for 2005J, if the May report delinquencies spike up, draws go down to zero then we have maybe a different set of facts that we would say now it becomes probable and therefore we’re going to use our estimating process to put up a real cash reserve and we would then reclass portfolio to cash. CMC 2 for us is that it is weakening; we think it has the probability of going to a reserve. 1 we say it’s still fairly fundamentally sound. The 2 life reinsurance deals that are in 1 as we said the performance of the deal is really related to the life, the mortality outcome and although they have a mark-to-market problem on their balance sheet which is putting their surplus in jeopardy relative to the ability to pay dividends or the interest on the insured securities that’s a short term problem. At the end of the day we don’t see any spike in mortality that’s going to cause an issue relative to the true performance of the transaction. So you might have some cash flow interrupted but at the end of the day, it’s a good transaction and as we look at, say the ABX spread coming in a bit, we hope that the market values in those securities start to recover a bit. Because they are typically fairly highly rated securities so at the end of the day they’re getting more punished by the market than they are from true economic loss. Tamara Kravec – Banc of America Securities: A question on the assumptions about the, you talked about the draws and the under the reps warranties, but on the draw rates, have you made any assumptions about actual changes in the credit lines aside from the draws? In other words, credit lines being reduced permanently or margin calls on some of these accounts?

Absolutely, that’s why we vary the draw rate from $0 to $5; historic has been $7, say on the 2005J deal. We take it all the way down. Now the funny thing is, and it’s a good question to ask, we monitor available draw. What is the use of funds, and that’s been averaging almost from inception 15%. As of the March report which is the last report that we have that data for, it was still 15% for both deals. We truly expect, and we’ve been told by other companies that have already hit rapid am triggers before we’ve hit rapid am triggers, that they do see a pull back in available draw balances and they do see a dropping in draw rates and that’s why we’re sitting here with the downgrade on our two HELOC exposures, exactly for that specific situation. Not only do we factor it in, it obviously led our Surveillance department to downgrade the transactions internally because of exactly that point. Tamara Kravec – Banc of America Securities: A question on the marks that you’ve taken so far, you’re around I think $700 million, what would be your thoughts if any on when those might start to come back into earnings in net income?

Tamara, I think if I really knew the answer to that question I could make a whole lot more money and be richer in 24 hours. During April we did see some spreads start to come in. Naturally the next time it’s really meaningful is the June mark and heaven knows what’s going to happen this month or next month, but if you looked at the market the end of April, it would actually improve slightly over what it was at the end of March. Some of the spreads are incredibly wide and they will come in but I couldn’t give you anything that I would tell you that you could rely on at all as far as when I think spreads will come in. I’ve been consistently wrong over the least year as far as what I thought spreads would do. There was some help at the end of April and I think it will be slow gradual.

You’re seeing transactions now in the market where people are selling portfolios of some of these troubled assets and as that starts to establish benchmark pricing then you take a little of the volatility out of the spread and the emotionality out of it and therefore that starts to come in. We saw that on ABX over the last few weeks. So fingers crossed, if that continues that would be great. It would be silly for us to start patting our backs with, whoa look at the great net income and that doesn’t really mean anything. We’ve always tried to tell you ignore the spread. If we have issues relative to the performance we’re going to talk to you about the issues relative to the performance regardless of how the accounting treatment wants to classify these things on our balance sheet or income statement. We’d rather deal in real economic terms, in terms of where our exposure is and what it costs the company ultimately. Tamara Kravec – Banc of America Securities: One broad question for you Dominic, I know that you guys talked about the operating expense growth of 7% to 8% but when you look at the business generally, you’ve had such rapid growth. When you look around the organization what do you think needs to be done in terms of infrastructure just to support the growth that you’ve had assuming that that’s going to continue?

In terms of the infrastructure, thank God as you may have listened on earlier calls we went to two year ago and built our online system relative to public finance which is obviously the area today that has the most transactional activity. Had we not done that I’d probably be having a different conversation with you? Today we’re really trying to put our money in our Surveillance and Credit areas. Obviously as we build the portfolio up it’s going to require a lot more people in Surveillance and also different skill levels than we had in the past. Remember we wrote a portfolio going back two years ago of principally swaps, principally at the triple-A level, were just a little top slice because that’s all we could really compete for and in the healthcare we did five, 10, 11 transactions a quarter principally in private higher end healthcare. Now you’re looking at hundreds of transactions. We’ve added roughly in the last say month and a half, two months, six people to Surveillance. We’re bringing in more experienced people, we’re looking at a remediation department or program as we continue to get more sophisticated in that approach. So the infrastructure today is really being stressed, and of course Sabra is going to give me a kick under the table, then I’ll talk about the side of Investor Relations as we now are seeing more investors post on the fixed income side and the equity side. Those are the areas that I think we’re looking at today. The business production in the structured credit side it’s a manageable transaction flow, public finance a lot more but we’ve built the systems, we brought in a lot more people, I think public finance staff has probably increased 50% over the last year and we still have further increases that we’re adding to that staff as we go through the year. But if you look at the body of staff, of say we have 130 people now, if we add 15 to 20 more throughout the year the impact on expenses is muted because you’re only paying on average a half a year’s salary for those folks. We watch that very closely. It’s a concern; you don’t want to grow too fast where you fall over. It’s like the kid that sprouts up eight inches in the summer and he can’t walk when he gets to school the next fall. We’re trying to make sure we keep that in reasonable manage position.

Your next question is from Ryan Zacharia – JM Partners. Ryan Zacharia – JM Partners: Couple of questions, on a month-by-month basis does AGL have to fund the HELOC shortfalls on the Countrywide deals?

Yes, they do and that’s how we get to the rapid am trigger because we have to fund a certain level of losses. In the 07 deal it was $9 million and we’re currently at $14.2 million. In the 05 deal it’s $27.5 million and we’re at $24 million today. So we fund those losses. Ryan Zacharia – JM Partners: Do you expect at some point to be reimbursed from those? When you say that you’re not going to lose money on the 05J deal, do you mean that you’re not going to lose more than the highest estimate or you’re not going to lose period?

Well if I knew the exact answer there we’d actually have been finished. We’re saying based on our view of the current perform statistics out there we do a modeling estimate and we have internal downgrade that creates a portfolio reserve. By definition the portfolio reserve is a reserve. It’s an expectation of a potential outcome. We can make arguments all over the board about what the ultimate real outcome is. When you said you do you expect to get reimbursed, if we’re going to have no loss we have to absolutely get reimbursed? If we’re going to have the loss that’s embedded in our portfolio estimate then some of that’s going to actually stick to our ribs. How do we get reimbursed? If you look at the simplest of terms, if you say for the 05 deal we’re getting about 300 basis points of excess spread and even if the draw rate drops down to say 3% that would give you in effect a 6% coverage and if we look at a constant default rate going forward of 2.5% which would still be reasonably high for a seasoned deal, you’re in effect grabbing back then 3.5% every year off of those two statistics and that’s how you ultimately get paid back the losses that you advanced. Ryan Zacharia – JM Partners: Going back to the draws, it would seem that Countrywide is economically incented to stop draws on these HELOCs. If they could it would seem that they would halt draws on their entire pool of loans as son as possible. You kind of alluded to the trend is down substantially in both the deals. Is your worst case scenario for these two deals, does that have draws at 0%, this $100 million after-tax loss? Does that incorporate zero draws ramping down from the current level?

We incorporate zero draws in some of our modeled out comps, but remember although that is incredibly significant because you can understand the value of having someone pay you back your losses off of funding those draws, you have to look at what is the constant default rate that we’re using, you’ve got to look at what is the prepayment rate that we’re using and you’ve got to look at the excess spread. So never one variable although we do say draws are probably the most significant or has the greatest variability of outcome. We can create cases but our expected case would incorporate in some of the modeled out comes to zero draw rate. We’ve got that modeled in there, it’s part of our expectation, attention is why we’ve got the internal downgrades. But it has other factors included. I go zero draw rate and if I don’t have a huge constant default rate it doesn’t really matter because it’s really what are you charging off that cost you money? How you get the money back is through the excess spread and the draw rate. If I keep my constant default rate below my excess spread, I’ve got a win and I ultimately recover the current money I funded so it’s not as simple as saying, if you take that down to zero, but then I’ve got to fill in the other blanks. Ryan Zacharia – JM Partners: But if everything was held constant it does have the power to greatly increase possibly sustained losses if you started with a set of variables, keep them all the same except for draws and you take that down from. I guess I’m just trying to quantify how big a percentage point move in draws is. Not what the dollar value but how substantial it is if you go from where the current levels are, let’s say 7%, down to 3% or 2%, how meaningful is that holding out all constants?

It’s funny, the 3%, 2% is not bad. It’s only when we get to zero and then if I remember looking at all the modeled out comps if you go to zero that could impact your ultimate outcome by somewhere in the 50% range. If you look at in text you can play around with the numbers. We’ll tell you how we look at it. I think we’ve been pretty open about that. If you look at those four factors and start changing your numbers around, and obviously you’ve got to look at what your roll rate is, but if you look at draw rate, if you look at constant default rate, if you look at prepayment and excess spread, they’re the four variables. Anyone can play with us at home with the numbers and see what information, the one nice thing is because you are bringing down the pool balance, your ultimate big number outcome is getting smaller and smaller. Regardless of the draw rate, remember the rapid am trigger does require that every dollar of cash flow pays down insured securities. To give you a number to make this even more fun for us that like to play games, our Surveillance department prints those small, either I’m getting too old but it’s hard for me to read some of the spreadsheets. But to give you an idea on 2005J, we’ve not hit rapid am. Remember it was a $1.5 billion deal to start. There were already principal payments of $1.1 billion. The problem is you had draws back on those things of roughly $637 million and we had $300 million of draws. So if you got rid of the ability to take that $300 million out which the rapid am trigger does, now all payments go against the principal value outstanding that $1.5 billion would have been down to roughly $400 million today instead of $700 million. It has a huge impact on getting you out of Armageddon. Ryan Zacharia – JM Partners: Two quick questions, you said that the 07D deal was downgraded. Did you mean on the closely monitored credit list or your internal rating? Because when I look at the supplement they both say double-D from Q4 and this quarter.

One is single-B, if you look on the page, 05 is single-B on page 28 of the supplement.

The 07 deal hasn’t been downgraded.

Yes, but we moved it to CMC 2 which does stress it more from a portfolio reserving process and you’re correct. It’s not been downgraded by its rating category, we moved it down a category in the CMC list.

It went from the fundamentally sound area to now potentially resulting in the loss and because of that it does kick off a higher reserve.

And 05J was downgraded to single-D; it was previously on CMC 2 but was downgraded to single-D which also kicks up incremental portfolio reserves.

And remember the downgrade for those is related to exactly the point you’re raising which deals with that draw rate and whether it goes down to zero, stays at 7%, settles in at 3% and obviously it behooves the servicer, in this case Countrywide, to get rid of those lines as fast as they can but they have to file a follow up process to do that. It’s just not that they can send out letters and cut off the draws. Ryan Zacharia – JM Partners: Is there any traction with investigation into RETs and warranties or is that a much longer process?

As you’re well aware everyone in the industry has got a real concern relative to the quality of the loans that were put into some of these portfolios. We’re no different than anybody else. Everyone is doing the audits, typically starting with charged off loans. We’re in that process the same as the other companies and banks that are involved in this asset class.

Just as an aside we take no credit for that in any of our analyses. All the reserve numbers, the downgrades totally ignore whether there is ultimately an issue relative to RETs and warranties in terms of the quality of the loans in the portfolios.

Your next question is from Ken Zuckerberg – Fontana Capital. Ken Zuckerberg – Fontana Capital: Dominic, forgive me if you mentioned this already but I wondered if you could help us better understand the growth opportunity in the reinsurance segment? It would seem that going forward there would be some explosive growth potential given some of the capital challenges for some of your direct peers. I wondered if you could elaborate on it.

I think you hit the nail right on the head. A if I look at excluding portfolios 08 and 07 obviously we’re doing business principally with one ceding company because we don’t include the business we cede ourselves to the reinsurance company, in the GAAP basis you don’t see that number on the stat down here. The stat basis it does have a significant impact. But we’re getting cessions right now from FSA. FSA is having a phenomenal year as we are so we expect that those cessions will somewhat compensate for the lack of the business that we used to get from what was principally the two main reinsurance clients, [IJIC] and [SCI]. So if I looked at year-on-year it’s going to be a reasonable comparison between the two. The portfolios, as we tried to indicate without trying to get too specific because it’s not an easy area for us to give you real hard numbers, there is significant portfolio activity. If I had to guess we have probably got six in house today. Some of them are smaller because they deal with smaller companies. Obviously some of them are huge and that would have a dramatic impact on the reinsurance results much like the Ambac session at the end of last year did on the reinsurance company and keep in mind once the value of that is building our earnings model. I appreciate the market has gone through disruption. I obviously understand that relative to our competitors and even now to our first quarter financial statement we have had to book based on our internal process of reserves. Although that’s not fun and it’s not really things that you like to see, you have to understand there’s cause and effect here. I gave you a statistic. I’m going to go a little bit further. If we look at our unearned premium reserve and our present value of installment premiums brought about by some of this market disruption today, and these are not net of tax or net of DAC, but those two numbers today total, round number, $1.9 billion. A year ago that number was $1 billion. Let me take the rounding out. It’s an $800 million increase to our deferred earnings. And yes we recognize the $50 million loss this quarter on portfolio but I think we’ve managed to explain hopefully reasonably well that you understand our kind of view of it and where potential outcome still could be very different including a zero number. But you don’t get the benefit of an $800 million build up in reserves without some eggs being cracked. At the end of the day we think we’ve weathered the storm pretty well, we’re in pretty good shape for the entire rest of the portfolio as we steer through this and we see these other opportunities that could even make that number jump up even further. Remember that number is principally been created off of fourth quarter and first quarter because the last two quarters of the comparison of 3/31/07 and 3/31/08, so the 6/30 to 9/30 quarter of last year were not that significant. So there is a tremendous benefit that I don’t think anyone is appreciating and these other opportunities that you’re pointing out would have a dramatic impact once again much like the Ambac transaction as of the end of the fourth quarter. I can’t help but feel good about our situation opportunity and what it means to the earnings of this company going forward. Ken Zuckerberg – Fontana Capital: Follow up question unrelated, interestingly on pricing of, I think Darin hit on an area I wanted to ask you about, years ago I guess Orange County in that bankruptcy was a cause and effect for a little bit of a cycle turn, if you will, in bond insurance pricing. Here you mentioned the Jefferson County there was a small municipality in California earlier this week that I guess is threatening bankruptcy and it seems like there’s a few others. In those situations do we have any visibility on what a similar structured municipality might need to pay for an assured guaranty like product? I guess what I’m saying is how great of a pricing up tick could we see for the smaller municipalities that are coming upon hard times?

I think it’s two things you’ve got to think about. A spreads are wide already and the amount of premium that is engineered into the deal in terms of the spread difference is high, it’s getting higher. The Jefferson County and the California municipality, the City Council voted the other day to go into bankruptcy which I thought was just magic that they’re just throwing in the towel. At the same time where we’re getting a lot of talk from the large states that they don’t need insurance yet it seems like one of their cities obviously does, where I think that helps us the most is driving back up penetration rates. So spreads are where spreads are. Will this have an impact on spreads? Yes, potentially but more importantly it’s got to drive up penetration, it’s got to drive up the demand for reinsurance on the product which, remember, historically we’ve had a 50% penetration in terms of insured versus uninsured deals that’s been dropping down now because of market disruption into the high 20s. This hopefully would benefit that and for us penetration is as good as excess spread because they’re both driving good business into the company at good underwriting levels of Par insured. I would hope that this would have more of an impact on penetration to be very honest with you.

Your next question is from William James – Lazard. William James – Lazard Capital Markets: I missed early on in the call where you had spoken about Jefferson County and your exposure and I just wondered if you could either reiterate or expand upon it.

We really didn’t talk about Jefferson County. We’ve got roughly $540 million related to the sewer system. It’s on our reinsurance portfolio so we have to follow the fortunes of the direct writers. We try to get more actively involved because we obviously think some of the direct writers are not capable of providing a reasonable value to a new guaranty going forward in terms of restructuring. Remember it’s a sewer, typically those look at the sewer systems as being at the safe end because it’s got an absolute dedicated revenue stream. In this case we’ve got a problem with rates. There is covenant in our deals that would force them to raise rates. They got into this problem because of their derivative contracts, the swaps they put on top that they financed, I think it was $3 billion, they swapped $5 million, it caused a little bit of an additional expense hit that really is outside the performance of the sewer obligation. So our expectation is that this has to get restructured. Remember we have rights to the revenue. It’s a net revenue calculation until we are paid off and we additionally have rights on the contract to force a raising of rates. So although there is going to be a lot of noise and I think this becomes very political, we’ve got some corruption charges as well in Jefferson County which always stirs the pot even faster but at the end of the day we think this gets resolved, it gets restructured, we hope to be part of the solution on the restructure because our view of typical sewer systems are their money good because you have the defined revenue stream that you’ll be able to grab ad [infinitem] to your pay back.

Your next question is from Alex Goldman – Castlerock Management. Alex Goldman – Castlerock Management: Can you give us some sort of color about your expectations for credit provisions on your income statement for the rest of the year? Clearly this quarter you had some downgrades to securities that drove $55 million of credit costs, with everything taken into account to what you just said about the 05 deal, the HELOCs and everything else, what sort of expense level do you guys expect for the rest of the year?

I’ve got about 15 people in the room that are going to punch me if I try to answer the question. I would rather be more than open than anything else. You can’t bet on anything but if you’re thinking about what standard loss provisions would be and then normalized circumstances which is not what we’re in, but if you get there because of the mix of business we write you would expect a normalized loss provision of somewhere in say a 5% to 12% range of earned premium. Heavy public finance content although those default they typically don’t create huge ultimate net loss liabilities, it’s typically a missed cash flow and a restructuring type of thing, corporates obviously tend to take a more severe default. But on average if you say what would be our budgeted loss provision if we were trying to do the year 2006 it would be in that range based on mix of business. So that’s normalized. We are not in a normalized situation so to that extent that’s about as good as I can get and nobody kicked me so I guess it’s okay my answer. Alex Goldman – Castlerock Management: Let me ask that question slightly differently if I may, what kind of scenario would it have to be for the rest of the year in order for you to see quarterly credit costs to be in that $55 million range for the rest of the year?

We’d have to have continued meltdown. I think you’d have to see the residential [inaudible] get a hell of a lot worse. Think of our $55 million, I already told you we take using 05 as the example, I hate to repeat but, we take everything that’s delinquent and take full charge for it. I don’t think that’s a reasonable guesstimate. The value of the rapid am trigger we reduce the value of the prepayment speed, and we take a fairly tough view of it. I can’t take another tougher view next quarter unless something really strange happens. For the sake of argument and just throwing this out there which is probably going to create another 1,000 questions is if Countrywide doesn’t close the deal with Bank of America and files bankruptcy, now we already take our draw rate down to zero which is typically the net impact of something like that happening, but we could have disruption in the servicer capability which would then cause some of the loans that wouldn’t have gone delinquent had they been serviced correctly to go delinquent so we’d have to factor that in. But it’s those type of impacts that would really make us go back to the drawing board. We really believe the number we took today reflects our concern over all of those things inclusive and therefore I would not expect that to happen on a regular basis. Alex Goldman – Castlerock Management: A final follow up if I may, out of that $55 million how much was a result of a step change in your assumption and the draw rates and downgrading of securities, something that once you take that drastic of a view on those securities probably will not recur. So out of that $55 million how much was that?

I’d say the majority of it. Remember, to give you the example we use the same assumptions that have ceded cash reserves that we got from another client and it caused us to double the reserve advisements. They advised us $4 million; we put up $8 million. And it’s the same basic assumption that led us to the $40 odd million that we’re holding on the HELOCs of the two Countrywide deals. That’s already baked in across our portfolio. Alex Goldman – Castlerock Management: That sort of changed, once you take that kind of a view, it doesn’t sound like that’s something that can continue. Once you assume a zero percent draw and you bake that into your loss assumptions to take you reserve accordingly, that’s not something that can recur next quarter or am I missing something?

No, you’re exactly right but remember let’s use the proper language because we’re starting to put words out there that have different meanings. Once we bring in the possibility of a zero draw that required us to downgrade those securities and to move the CMC 2, the 2007 deal that creates a higher portfolio reserve. It’s all based on if the portfolio reserve but it’s based on our internal rating and then how we model losses off that rating through the standard calculation of our portfolio which I think is explained in pretty good detail to get comfortable with it. It’s that potential expectation of now bringing into that play that forced us to lower the rate. Alex Goldman – Castlerock Management: Would an incremental downgrade to a CMC 3 have an incremental provision associated with it or is it just that the probability of the loss increases?

CMC 3 is only the fact that we put up a cash reserve. Hopefully if we’ve kept our model view of the transaction and typically it’s not dollar for dollar and we gave a good example, I forget it was in fourth quarter of 06 or 05 we did the Northwest transaction, we showed you if you go back through that explanation how the portfolio built up but because the default was so quick behind it we were still short of the cash reserve that we had to put up off the portfolio. Here we have a little bit longer lead time, we get monthly statistics so it’s not in the same kind of dramatic default the next day, here is your payment. Remember off of that Northwest reserve we’ve recovered probably 80% of it if not 100% of it. Even at the time the number that we put up seemed to be right, you ultimately got recovery because you own the asset. Will there be recoveries out of this? Well in certain cases yes, because you own the assets and remember even if the guy defaults and the second lien or the HELOC does not buy out the first lien and therefore default the property, you still have a claim on that property forever until it sells, if it ever sells for a value greater than the primary you get the recovery. Those things still exist, we don’t calc them for anything in our modeling and hopefully you would say that the portfolio reserve would transition to a cash if it ever became that and hopefully it doesn’t become that but that’s kind of the fear.

Your next question is from Analyst for Bev Dijinson – Pine Capital. Analyst for Bev Dijinson – Pine Capital: The questions around the CDS booking and there is really two parts to the question, first just to be clear, given the spread they’re much tighter than they’ve been probably at any point since the beginning of 08. Could you give us a real sense for are we going to see a gain? If you had to report numbers today, would there be a gain on the CDS book? Secondly as far as losses on the CDS is there anything in the statutory requirements and the accounting that when you take the mark-to-market CDS hit you have to reserve for it or it hits your statutory capital in any sort of a manner assuming internally you still believe the risk is okay?

There is no impact on statutory capital for the mark-to-markets number one. Number two you asked about what would happen if we marked the book today, we didn’t full a mark at the end of April, we did a summary mark and there was a slight improvement in the mark at that point in time. As spreads come in the mark will improve and the other thing that improves the mark is the as the individual exposures approach maturity the mark will dissipate also. It has improved, at this point through the end of April it’s not significant but as the spreads come in it will improve. Analyst for Bev Dijinson – Pine Capital: How do we think about the process by which you mark? How much of it is mark-to-model and how much of it is mark-to-market and how do you think about the market for some of the things that you hold which are not potentially widely traded?

We’ve talked quite a bit about this in the past. These are not positions that are traded, they are non-standard terms, these do not require posting of collateral. They are pay as you go contracts. Looking to an active market is not something that you do as part of the mark-to-market. Hence, if you follow the new accounting guidance one would say that it is all Level 3 marks which include the use of models. We generally use like transactions or exactly similar transactions but in many cases it’s mark based upon indices and it’s a very mechanical marking process. We will mark the cash flow CDOs to the JP Morgan high yield cash flow benchmark which during the quarter widened I guess just over 50%. We will mark the CMBS deals to the CMBS index which widened 18% during the quarter. We mark the RMBS deals to the ABX index and that widened in all of the different classifications there that are applicable relative to the triple-A deals. It is a long and complicated process, substantially it’s mark-to-indices.

If you follow those three indices you’ll get a good idea of where the mark is at any point in time in terms of open to change. So just follow those three indices as probably a good surrogate.

I would note on page 26 of our financial supplement we do a pretty detailed listing of the exposures in credit derivative swap form including the asset class and the average rating so you can get a pretty good sense of what the numbers are correlated with the different indices.

Your next question is from Tejal Sharma – Pilot Rock Capital. Tejal Sharma – Pilot Rock Capital: I was wondering if you could talk about the excess spread in the two Countrywide deals that you’re seeing today. And then also what is your average expectancy on the life of these two deals?

The excess spread if you remember we talked about that last year was in the 2 to 40 range. Now we’re in the 340 to 360 range for both the 05 and 07 deals. Excess spread has gone up significantly so that’s a big help in terms of ultimately paying down losses and internal reimbursing us losses once again you’ve got to look at [inaudible]. In terms of the life of the deal typically these things go out five to seven except that we do have a slowdown in prepayment speed and whether that continues or not will have the ultimate impact on what to further expectancy is. Typically it’s in that five to seven range. Obviously the 05 deal is roughly two plus years, 07 is only one. We think either the maturity in around that third year in terms of experience at that point in time so we’re seeing whether that happens on the 05, but there are the round numbers if I can give you those.

And I would note that on page 28 of the financial supplement we actually do a listing of the top 10 non-investment grade exposures in our portfolio and we give you there the average rating in the net Par as well as our current estimate of the weighted average life remaining which obviously on an asset backed or a mortgaged security is subject to change but you can also see the maturities on any of the other top 10 on there. Tejal Sharma – Pilot Rock Capital: Is it the right way to think about this if we use about five years and say the average excess spread that you see is around 3% on these deals? Are you going to have a 15% subordination built into this and then whatever the cumulative loss assumptions are on the AVS side and maybe it’s 15%, maybe it’s 20%? We can use our own math and then figure out that this is the worst case loss that you guys should see on these deals and then any help that you get on the draws is a one-to-one charge against that.

No, because remember you’re getting the excess spread on the remaining principal balance, you’ve got to look at pool factors to get what it means ultimate to the overall pool non-performance. We try to always quote things specifically on original pool balance. If you’re saying I’m getting 300 plus basis points and the pool factor is 50% you’re really getting 1.5% against the original pool balance.

There are no more questions at this time.

Thank you all for your attention here today. I just want to thank you for your time and if you have any follow up questions on Assured Guaranty our quarterly earnings or want to request information about our upcoming Investor Day, please do not hesitate to contact me at 212-408-6044. Thank you.