Octave Specialty Group, Inc. (OSG) Q4 2007 Earnings Report, Transcript and Summary

Greetings and welcome to the Ambac Financial Group Incorporated, the Fourth Quarter full year of 2007 Earnings Conference Call. (Operator instructions) It is now my pleasure to introduce your host Sean Leonard, Senior Vice President and chief financial officer, thank you Mr. Leonard you may begin.

Welcome to Ambac’s Fourth Quarter conference call. I am Sean Leonard, Chief Financial Officer of Ambac. With me today are Michael Callen, Chairman and Interim CEO, David Wallace, Senior Managing Director responsible for Portfolio Risk Management. Robert Iceman, controller, David Trick our treasurer on investor relations. Our earnings press release quarterly operating supplement and our short slide presentation that summarize the quarter’s results are available on our website. Also note that this caused me to broadcast on the internet. I like to make a statement before we get started. I would like to remind you that during this conference call, we may make statements that would be regarded as forward-looking statements. These statements may relate to among other things, management’s current expectations on future performance, future results and market outlook. You are cautioned not to place undue reliance on these forward looking statements, which speak only at the debate of this presentation as actual results may differ materially on any future results expressed or implied by such forward looking statements due to a variety of factors. Information concerning factors that actually caused results to differ materially on the information we will give you is available in our press release and in our most recent Form 10-K, Form 10-Q, and Form 8-K. You should redo (audio gap) discussion of these factors and other risks. Copies of these documents maybe obtained from the SEC website. I would now like to turn it over the Mike Callen.

I am Mike Callen, I am the recently appointed chairman and interim CEO of Ambec. I have been a board member of Ambec since 1991. When Citigroup, who I served at that time, undertook a public offering of Ambec, which has had acquired earlier. After my introduction Sean and David will take the floor to discuss in some detail our quarterly results and an analysis of the company’s portfolio and then we will move to Q and A for as long as you like. I am advised that there maybe a few questions. Ambac in the industry, clearly are facing trying times in the market place. We have recently been downgraded to double A by one rating agency and the market value of the company has plummeted since the middle of last year. Both of these are external assessments of our business and future and we at Ambac believe that they underestimate our company’s strengths. So in the next five minutes, I am going to begin by reviewing the following memos and then I will comment on the future. A business enterprise, especially one in the financial industry as you know, is normally looked at from the stand point of its capital adequacy, its earnings, liquidity and its asset quality. So it seems appropriate to me to briefly examine Ambac from those perspectives because I believe by each of these measures, Ambac is more than adequately positioned. Ambac has a capital base that is very strong. Our claims paying ability and that is a calculation you are all familiar with is more than $ 14 billion. Given the nature of its business, 90% of Ambac’s operating revenues derive from its embedded book of business. This audience knows how honoring premium becomes earnings over the life of the contracts. So I want to elaborate here what will certainly provide clarification were sought. Liquidity is particularly strong. Our debt service obligations that the homing company totaled less than $ 90 million per annum with a cash position of worth 50 million with potential dividend close of up to more than $200 million without regulatory approval, I might add. Our adequate cushion by any yardstick, so I do not think there is any cause or concern on that account. Now how about answered quality? Many of you have expressed concern over this issue. Some feel that our 1.1 billion reserves, which is incorporated in our quarterly results was a surprise and contrary to assurances expressed by the company in the past. David Wallace is going to cover this issue in detail when I am finished. He will provide you with the same analysis that he provided our board and financial advisers. I do not want to run on here only to force listeners to hear it all again but the short answer is this. We analyzed our potential losses using several methods. Until this quarter, the methodologies in which we had the most confidence showed no losses, this quarter although one methodology in which we had previously relied continued to show no losses. An additional methodology, which is tied to the specific legal structure and radiance on the underlying securities, began to feel losses as the rating agencies accelerated downgrades of the underlying securities. Naturally, we took these results in to account setting our reserve. I am going to leave the subject here with two thoughts, first, with Sean’s statement. Forward-looking statements are subject to many uncertainties but second, the law’s estimates incorporated into Ambac’s stock price debate and lost assumptions supporting various models sighted in the market are very desperate and drastic and personally, I cannot find the logic underlying these assumptions. I admit to be mystified by the wide and persistent dissemination of these projections. There are three transactions, the famous CDO-squared, amounting to 2.4 billion that had been the source of most of the consternation. Our 1.1-billion reserve was almost entirely allocated against those with one other transaction. The reason as David will shortly detail has less to do with the economics of these structures than it does with the legal detail of the contract. It is important for you to understand, however, that our claims paid under these assets in 2007 was zero and for 2008 we would not expect that it would be more than $10 million. So on the fundamental it is very difficult to identify the disconnect between the external and internal perceptions of our strength. Certainly the issue cannot be one of solvency. Now looking at the company’s franchise, looking at our business model in our strategic direction, we believe we can build capital to maintain our triple A under Moody’s and SMP as well as re-acquire it under Fitch. Let me make a brief comment on the events f last week. We said that we intended to raise a billion dollars or more, which based on the information we had at that time, would have secured us a triple A rating from all three agencies. Unfortunately, Moody’s unexpected announcement and the consequent stock price decline (audio gap) how much we would have to raise to maintain a triple A and lead us to conclude that raising capital was not an attractive option at that time. So we are strategically evaluating several (Audio gap)

Our Fourth Quarter as well as our full year, US GAAP financial results were heavily impacted by two large loss adjustments recorded during the Fourth Quarter. First, losses resulted from an estimate of the fair value for our market-to-market adjustment derivative portfolio for the quarter, amounting to a non-cash estimated loss of 5.2 billion pretax, 3.4 billion after tax or 33.14 per diluted share of the 5.2 billion pretax, market-to-market loss on credit derivatives are actually 1.1 billion pretax or 719 million after tax for $7.03 per diluted share certain which represents credit impairment related to certain collaterized that obligation (audio gap) securities transactions. An estimate of credit impairment has been established plus it is management’s expectation that Ambac will have to make claim payments in the future. Secondly, there was a loss provision amounting to 208.5 million relating primarily to home equity line of credit enclosed and second lean transactions within our RNBS portfolio. I will now give you some additional detail on these losses and later David Wallace will discuss how these loss estimates were derived. Our Fourth Quarter maket-to-market adjustment is the result of dramatically lower prices on our credit derivative exposures particularly CDOs of asset back securities comprising sub-prime mortgages and internal rating downgrades to our transactions. Factors such as poor collateral performance and lack of liquidity in the market has contributed to lower pricing. Poor transactions generated the 1.1 billion impairment, including three CDO-squared transactions and one (audio gap) All four transactions are ultimately backed primarily by mezzanine levels of sub-prime residential mortgage bank securities. The 1.1 billion impairment amount represents 38% from the par value of these securities. It is important to remember that these are not paid claims, but estimates of the present value of future claim payments. Market-to-market amounts above and beyond that impairment amount continue to be backed out of our reported operating results and back to continues to believe that the balance of the market-to-market losses taken today are now predicted of future claims and that in the absence of further credit impairment the cumulative marks would be expected to reverse over the remaining life of the insured transactions. Additionally, we have updated our internal ratings, our CDO of ABS transactions all of which can be seen on our recently updated web site disclosures. Next is alternative losses and loss of investment expenses. Loss provisioning amounts to 282.5 million in the quarter, compared to 9.6 million in the Fourth Quarter of 2006. I will provide more details on the loss activity. Total net loss reserves at the December 31, 2007 amounted to 473.1 million, up from 273.8 million at September 30, 2007. Total loss reserves include case basis reserves, which are recorded for ensured exposures and our portfolio that have defaulted and Active Credit Reserves or ACR for probable and assemble losses due to credit deterioration on certain adversely classified insurance transactions. Case reserves of 109.8 million at December 31 are up to 2.7 million from September 30. Primarily, due to net activity and our RNBS portfolio for transactions that are underperforming original expectations. Of the 9.2 million net claims paid during the quarter, 8.1 million related to RNBS transactions. Active credit reserves of 363.4 million at December 31 are up 196.7 million from September 30, driven primarily by unfavorable credit activity within the home equity line of credit and enclosing second lean RNBS portfolio, partially upsetting the RNBS activity that is favorable credit activity within the public finance portfolio. Our below investment grade exposures increased 6.4 billion during the quarter to 11.1 billion, where approximately 2% of our total portfolio. Primarily, due to increases within the RNBS home equity enclosed on second lean and CDO of ABS asset classes. Outside of those asset classes we are pleased with an overall credit quality of our portfolio. It expects difficult credit conditions to persistent to 2008 and will continue to closely monitor our entire portfolio. Next, we will turn to operating income, in this quarter; we recorded a net loss of 3.3 billion or $31.85 per deluded share, compared to net income for deluded share of $1.88 in the Fourth Quarter of 2006. The primary contributor to the loss reported in the current quarters, negative mark-to-market adjustment and our credit derivative portfolio would also include the increase loss provisioning for a direct insured RNBS portfolio. Flying back reports net income in accordance with generally accepted accounting principles or GAAP. Research analysts make certain adjustments to net income, to calculate the reported estimates to arrive at an operating income number that reflects how they view the underlying performance of our business. Therefore, to enhance investors understanding of our financial results, we continue to provide information on the IMs and analysts adjust at a GAAP net income to arrive at their current estimates. Those items are as follows: Net after tax; gains and losses from investment securities and mark-to-arket gains and losses and credit; photo return and non-trading derivative contracts for investment graded (audio gap) exposures and certain other items. In the Fourth Quarter of 2007, and back recorded net after tax losses amounting to 2.6 billion or $25.64 per deluted share that is added back to our GAAP results. This amount is net of the impact of the estimated 719 million credit impairment loss from credit derivatives, worth $7.03 per share that I mentioned earlier. So just to emphasize, we did not back out market-to-market amounting $7.03 for diluted share, which represents our estimate of the present value of estimated claims on the below investment grade CDO of ABS transaction that I mentioned earlier. This quarter’s result compares to Fourth Quarter 2006 when we recorded net after tax gains of 4.3 million or $0.04 per diluted share that were backed out of our GAAP results. On this operating basis, earnings per diluted share were at net loss of $6.21 (audio gap) in the current quarter compared to an operating gain of $1.88 in a comparable prior period. Some analysts also backed out the extra tax effect of accelerated premiums earned on obligations that have been refunded and other accelerated premiums. Totaling the tax accelerated premiums amounted to 18.4 million or $0.17 per diluted share in the Fourth Quarter of 2007, which compares to 18.1 million or $0.17 per diluted share in the Fourth Quarter of 2006. On this basis, we recorded a quarter loss of $6.39 per diluted share as compared to the prior period’s quarter earnings of $1.71. Credit Enhancement Production or CEP – CEP represents first upfront premiums plus the present value of estimated installment premiums on insurance policies and structured credit derivatives issued or assumed in a period. CEP came in at 304.5 million which is down 3% from 314.5 in the Fourth Quarter of 2006. I will now take you through some of the details of our production by sector and how each has been affected by the current market conditions. Public finance – Public Finance CEP was 97.4 million up 16% from the Fourth Quarter of 2006. In the current quarter we benefited from strong writings and healthcare and municipal structured real estate transactions. Overall market issue on December for actually 106 billion was down 17% from prior year of total market penetration, which is the percentage of bonds issue during the period with financial guaranteed insurance was approximately 41% down from 44% in the Fourth Quarter of 06. Overall, the market was characterized by weaker insurance during the Fourth Quarter and in December 2007 penetration rates declined through approximately 30% as several municipal insurance cherished the program insurance as the agencies reported on (audio gap) putting it on the capital adequacy of the financial guarantors. Ambac’s market sure declined to approximately 18% in the Fourth Quarter of ’07 from approximately 23%, primarily it has resolved up concerns about the ongoing rating agency reviews of our capital adequacy. Structure and Finance – Structure and Finance CEP was 125.9 million, which is up 30% from the Fourth Quarter of ’06. Fines and many asset classes could have gone in this consumer related assets were significantly down during the quarter due to the much publicized turmoil in the markets. CEP in the Fourth Quarter was driven by strong writings of commercial asset back transactions including one large transaction and investor owned utilities. Spreads are demonstrably wider in most structured markets and pricing has moved up accordingly. During the quarter, we do not underrate any direct sub-primes or second lean RNBS or CDO transactions. International – International CEP in the Fourth Quarter came in at 81.2 million down 39% from the Fourth Quarter of 2006. While strong ratings across several asset classes and geographies were included in the current quarter incomparable quarter last year including three large UK transactions. Again, this quarter’s production is a reminder of the lengthy nature of this sectors production as 74% of the CEP came from large transactions. Some brief comments on our re-insurance transaction were assured guarantee rate. In conjunction with the previously announced 29 billion re-insurance arrangements with an insured guaranteed rate. En banc exceeded 143.2 million of written premium to the companies during the quarter. The AG Reed transaction which took place in early December 2007 reduced normal earned premiums by 1.3 million in the current quarter. Before year 2008, premiums earned impact after sitting commissions is expected to be approximately 24 million. With the further representing future earnings already collected and the future volume installments stands at 6.3 billion. These deferred earnings will be recognized as earned premium and other credit fees in the future, I would relate to the related to the related exposures. 2.6 billion represents cash collected upfront and are already invested in our conservative investment portfolio of 3.7 billion is installment premiums that we estimate will be paid to us and will over the late transactions. In 2008, we estimate total premium earnings based on contracts and force at December 31, 2007 to be an excess of 700 million. Please refer to page 16 of your operating supplement for schedule at these expected future earnings. The benefit income was 119.3 million; it is up 8% substantially due to growth and a portfolio driven by strong operating cash flows in the financial guarantee business. Our portfolio remains a very high quality portfolio that contains no sub prime mortgage exposures. Improves financial guarantee under writing operating expenses for the Fourth Quarter 2007 amounted to 47 million and is essentially flat compared to Fourth Quarter of ’06. The Fourth Quarter 2007 affected tax rate increase to 36.7% from 28.7% in the Fourth Quarter of ’06 as a result of the large loss recognized during the quarter and market-to-market loss was taken for the first nine months of the year. The impact on the affected tax rate from tax exempt investment securities was reduced significantly to the proportion of tax exempt income versus the loss for the quarter. Two final comments before I turn it over to David Wallace. Ambec recently amended its 400 million credit facility to exclude market-to-market adjustments except for amounts considered to be credit impaired from the determination of minimum network so we have not reached any covenants under this facility. Bankrupt credit facility has never been drawn upon. Our financial guarantee business has never requires collateral posting. However, there are certain collateral pressuring requirements in our financial services businesses that are triggered upon certain downgrades, which is downgraded to double A has no impact on collateral posting. That concludes my prepared remarks on the financial results. David Wallace will now discuss our methodology for establishing his credit impairment loss and loss for visioning for the quarter. After David speaks, we will open it up for questions.

I would like to focus on the key question, how we computed Ambec slightly 1.1 billion CDO impairment primarily books in respect to Ambec’s CDO squared transactions and what has changed from prior periods. To cut to the chase, different law’s estimates can arise from different methodologies and different assumptions within the same methodology and what I will be discussing in some detail is an evolution of our analytic focus as we believe events have dictated. Although the foreign depiction is somewhat (audio gap) perhaps suggesting a greater distinction that maybe entirely accurate, let us review some of these methodologies in turn, which are helpful cast some insight on to the central question proposed earlier. So the first approach is the CEO model approach. This approach consists of using assimilation model based on key inputs of ratings as proxies for probability of default. Assumptions on severity are loss given default and finally assumptions about default timing correlation. The model is run and ensured obligation ratings, unexpected losses are produced for the transaction’s specific average life. And it is these expected losses which might form the suggested impairment number. So what are the possible issues and reasons, the variants within this methodology? Answer, essentially different assumptions on the key interest, let us look at these. Ratings, are the clients for rating inputs up to date and truly representative of collateral default probability. Correlation and severity, little doubt here that both have increased stress over the last few months. But how much and to which deals? Should transactions with different vintage components utilize different assumptions et cetera? The point is that there is a lot of possible variants and a hose of assumptions. Assumptions can both burry true time and differences exist at the same time. Reasonable people can differ, thus it is easy to understand differences in assumptions can produce different laws estimates, even with in the same apparent methodology. That is considered a market value approach. Essentially, use market value as a proxy for anticipated losses and there for impairment estimates. Essentially, we use market value as a proxy for anticipated losses and therefore, impairment estimates, essentially a market-to- market to market approach. So what are the possible reasons or issues for variant of loss estimates within this methodology. Perhaps more limited room for disagreement than for the CDO model approach that even this is not clear cut, it looks awful timing of estimation is a big factor. For example some of the Abac’s industries fall around 30% from mid-October to mid-November. Secondly, there is no real market for any of the pretty Esoteric ensured obligations that we are talking about here. So, what is the appropriate basis risk between an observable market price, EG at Abac’s index and the insured obligation and are there any intervening factors which could mean that this basis risk may change. So in summary, while going to the apparent transparency of the market-to-market approach, one might not expect the wide variants of opinion, reality is perhaps somewhat different. Some variants are definitely feasible both through time and at the same time. Let us turn to referred, again somewhat stylized approach for estimating losses and constituent impairment. This is the cumulative loss approach. This approach is a much more fundamental cash flow based approach. (audio gap).

Please stand by, the conference will re-begin momentarily. There is some interruption in the line there. I will just wind back just for at least a second. So, we are discussing the cumulative loss approach and trying to answer the question what are the possible issues and reasons for variants of loss estimates within this methodology. Now as I have said, there are two main possible areas – one, to deal with information analytic requirements and another in respect of assumptions. As regards to information, clearly one needs a great deal of detailed knowledge of precise Q6 and inner CDO constituents and the ability to handle all these data thousands of Q6. Secondly, one might have different views on some of the micro-level assumptions for example prepayment speeds, lost curves and severities, et cetera. In summary and aside from the informational and data handling points, there are gains and several reasons with differences and assumptions and therefore variations and potential loss estimates both through time and at the same time. Again in a somewhat stylized way, now I could turn to the final approach, which in the event is the one that has been used in estimate in the lightly losses and impediment announced. I am going to call this a structural or collateral survival approach and this incorporates rating information along with highly specific transaction structure based opinions. The approach consists of an inner CDO by inner CDO analysis assessing each inner CDO’s potential contribution to the interest and ultimate principle of the relevant CDO-squared transaction. The approach is essentially a marriage of ratings and legal structure, focusing on the way in which they interact and ultimately affect the insured obligation. The assessment comprises a review of underlying RNBS vintage in ratings the calculation of performer over collateralization tests. Using ratings, the hair cut, the RNBS collateral. The resultant performer can be compared against the attachment point of the relevant inner CDO and a view taken of the ultimate survivability of the relevant inner CDO from the perspective of the Alpha insured CDO. Additionally, and crucially, it is necessary to evaluate the legal documentation of the different inner CDOs in order to assess certain features which will affect the certainty or otherwise the cash flow to the insured CDO. Amongst the important distinguishing features of the individual in the CDOs are whether they incorporate payment in kind divisions and similarly variations in the event of default and liquidation provisions. Finally, they expand to each rating agency haircuts are included in these covenant tests is also very important. So what are the other possible issues and reasons for variants of lost estimates within this methodology? I would say that their ends is definitely possible over the outcomes of somewhat bounded and are transparent. The most likely source of variants may be views on the incidents of future collateral rate in changes. Note here, that it somewhat irrelevant as to whether these collateral ratings prove to be accurate. The approach focuses upon the notion that the ensured transactions can be directly impacted by rating agency views of the collateral per se. Again, the effective agency views upon the collateral can be dominant and more or less immediate, in respect to its effect, irrespective of the ultimate accuracy of those collateral views. Having talked about the ways in which the CDO’s great loss estimates may be computed, I would like to make a few comments about the respective results. Leading aside the market value approach our analysis could use as the result that it is the latter structurak approach which produces the highest estimate of loss on assumptions. The approach also provides the most transparent incredible framework given the combination of the cons on this environment and our understanding of the transactions themselves. I have stated previously, it is this methodology which forms the basis for the impairment motive. To illustrate this further, let us briefly discuss some comparative results and point out what we see as the main flaws in some of the discarded methodologies. The CDO model approach. Aside from the possible tardiness or inadequacy of ratings as indicators of the probability of default, no criticism is intended here. The model approach has the deficiency of not being able to capture the legal structural mechanics of the transaction as discussed earlier. As stated, the reason is, that at a certain point, the dominant driver becomes the effect of a degraded ratings, in combination with the legal structure as against the model implied increase in default probability driven by collateral downgrade itself. Essentially, Collateral ratings may give off falsely optimistic signals given the legal structure. The model C and assigned cash flow to assets are structurally blocked. Fundamentally, past the certain point of rate integration, structure likely triumphs over collateral default probabilities as implied by ratings. What about the cumulative loss approach? It is really the same story as before, here, structure triumphs over cash flow, potential value in the underlying RNBS, which cues at level drill down analysis may assert does exist given the vintage distributions et cetera. Simply does not get to be realized by the insured CDO because of the impact of the intervening ratings and structural features. Again cash flows are blocked. So to summarize this discussion and this will hopefully declare from the above, what has changed and therefore lead to this deterioration in laws estimates that we have announced. Essentially two things in combination. Personally, an exceedingly rapid and substantial set of recognitions with downgrades, starting towards the middle of October and continuing thereafter. Secondly, resulting from the above an evolution in our analytic focus from model or drilled down Metanalysis to an examination, which has completed that at the certain switch point legal and structural mechanics will likely triumph for the model expectations and the fundamental MBS cash f low analysis. Lastly, on the CDO’s grand transactions, a couple of brief comments on the timing of potential claims as regards to the CDO squared deals. Into the three transactions and that is not likely to experience material claims over the next year or so, as these transactions are very unlikely to force principal claims for some time. The third transaction which differs in structure, does commit the possibility of earlier principle payments on the pay as you go back once the subordination has been eroded, however our estimate in respect to this third transaction is that no interest or principal claims are likely over the next year or so and possibly up to 2010. I like to spend some time on Ambac’s figures grand transactions or close with a few comments on the MBS book. Over the quarter, we saw some continued deterioration particularly as others have noted and select Hillock and closed in second transactions, these product types comprised of the last bulk, over 90% in fact of the reserving activity discussed. The key question is asking when loss rates will peak or burn out and to what extent the present slowdown in voluntary prepayment rates is determined feature of the MBS landscape. Clearly, the combination of high default rate and low prepayments tends to be universal. Although, I might expect some help in the near future from increased excess spread driven from low liability costs given the recent announcements. Taking the MBS book as a whole, it appears to be withstanding the current environment relatively well. Although, that does not seem to be a significant letter in this very adverse environment. Finally, in a sector and vintage where stress is particularly evident a note that Ambac has a large exposure to three 2007 bank Hillock transactions, comprising around 3.7 billion in total or about 30% of the overall Hillock portfolio. These transactions are currently performing according through our original expectations and no claims of presently foreseen on them. With that I will hand back to Sean.

Now we would like to open it up for questions.

We will now be conducting a question and answer session. (Operator instructions) Our first question comes from Steve Stelmach with FBR Capital Markets, please state your question.

I just want to circle back a little quickly on your strategic alternatives. You mentioned a number of parties and I just want to know, what those alternative are at this point. You have taken an equity raise of the table, presumably it often takes and acquisition of the table given the devaluation of the stock price. Could you just give us an idea of what those alternatives are? And then, in terms of the parties you are dealing with, are any regulators or government agencies involved in these discussions at all?

One can anticipate this question and I regret to have to say that the degree of detail I want to go into, is constrained significantly constrained. Both because of the parties we maybe talking to but let me, and I am not going to take anything off the table here, but I will say that we have been in close communication with regulators. They are very familiar with what we are thinking, and we are also talking to very credible parties, pools of capital and so forth. But to go beyond that it at this point would be doing it to service to everybody. So I am afraid I have to stop at that point.

Are regulars helping to drive the process or they are just simply from a bystander at this point?

I would call them at process of active oversight, our main job with the regulators have been to keep them completely informed on the fundamentals on what our ideas are. And I have been very pleased with the amount of support coming from both New York and Wisconsin.

Just lastly, you mentioned the collateral posting requirements and that the downgrade by this does not impact those 12 posted requirements. I believe they get triggered at single lane, should that eventually come to past, what is that the dollar non collateral that you had to post?

Our collateral posting requirements are driven off of Moody’s and SMP ratings. So that why the statement was made and Moody’s and SMP at the double A level to all the way down to double A minus, there is posting requirements on our Swaps business, interest rates swaps business is not significant it is less than 200 million and then they were these some potential posting requirements on some of the total return that we have entered into and again down into the double A minus level, that is three hundred million. There is a little impact on the investment agreement portfolio for contracts that, we currently have to post under some of our contracts even at the triple A level. So all the way down to the double A minus level, there will be little additional posting. That number is approximately a hundred million dollars. Then across the board for interest swaps and total return swaps, the numbers do grow as thresholds declined under our agreements with our counterparties. Again though, that business the collateral requirements all the way down to the investment grade levels are not significant, they go up a couple of hundred million a piece. What does become more significant below the double A minus level is the posting requirements starting at the A plus level for our investment agreement business and that would require us to post high quality collateral back to those counterparties under those agreements and they could go anywhere up currently which is what we are posting now is about 2.1 billion at the triple A level, up to 5 billion and then up to 7. So, effectively what we would need to do is obtain the appropriate collateral to post under those contracts given that event where they will occur.

Okay, do you feel that you can accomplish that? Will the SMP stay to 5 to 7 billion number?

Well one, we do not anticipate in being downgraded below the A minus level, the capital adequacy test, even under a Fitch's methodology had the double A flat level, would leave us with the capital adequacy based on the model runs that they indicated which are estimate of the model runs, where they indicated we had a collateral shortfall of about a billion dollars and at the double A level, we would have a capital surplus of about $2 billion. So, at double A levels, our capital adequacy is quite sound and we would obviously need to work through that and need to plan if that were to occur.

Our next question comes from Gary Ransom with Fox Pitt Kelton, please state your question. Gary Ransom – Fox-Pitt Kelton: I wondered if you could talk a little bit more about the flow of business particularly as all these news came through in December but it does seem like issuance from the municipalities was lower but can you talk at all about how this flowed perhaps into January and if you are able, what the Fitch’s downgrade might, or how that might affect the flow of business going forward and maybe you can just talk about inquiries or something like that that might be a proxy for activity.

Sure, we did see decline, as I mentioned in my remarks, we saw declining activity after the rating agencies had what I call feared the financial guarantors so we did see declining activity in December. We did obviously closed some transactions and had a fairly robust quarter but we did see it decline in the month of December. That has further declined in January and it is too soon to tell how the Fitch’s downgrade will impact but my expectation would be is that we would see further declines into the month of January and February as some of the uncertainty becomes more clear as to our plans and our strategies. Gary Ransom – Fox-Pitt Kelton: Just a followup on the municipal side, you have made the comment that there was some benefit in the credit portfolio that offset some of the RNBS’s reserving. Was there any particular area there and I guess I am also asking about the Katrina reserves, whether whatever was left there might have been released.

Yes, very little on the Katrina, about a million and a half, from Katrina items, largely due to principle declines of some of the exposures there. We did have one lease transaction that we did pay a modest claim during the quarter of less than a million dollars and with the closure of that particular policy, we did reverse some reserves for that, but all in the amounts are less than 10 million dollars.

Our next question comes from Ken Zuckerberg with Fontana, please state your question.

Yes, good morning, two for Michael and two for Sean. Sean on a housekeeping note, could you remind us what if any holding company dead is maturing, during 2008. Secondly, if you were able to comment on what you are seeing in commercial, mortgage bank of securities trends, that would be great and I will ask Michael afterwards.

The 2008 question for principle mature is easy, we do have a piece of that maturing in 2011 and that is about 143 million. Most of our debt is a longer term debt, including some debt that comes during 2103.

Okay, so the nearest trigger date is dated, 2011, 140 million, which is far away and not that much.

That is correct.

And CNBS book any trends that you can update us on just in terms of underlying delinquency or you know.

We have little exposure to CNBS, so that is not an exposure that we have in our portfolio.

Great, thanks for clarifying. Michael two questions and I appreciate what you can and cannot say. First, can you help us better understand the somewhat swift departure of Bob Genator (ph) and that seemingly has caused a bit of a communication right down with the agencies and I guess related to that in the event that your strategy going forward is a double A strategy. Can you help us understand the how should we think about business mix and areas where you want to put the capital to work?

First, a lot of people ask about Bob, so let me give an intermediate long answer on that, when the stock rise started to decline in the middle of last year, the board obviously became concerned at a certain stage. We hired our own financial adviser, Credit Swiss and our own legal council, which in today’s world is an appropriate and prudent step and they were reporting directly to the board and the board got somewhat more on the hair of the management and you are going to have some strings but Bob and his team handled that very well, but let us not assume that there was no conflict or tension, there were some. Bob at the same time, of course, was going around to see all our investors, working his heart and soul out to convince them of what we are telling you now. We have been saying and we will continue to say this is a great franchise, etc. We could go Saturday, when we were looking at immediate plans; the board decided that for a variety for reasons we could go in to if you wish. We thought the equity and equity-linked issue was the best way to go, rating agencies has something to do with that condition of the market as we are deliberating and had something to do with it and Bob felt he had to descent on that decision, very strongly in favor of a capital mode issue, at that point. Felt so strongly and I think was committed to our existing investors to a point that he just felt he had to step down. There was no push from this board. He was a treasured asset of this company, I have recently as yesterday consulted him and almost on a daily basis to tap into the depth of his knowledge. He just felt that he was compromised in terms of what he had represented to his investors, relative to where the board came out at a particular time. It is regrettable, but I will finish this by saying there is absolutely nothing that Bob knew about that or what would have forced him to go out, to leave the place. Now, on strategy our decision in this place that this is a Triple A strategy that we are going to pursue, there some events over, which we do not have control in the very near term. We have had to face the Fitch’s pricing ad when I go back for one moment here. We have the deadline that Fitch had laid out saying if you need a billion by February 1st. We were working towards that deadline that was the pressure point, when the markets went the way they did, we set aside that deadline, decided that we could not be beholden to it to the extent of doing what an equity issue would have done, so it was all in that context. Now, that we informed Fitch that we would meet the deadline and they did what they did, but the plans that we are putting in place now are plans that have double A into our future and my lawyers have got poisoned darts aimed at me as I speak, so I have to be in renascent in saying more, but we are going to keep all of you informed as we possible can as we proceed here with deliberate speed. Ken I am sorry that is all I can say.

Our next question comes from Tamara Kravec, with Banc of America, please state your question. Tamara Kravec – Banc of America: Just a little bit more elaboration on the rating agencies, with Moody’s and SMP in particular and how those conversations are going and whether they seem to have any such time restrictions, as Fitch. How much pressure are you feeling and how much flexibility do you have in dealing with them now, that they have placed you on review for possible downgrade.

I think we have had a good dialogue along the way, with the rating agencies. Obviously, we wanted to get to them as quickly as possible and sit down with our plans and we will be doing that. I am hopeful they will be receptive to some of our ideas and we can work with them and work through our ideas to have, I think a successful conclusion for a lot of our stake holders, so we are going to work through that very diligently, very actively and very quickly. I think they will have a vested interest to do the same and in any time that we had a request or they have a request. We both have been very quick to act to them, so I would not expect that to continue.

Uncharacteristically, somebody who actually listens to what I have said, wrote me a quick note and said that I had used the term our future is Double A, what I meant to say, to clarify is that our future is Triple A and that is for everyone’s benefit. By the way, the radiant agencies, on your point, and our conversations with them, I do not want to leave any impressions that they have been completely constructive in the communications back and forth have been useful. I think on both sides that are continuing and we bring them completely up-to-date on what we are thinking and so there would not be any gaps here. Tamara Kravec – Banc of America: Okay, is there any chance that Moody’s is going to release the actual amount of the shortfall? They have not given any numbers and according to SNP you do not really have much of a shortfall at all, so I guess I am thinking that most of your correct me if I am wrong, but most of your strategic alternatives are still seeming addressing Fitch and I will be curious in thoughts as to how important is that rating really to your overall Triple A strategy.

Just a couple of points of clarification, Moody’s in their release mentioned that these distress out in the market, as an uncertainty point, but they were very clear to mention that the recent events, just reduced the Triple A capital cushions, so it did not eliminate it, so we can still maintain Triple A metrics at this point in time, we used the best of our knowledge onto the Moody’s models. Now, SMP recently came out with the report, where they have opt the first lean sub-prime percentages and that created an approximate $400 million shortfall under their model, what we will be discussing with them, capital modeling and obviously our plans. Fitch has not changed any of the numbers to the best among my knowledge and that remains at that billion dollar number.

Our next question comes from Jeff Dunn with KBW, please state your question. Geoffrey Dunn – KBW: Sean I want to tap your previous accounting experience, in the question for holding the company liquidity is obviously circulating around whether not DOI would step in and prevent the normal extractions that you would be doing under the statutory law. In your experience is there any kind of president for the DOI stepping in, blocking a dividend that does not need approval. Is there any risk that you can see on that front?

Even better with my past experience, we have discussions directly with Wisconsin regulator, which would be the regulator that is pertinent to your question and the matters included in your question. We had direct discussions with them and our solvency; we meet all solvency standards with robustness. Even after taking some of the impairment losses through our statutory returns, we still have an over $3 billion statutory surplus. That happens to be delimiting, when you go to the dividend calculations, 10% of the surplus is the delimiting factor, so we have over 300 million of dividend capacities there. Not only do we have 3 billion of statutory surplus, but under the accounting rules, for Wisconsin and other states under statutory accounting rules. We also have about a $3.1 billion reserve set up against our portfolio, so they call it the contingency reserve, so that effectively reduces the surplus that is available for dividend, so just to be clear on that, if there was not a contingency reserve and we report this on the last feed of our supplement, that number would be well in access of $ 6 billion. From solvency perspective, when regulators look at those types of numbers and even after the dramatic year, that we have this year with a large impairment charge, running through our statutory numbers. We are still relatively, on a flat basis from a net income on statutory, so from a solvency perspective and there are discussions with them, we feel confident about the dividend abilities out of the insurance company. Geoffrey Dunn – KBW: Okay, so you have currently, roughly, 50 million up there and it looks like you have a very high probability of getting 300 more.

The way the dividend rules work is you can increase your dividend level by 14.9%, so just under 15% off of the quarter a year ago. Without prior consent and there are certain consent requirements and then, which is called an extra ordinary dividend, which will obviously require a discussion with Wisconsin. Just on the dividend levels, if were to assume that we would bring them up by 14.9%, that would be over 200 million of dividends, for 2008, which would be foreign excess of the 90 million of interest on our debt and approximately 30 million of share holder dividends. Geoffrey Dunn – KBW: Okay, last question, in terms of the investment agreements, or the swaps business but more on investment agreements. If you are ever in a position to post collateral, what entity would be needed to post collateral would be the holding company or would it be the investment agreement business or some other support?

It would be the investment agreement business Jeff and then, if there were to be any shortfall, obviously then, that would fall under the insurance company, but the investment agreement business, that we provide the asset breakdown and quality breakdown and supplement pages, but there is a significant asset portfolio there and that will be used for either swap or liquidated to a certain extent to provide the ability to post that collateral. Geoffrey Dunn – KBW: Okay, so but so importantly no recourse or direct bearing on the holding company?

No.

Our next question comes from Darren Arito with Deutsche Bank, please state you question. Darren Arito – Deutsche Bank: Can you talk about how you are planning to balance trying to grow here or could it be difficult, but trying to grow versus allowing the business to advertise and freeing up capital.

The word that has been banished from our holes is the word run-off. Nobody here has given that serious consideration. First of all, there are many, many uncertainties in that type of scenario and any kind of analysis is somewhat static, because if you really get into that kind of a thing then, you have implications from the raiders and from the regulators that were not even seriously looking after, just too many very viable alternatives in front of us, so we have in the name of good governance, I guess somewhere we have done well, if we were to run off, where would it all end up, but it is not anything in my head. I do not think any of this table is very much aware with it. It is just not an option we are looking at, because nobody here believes with all the numbers that we have been talking about this morning and the level of solvency that we have and the attitude regulators. You put that all together, why would some one think about amortization. The one number I think I can give you that you are probably aware of is that just come in the work in the morning, we generate internal capital of something in the neighborhood of a billion dollars in the absence of riding new business. So, there is a significant ability to generate capital internally, but it is a growing concern that is kind of a notional number. It is not something we really use for operating presumptions going forward. Darren Arito – Deutsche Bank: Thank you and just turning to the CDO, David you provided a very detailed explanation here on the changes and is it further assumed in your approach, cause change here for the mezzanine, but this approach is also been applied to the high grade CDOs.

No it is not, the high grade CDOs are different and clearly in those deals, with the exception of the CDO buckets in the collateral pools. We do not have the kind of structure impediments that I talked about, so no, the analysis that I talked through is really pertinent to the CDO-squared deals and not in vast majority of the high grade deals. Darren Arito – Deutsche Bank: Can you just talk about what has been different from your assumptions on the high grade CDOs, three months ago versus today, the ratings have been changed, quite meaningfully.

If you get back to what the CDO models are about, the first input is ratings. What we have done and I think I described this in the prior call, is to effectively hair cut ratings, where they have not been moved, so in a previous incarnation, if the ratings have not been cut, we downgraded rating by four notches or six notches for Triple B. We have progressively ramped up the downgrading, where the cups have not been made. In particular, we focused on the mezzanine buckets, because clearly, that is where we discussed at length. There is a fair amount with stress, so what we did was to model out few deals, which did not have mezzanine deals in them and look at the rating degradation of mezzanine classes of those fields. And, if you do that, on realistic assumptions, I stress assumptions, declarations, virtues and so forth. You can come up with good practices of what the appropriate downgrade might be, in the absence of operating agency move. For example, our basic metric is that if you have a, single A rated piece of mezzanine collateral in the CDO bucket that has not yet being re-rated. We would incorporate that into the analysis at a CAA2-type level. We really, substantially have the projected downgrades if you will, within the analysis. We have also spent a fair amount of time on the correlation and on severity numbers. You may recall, at underwriting, I think we used a correlation at 90%. We have opted that significantly and we have chosen to take quite a lot of care into how we differentiate between deals. So, what we have actually done is to go into all the high great deals, split out the vintage distribution of those deals, and use the vintage distribution as a guide to the extent to which we should opt the correlation, assumptions, and also increase the severity assumptions. So, for example, where we believe we got a highly correlated goal, the vintage dispersion is second half of ’05 and almost predominantly, we have certainly doubled sometimes more, and the type of correlation numbers that we have input and equally, we have cut the severity numbers. So, what we tried to do in summary, is to look at what is happening in the market and be thoughtful especially about the mezzanine buckets, and distinguish between transactions in respect of certain key assumptions using vintage distribution as a key moniker in taking those decisions.

Our next question comes from Heather Hunt – Citigroup Heather Hunt – Citigroup: I know that you are not counting on capital being organically freed up as source of capital to get you back to triple A. But could you just walk us through the amount of capital that you can generate organically and that, hopefully, will supplement what you can raise in some kind of a transaction?

Heather, you are using the words (inaudible) and how are you. You are using the word “organically” to mean internally. Heather Hunt – Citigroup: Yes, that is correct. Through the maturity of bonds that you rapped, your investment incomes through operating income.

Yes I would be happy to do that

Yes. Generally, Heather, we estimate and again, it is dependent upon how transactions would amortize the level of “refundings” and other things but generally, we believe that capital generation over a year’s time, considering that, and no further downgrades or upgrades in the portfolio effectively about a billion dollars per annum. Heather Hunt – Citigroup: Is that from runoff alone and not including investment income or does that also include investment income?

That would include investment income because the dynamics I can bore you with some details, but the dynamics are such that I do. If you just look at the runoff of the portfolio and how that would affect modeled loss. It is coincidental but those numbers, at least on some analysis that we have done internally, we think that those numbers happen to be about the same, about a billion dollars. But, what happens is since our claims-paying resources include our statutory capital, and includes our honoring premium reserve at a present value of installment number, our premium earnings are effectively built into our claims-paying reserves already. So, as we earn income there, that does not add to our claims-paying resources. It actually attracts from a tax perspective. That is where the investment income overtakes that and does provide some organic levels outside at the amortization of the portfolio from a loss modeling perspective. Heather Hunt – Citigroup: In your conversations with the rating agencies, does the anticipation of this freeing up of capital over time provide some sort of cushion or help in their expectation of the capital, maybe of Ambac meeting your capital requirements?

I think it does help clearly. I think the discussions with the rating agencies have been also a discussions relating to franchise, franchise value, generation of business, and other “qualitated” matters that we have talked as well. But, there is no question that, as portfolio and the capital metrics improve, I would think that would be helpful, particularly in classes where the consumer asset classes where the portfolio is worth to decline, I would say that is a good thing. I think we saw and you folks can look on our website where we gave all the details of our consumer asset portfolio, including the mortgage portfolio. You saw some pretty sizable runoff in that portfolio on the mortgage backside, which I think is a little bit over 3 billion, and then the overall portfolio consumer direct insurance-like policies came down I think at Circuit Six for the quarter. Our CDO portfolio, coming mostly from CLOs and international business, but that came down 6 billion as well in the Fourth Quarter. So, those dynamics certainly should help bring down some uncertainty and should obviously improve capital levels. Heather Hunt – Citigroup: Thank you very much.

Our next question comes from Michael Grasher with Piper Jaffray, please take your question. Michael Grasher – Piper Jaffray: I just wanted to follow up with David if I could. The large exposure on the Hillock, I think you mentioned 3.7 billion in total. Can you talk about some of the underlying assumptions to that, and have a follow up question.

Sure. What we have done is same on the website. What we have very recently done, I think it was last week in anticipation of this call in just as a general catastrophe being in any case, is to look at the remix of the deal and assess where we think they are going and right now, and every with a fax machine can take a little closer. We do believe that the transactions project out extremely well. Delinquency buckets all use the word minimal losses, accumulated losses are zero in some cases and the trouble is performing really as we predicted it would. So, where are not seeing any stress either in terms of loss or as a foreigner loss and delinquencies in those transactions. I mentioned it specifically because clearly, Hillock are under some pressure and ’07 ’06 Hillock in particular. In respect of these deals, these are bank Hillock deals. These are iBank shelf deals. They have different types of characteristics in term of the FICO client completely there, sort of the 730, 740, 750 type FICO deals. The other feature of the deals is that, and I think I talked about this previously, is that adding section, these deals are half negative OC. The notion here is that the OC bills through excess spread and then you have been since fully protected. It is actually taking the bet that there are no early on mini scale early delinquencies and losses and therefore the excess spread will build that OC. The obvious evidence of that I have mentioned that nothing really is happening on losses, nothing is really happening in delinquencies and so, these transactions obviously are building and are not now in a negative OC petition and I guess, we will be out there targeting the next month or so. So, we are taking a real hard look at them. Clearly, the big exposures, their ‘07 exposures, they are different in relation to the nature of the collateral and happily, they are performing differently also. Michael Grasher – Piper Jaffray: Okay, thank you that. That is helpful. On the 1.1 billion of credit impairment anticipated, I think you mentioned that two of the three CDO-squared where involved with that and then there was another transaction or the CDO that also, was that the McKinley transactions that is now triple B?

No. We do not reserve investigatory transactions. The transactions I was referring to all the CES grand deals the point that I was trying to make is that structurally, the two 500 million deals although their “abouts” are different from the larger $1.4 billion deal. So, specifically, I think I was talking about them in relation to the timing of potential principle claims and the role essentially, is on the two 500 million deals is that principal payments can not be accelerated and are only payable on the earlier of legal final which is way out into the wide Luanda or liquidation, essentially meaning there is no collateral left. The later is a very, very remote possibility over the near or medium term and therefore, we can feel pretty certain that there would not be principal payments due on those two transactions because of the structure. The other deal, the $1.4 billion deal is different and the rules here are as follows, we have a level of subordination, I think it is 30% through our website and effectively, what happens is that as the inner CDOs are delivered to the outer CDOs. In effect, the inners have bought protection from the outer CEOs. That erodes the subordination. I think it 15 deals can be delivered and on the 16th deal, that for the first time would kick over the subordination that is in the deal. And if you get those 15 deals, then the one additional deal will generate a principle payment at that time and then each successive delivery pass that 16th deal will also generate a principal payment at that time. What we have done therefore is take a look at the inner CDOs and figured to the best of knowledge and judgment as to when these deliveries to the outer CDO will be made and consequently, when we can see principal payments. As regards, interest payment, some are complicated but essentially, what we believe is that we want to face interest payments until around the same sort of time as we anticipate the first principal payment and that is on 2009, maybe even 2010. My discussion was in relation to the CDO-squared transactions, and I was really distinguishing the two types of deals that we have in that portfolio. Michael Grasher – Piper Jaffray: Thank you for clarifying that. I wanted to go back to the McKinley transaction. Can you talk to us about the legal structures there, the protections that are in place on that transaction?

Sure. The McKinley which I think on the website, we erased, and triple-B-minus, that obviously had a fair amount of attention there is, as it is widely known on the defensive default in that deal, what that means is that certain multiple actions take place. We are obviously the controlling internet transaction. As deals degrade, the terms of the deals progressively change. And so, effectively, what you got is that this transaction is now sequential. Clearly, it would static. There would not be any trading allowed in the transaction and effectively, it is in a kind of a runoff mode from this point going forward.

Our next question comes from Andrew Wessel with J.P. Morgan Chase. Please state your question. Andrew Wessel – J.P. Morgan Chase: I guess my question circle around more of the potential losses and losses going forward and then kind of tying that into customer response and customer demand for your product but to start with, I guess looking back to September 30, you had about 18 billion closed and second in Hillock rapped. What is that balance standard today, because I know the season has been pretty rabid.

The Hillock balance today for the website is around just on the 12 billion around 11.9 billion to close and the second portfolio today for the website is about 5.3. Andrew Wessel – J.P. Morgan Chase: Looking at reserves, a lot of these are going to be primarily on Hillock. What percentage of that total closed down on Hillock portfolio together is ’06 ‘07 vintage.

Again, it is all laid out on the website but I will give you the numbers in respect to Hillock, the 06 NetPal number is 2.9, the 07 is 4.2 obviously, within that 4.2 are two very large deals which we spend a bit of time talking about. Andrew Wessel – J.P. Morgan: Yes, of course. It is really this whole process, there has been statements made that thee is market-to-market losses on CDOs. We feel confident about the performance of our second leads in Hillocks and now, we have this quarter obviously. A huge market-to-market in what the CDOs, particularly the large impairment due to a change in, which spent the dollar do you choose to believe in more at this point. With that level of kind of whipsaw between, we would expect to reverse that entire amount to market to loss out over the term of the agreements versus now actually recognizing 1.1 billion impairment this quarter. How did customers responded to this, investors, it is obvious but your customers coming to you looking at your product is being either triple-A or that way or whatever it is going to be. In the longer term what has been their response to you and based on what you said on the past and what is happening to that.

Yes, I think the market is certainly on the impairment side, that certainly disappoints and there is no question about that. We have discussed that a number of parties, obviously. I think we have to put it a little bit in context with the environment that run is a pretty dramatic one. We do have these three transactions that are obviously carrying quite a bit of impairment. I think folks have talked to us and obviously, we sat around the table many times as well. I thought about how would we have done things differently? Looking back in time, I think there is certainly a complexity factor amongst those three transactions that is a difficult one to talk with customers and others about. I think that we obviously analyzed the portfolio very thoroughly and we think certainly, the rating agencies have also done that. So, we feel like we have done an extremely thorough job with coming up with what we come up with, while we do have some impairment and that has been a confidence type issue. We were confident in what we have done.

Maybe, I just have a one thing. I think we are spending a lot of times, quite understandably and reasonably and we have expressed our disappointment on them. But we are talking about four deals. So, I think one of the things that is important to grasp here is that we do not believe that there is any indicated, if you will, of systemic failure. What we got here is these four deals. Clearly, we wish we have not done them but it is four deals and we all know that the environment is phenomenally stressed. That was not systemic. We believe in our book of business and consultant circle. Andrew Wessel – J.P. Morgan: Sure, and from the fifth income investment relation side, it has not been a positive response from the customers based on that kind of explanation of the problem or is it has been, have you seen a lot of new testaments that are going to hold back from customers looking to rap deals now in the midst of this current where like you say, the guarantee is even more important. There has not been a pullback and their willingness to use you versus a newly capitalized competitor. A competitor that has taken less, I guess a meeting in terms of the rating agencies or just in terms of motion.

Let me make a quick comment. As a one weak veteran in chair I am in, it is interesting that where you sit sort of determines where you stand. The customers have been very understanding and I have had probably a very large number of discussions including investors. I will say this to you that this is how I would summarize my experience after that time. People come and there is fear because with uncertainty, comes fear and they hear all kinds of things from all sorts of things from all sorts of sources and so, and into that environment, we stepped and that is why I wanted David here today to explain something that is not easy, the thing I have ever explain that is we have been telling you one thing that I would put up a reserve at one point. One, that is where we are working at because into the environment where people are coming to me and saying thanks for call, Callen, is it true you abused children and beat your wife and Ambac is about to walk on a cliff. We heard from this source, that source, and another source. So, in this environment, there are stories about that are bizarre in many respects and responding to them is necessary I have no idea where they come from. But I have not found one yet that has any validity. It is an emotional issue, our customers had been very supportive but if I told you that our product is unblemished at this stage, it just would not be correct. It has been blemished of course and that is what we are really addressing here. We are addressing in the next couple of week I said.

Our next question comes from Arun Kumar with J.P. Morgan. Please state your question. Arun Kumar – J.P. Morgan : Most of my questions have an answer. I just want clarity on two of them. One is in response to your question about the holding company dividend, do you mentioned that you expect to take about $200 million from the Wisconsin Operation to the holding company. Could you elaborate the timing of that when you actually expect to be allow to take those proceeds out and the second questions is in relation to the asset management unit and the collateral placement. You mentioned that the holding company that there are no records to the holding company for the placement of the collateral. Could you comment of the operating company even in anyway potentially in hope for the collateral posting or is all the collateral posting going to be done or to be asked in Management Company itself? Thank you.

Sure, I answered the dividend question quickly. We anticipate dividends in January, May, July and October relating to cash flow from the operating company Ambac Assurance Corp. and Wisconsin company opted the apparent company and in equal increments on a quarterly basis.

Regarding the collateral posting Ambac Assurance has guaranteed investment contracts of that business. Those contracts are backed by assets. You can see the breakout and quality of the assets, disclosed our operating supplement. That company would be required to post collateral under any of the guaranteed investment contracts that would be trigger or currently have collateral pledge requirements or it would be triggered base upon some type of downgrade trigger. Arun Kumar – J.P. Morgan:

Yes by the months that I have described. Arun Kumar – J.P. Morgan: Regarding the collateral could in anyway you just try that required collateral posting back to the institution that gave you the money to manage the GEC. Do you have to post collateral or could you just say, it has been down rated neither the assets that supposed to GEC and we will give their assets to you?

It is indicated in post or sub double-A-minus, we get to a category and certainly where we have to post a lot of collateral but within the investment agreement business existing portfolios and assets that are eligible proposing under those contracts. Relatively, it increment that collateral we have to acquire even to the swaps or through a sale of assets or perhaps sales of assets between the insurance company and the gift business and even inter-company loans, there are different pockets of collateral within the company. So, we will do our best to minimizing the amount of collateral we have to get from outside the company.

Our next question comes from Jonathan Adam with Oppenheimer Capital. Please state your question. Jonathan Adam – Oppenheimer Capital: I have two questions. The first is for Mike Callen and it has to do with share holder delusion. I wonder if you could address that topic in the context of a various strategies that the company is going to pursue, to maintain this Triple A, a claim staying rating. Perhaps as you addressed the question could you mindful of some points that were brought up in the recent Shareholder letter from every quarter that was publicized recently then I have a followup for Dave Wallace.

Now I thought the every quarter letter was very thoughtful one and was read carefully around here. It was not treated as just another letter that I was thinking of inviting the gentleman to the Class A Pittstown of the Georgetown Foreign Service School to maybe feel in an electric. On the subject of delusion, I can only tell you what is uppermost in our minds as I said earlier today it was uppermost in Bog Ginator’s mind. The investors who stayed with us through this difficult period deserve to be treated very well. The situation we faced as of February 1st considering the inter-phase we with the Arabian agencies considered the flexibility we needed and so forth. We look very carefully a right issue particularly for the delusion issue. And once again, I am going to position of saying “Gee, I wish I could say more” I just want to assure you that we are (audio gap) as is our financial advisers of the delusion issue. And statements of guarantee here would be out of order but just trust me we know exactly what the sensitivities are and what are loyalties have to be. Jonathan Adam – Oppenheimer Capital: And okay, the followup question was for David Wallace. I wonder if you could address the speed of the internal rating erosion and what was troubling was that several months ago it appeared like a pretty thorough analysis had been done, not just the CDO-squared but the high-grade CDOs and it now appears that certain structural considerations are driving (audio gap) downgrades. It is not clear to me why those kinds of considerations would have been understood and reflected in your internal rating in the past. I guess the fear is that despite your assurances today, three months from now you will discover CDO rating methodology number 5 that warrants the high-grade CDOs suddenly going to blow investment grade.

I certainly have not but in the sense take your old point and respond to it. As somebody once said, if the facts change, I reserve the right to change my opinion. In this case what I tried to articulate was really an evolution of the approach based on the, frankly unprecedented kind of environment that we have got. We take a lot of time and to look at the portfolio and not (audio gap) ways and different times, different methodologies will give you better or worst results. I think it is still fair to say that on some approaches the one that we absolutely believed in drill-down type approach. I do not think it really generate any losses today. However, the facts change. I think it will be stupid to sit here and ignore the fact that the facts have changed and not to evolve in the way in which we are looking at this. I think we did not anticipate and probably we are not alone in that the kind of markets that we got and the kind of rating degradations we have had. These things are unusual and very sharp in terms of their timing and as such you look at things in a different light when involve in changes and the impacts on your bill change. A 20/20 eye sight obviously useful. I can assure you that we have been very thoughtful. We are trying (static) long tables all sorts of ways all the time. In the case we have changed the way which we look at it. We are going to the worst kind of outcome but I think in a sense the most transparent incredible outcome. There is no point in saying that drill down produces a zero result. The CDO model produces a lot of 6, 7, 800 million or whatever that is and say “well let is go with that one if you do not believe it”. So we are trying to be flexible that is not a word perhaps you want to hear but be transparent and honest with our assessment off the credits at that point in time. Jonathan Adam – Oppenheimer Capital: Maybe I can be more precise with the question. I am not clear on what facts have changed because the structures are the same and if you stress the collateral, presumably that would lead to assumed rating’s downgrade which lead to assumed cash flow consequences. So, I am not really sure what facts have changed.

Well, I think these are the facts that have changed. I mean, it is really have the marketers changing. I mentioned that a market proxy, it has to excel 30% in the market for around mid October. So, if it was incredibly obvious, the market was deteriorating to that degree, presumably that index would have moved earlier. So, I think, am I surprised by the extensive degradation, you know absolutely I am, and obviously by definition absolutely is everybody that has down graded any of this transactions. They would have been rated as they were if one has anticipated the environment that we are in at the time they are initially rated. So, I think I think that has been quite unbelievable. I mean, the extent of it. If you look at shops that put downgrades, it is incredible. That is what we have done, obviously I wish we have done it earlier but the reason is if we thought of it, I do not think we would have seen the massive degradation that we observed very recently.

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

I just have just two quick questions. One, related to the disclosure and I believe the third quarter, thanked you about the $3 billion Contingency Insurance Policy that was being provided on the CDO-squared transaction. Has there been any loss estimate or update to performance on that transaction? And, then the second question was in relation to several of your high grade deals. If you look at the Ambac attachment points. I think they generally range from, if we look at the DO6 and DO7 deals, generally from mid teens to upper teens and 25% and then if we compare that to the amount of CDO collateral and Single-A RNBS collateral and a lot of those deals, the single A RNBS and ABS CDO collateral have been exceed the Ambac attachment point by multiple times. And, given at the market and the rating agencies are projecting significant loses in those types of collateral. You look at the Ambac ratings on those deals and they are still in the Double A and Single A level. What do you think the likelihood is that a couple of quarters we are going to looking at ratings that are Triple C or Single B on those high grade deals.

Let us take the questions in all there, we have looked at the transaction, the specific transaction that you refer to, you know clearly, it is somewhat distinguished in terms of its vintage dispersion and some social and earlier I made some comments about one of the things that we do in terms of some of the base assumptions when we see that kind of vintage dispersion. We do not think that this pull of transactions is that if we were, it is anything like as a correlated in so on and so forth for some other transactions. So, yes, we are constantly looking at this deal. We have very recently reassessed it but we are to change that assessment so that we have disclosed. These are your comments which I think it is a good ones in respect of the high grade deals and particularly in respect of the mezzanine buckets and comparing that to subordination and thinking of the lower rated RNBS asset. You know really, I can only kind of repeat what we talked about earlier. We believe that we have taken quit a hummer in terms of the collateral ratings to those mezzanine pieces of collateral in the buckets. Clearly, in respect to some of these deals, in about half, I am referring to the underlying collateral, do not have some value as an IO. I mean, you can get all sorts of CDOs which even at the mezzanine level with no triggers and those two deals do exist, the sum cash, maybe coming from them, even though they fit A and B and so on and so forth. So, in summary, I would be concern and I would like to think we are being very transparent and somewhat flow forth of that how we are looking at those issues.

Thank you. Our next question comes from Andrew Quan with Primmest.(ph) Please state your question. Andrew Quant, please go ahead you line is open.

Yes, this is Steve Murano(ph), it is from Primmest. I just have one question remaining. You had talked about that there is no consideration at the company now for a run off scenario. What I was wondering is, is there a trigger for a run off scenario that might be imposed upon you by the rating agencies and if that is the case, is your dividending capability up to the holding company automatically cut off. Thank you.

, :

Thank you. Our next question comes from Tom Walsh with Lehman Brothers. Please state your question.

As mentioned before the surplus of the company had gone up and I guess we are looking at this exposure between 9:30 and 12:31 and it looks like back on 9:30 you were adding in unrealized losses on your creditor evidence and it totaled 796 million. This one is like you put that in your D31 surplus but you now show some of the estimated …from 96 million. It sound like you put that on your D31 surplus, but you now show sort of the estimated impairment for losses of 756. Given the size of the mark on the portfolio, I am wondering why it does not still run through statutory surplus.

Ambac is a company that rates credit derivatives, company called Ambac Credit Products. That company is a fully owned subsidiary of Ambac Insurance, Ambac owns the common stock of their company. The statutory accounting is such that we need to pick that company up, the operations of ACP, Ambac Credit Products, on a US GAAP basis, under the equity method. The question comes in obviously we had significant unrealized, mark to market losses there, question comes in as do you let the equity of that company run negative, because they have taken losses under a US gap basis. The way statutory accounting rules read is that you will only do that if you thought if there is a affectively an impairment at that company, whereby the equity holder will be contingently liable to (audio gap) funding or has a guarantee. The insurance company in this case has a guarantee, so it meets that criterion, so one would be to estimate what the probable and estimate losses are under the statutory accounting rules, so at the end of the year it is reflective of that. I think our operating supplement in the third quarter had an element of the mark-to-market that has been corrected in the December 31 numbers. So, within the December 31 numbers, just to be clear, we are picking up an impairment of effectively that with what resides in the Ambac Credit Company of the 1.1 billion that we talk a lot about today. Due to some capital and non-capital generation that works in that company, we picked up an Ambac Assurance, approximately 800 million of a liability --- towards statutory surplus in the Fourth Quarter of 2007.

Oh great. One more just a disclosure as we understand it better, on your CDO disclosure, you have been disclosing parent’s subordination levels and now looks like you have gone back to subordination level at insurance. And, I guess I am just trying to understand why the change.

Sure, I will address that. We felt that the number posts the origin of the deal was potentially misleading, so we thought about this quite deeply. The problem is that we are talking about liability subordination, not assets and that could be difficult, to the extent that you do not write down the liabilities, but the assets have been written down or impaired then, you look at that number. I do not think it would be useful to few other numbers (audio gap) people and we very clearly state that this is original subordination. To give people a sense of the kind of protection and the deal have origination, I would say, you would not commend to compare that as others have done to different buckets and so on and so forth… but I think it is potentially misleading on the going forward basis, as you get movements on the assets side and therefore we decided to remove it.

Okay, and the final question, just do not know if you guys put a lot on portfolio and you got 6 billion almost of mortgage in asset bank securities in there. Is there a breakdown on anywhere on that roughly 5.9 billion, or if I just have missed that?

Just slipping the page, you are looking at the mortgage, asset banks and security number? Yes, in the financial services business the mortgage number and the financial guarantee business, mostly agency, securities approximately, out of that 6 billion—about 3 billion of mid-prime mortgages, all Triple-A rated mortgages in there and then, there are asset bank securities, so credit cards and other asset crisis are within there.

Okay, anything respect to the Vintage?

I do not have that right in front of me…I think the the Vintage is going to be a mix of vintages. I do not have in front of me, so I do not want to quote it.

Our next question comes from Scott Frost with HSBC, please state your question.

I think you went over this a little bit before, but you said triple A is your future, that is how you are planning things, but what sort of plan B, I mean the agency (audio gap) a little bit, I do not know that the term may be, but Fitch is saying that if you were not able to raise the capital they only take you only at one notch, now you are down two on-watch downgrade. Moody’s is affirming in December 14th and now you are on-watch for downgrade. How would the plan work, if you are to operate Double As, sort of contingency planning case stats, that happen or what is the deal there?

Well, at some level of capital, it is up to us. If you are looking at a mini portfolio that is clearly a Triple A type of portfolio, the question then would be, could you proceed the structured finance side, the international side having the useful franchise at a double lay level and one could make that case. For sure, there are not many companies that are going to rate (audio gap) President with double A companies having done just fine. When I say that we do not control the environment, obviously, we do control the structure of our capital. We do know what the rules of radiant agencies have laid down and to repeat again that we are in constant communication, so our plans were built around the known rules and we have imperative confidence that with a reasonable amount of time we can do whatever is necessary to ourselves a situation that complies to those rules, in fact exceeds those rules and I do not remember if it has been mentioned but I am sure that you are aware of the business conditions we paced today are as good as anything I have seen then, in terms of pricing and so forth inherited in fifteen years. So, there is a positive side to all of these and we are focused on exploiting (audio gap)

Our next question comes from Steve Land with Morgan Family, please state your question.

Hi, Sean Leonard from Morgan Family, just a quick question in the context to what other banks and brokers been saying about the financial guarantors. We have seen several banks, who have take provisions for come of the Triple A financial guarantors. Could you comment on your discussions with counter parties and is there any anxiety from counter parties, picking up from the context on some of them, certainly laying out the exposure and also some of companies that actually provisions that is actually provisions for Triple A financial guarantors.

Hi, Sean Leonard from Morgan Family, just a quick question in the context to what other banks and brokers been saying about the financial guarantors. We have seen several banks, who have take provisions for come of the Triple A financial guarantors. Could you comment on your discussions with counter parties and is there any anxiety from counter parties, picking up from the context on some of them, certainly laying out the exposure and also some of companies that actually provisions that is actually provisions for Triple A financial guarantors.

Hard to say, we wondered about that, clearly we talk to counter parties. They are a little bit reluctant, the accounting rules changed, when you are talking …say … to a city or a BNP people like that, I do not know quite how they treat all these. To say that they are unconcerned about it, just simply (audio gap) you can well imagine. They are anxious, as you are knowing what you going to do about this problem and this environment. We are constrained at this point to date, to them as we are with you and so, one feels this pressure to come up with answers and you maybe even feel a little inadequate if you say we know about all these pressure, we know what we have to do, but it is not like turning a light switch and we are going to keep you informed as we can in the process of going down this road. But, yes the basic answer is that we do talk to the counter parties, we have talked to other counter parties. They are not totally relaxed, but we are trying t communicate confidence that we also have our own plans and again as I have said before and I think it is important that the one thing that you are to be impressed by is the amount capital and interest in participating in these kinds of solutions (audio gap) that we have been discussing.

Okay, then one quick follow-up Michael, in the context of you have being on board a week, can you just give us some background on your exposure on level of my understanding, each of the transactions and the CBO portfolio and also the RBNS portfolio and the portfolio more broadly in the transition of long-standing board member to CEO at a week ago.

Okay, then one quick follow-up Michael, in the context of you have being on board a week, can you just give us some background on your exposure on level of my understanding, each of the transactions and the CBO portfolio and also the RBNS portfolio and the portfolio more broadly in the transition of long-standing board member to CEO at a week ago.

Big change, big transition, I have spent … I can tell you a fair amount of time and will continue to do so, getting down deeply into those transactions. I have them walked me through the grill down analysis. I think I understand the event of the fault issues that we are facing, so I have spent a number of hours, but I want to do spend more hours, because I want my familiarity to be down to a third degree. I would characterize it as we speak to a second degree, but it is not as if (audio gap) had many years to last here before him. It is a question of a week with whole lot of demands, but you are just hit on one of my key objectives. I want the details, I want the understanding and I want to be able to pass the toughest exam, but this are complicated transactions. If you are to ask me, by the way, is there any one the liner you can give us concerning mistakes made, I think it centers on that, I think we got however safe, one might consider it internally that we just got to complex.

Our next question comes from Eleanor Chan with Orilles Capital, please state your question.

It is actually prosier than it really is. I have a few questions on the collateral, I think you said earlier in the call presently you are posting 2.1 billion of collateral (audio gap) of some circumstances. It could grow either 5 billion or 7 billion, roughly. Two questions about that could you just let us know how much collateral had been posted as of December 30? Could you just clarify again please, it was not there earlier, what the triggers are for the increase from 2 to 1 to 5 to 7 and whether there are any obstacles, hosting the additional collateral if you were called on to do so. For example, with the regulators take on bridge to that and stand in the way. My other question relates to the Geeks and other investment contracts, could you just explain to what circumstance. The holder of those instruments could seek their redemption.

It is actually prosier than it really is. I have a few questions on the collateral, I think you said earlier in the call presently you are posting 2.1 billion of collateral (audio gap) of some circumstances. It could grow either 5 billion or 7 billion, roughly. Two questions about that could you just let us know how much collateral had been posted as of December 30? Could you just clarify again please, it was not there earlier, what the triggers are for the increase from 2 to 1 to 5 to 7 and whether there are any obstacles, hosting the additional collateral if you were called on to do so. For example, with the regulators take on bridge to that and stand in the way. My other question relates to the Geeks and other investment contracts, could you just explain to what circumstance. The holder of those instruments could seek their redemption.

Sure, at the (audio gap) level the collateral posting requirements, as of the end of the year, is approximately 2.1 billion as we stated. That comes almost entirely with some smaller amounts from collateral postings on investment agreement contracts, themselves, so the contracts are entered into with collateral posting requirement from the beginning. It is very little posting as a substance right now, based upon the mark to markets and the threshold levels of interest rate swaps and our total return of our swap portfolio. That 2.1 is so much entirely investment agreement contracts. It triggers for additional collateral posting based upon ratings of SMP and Moody’s and it is the lower of the two. So, what we have mentioned, when he collateral posting through double A minus level (audio gap) to about 2.2 billion, so very little additional collateral posting require at that rating level and then again this in the guarantee of investment contract. Companies, these companies are outside of the insurance company umbrella and there underneath the parent company, but nonetheless, they geeks are guaranteed by the insurance company. At the A plus level that is where you jump up from the 2.2 to 5 billion odd number and then, when you get up to the seven billion number. You are needed to be in the Triple B category.

Our next question comes from Gary Johnson, with the Lion’s, please state your question.

Most of they did have worn about the regular … and that is with constant commissioner, present evidence from being upstream from being upstream from up coast

Holding companies a gap negative equity on a consolidated basis. Our GAAP is not in a negative equity position at the end of the year, even though we took circus 6.3 billion of mark-to-market, we are not in a negative equity position. Our equity position is approximately 2.3 billion, total stock holders equity at December 31, 2007, under US GAAP.

But, as a hypothetical and future periods, if that were to turn, theoretical basis. Negative, with there be a problem with the regulator …with or without the regulator, preventing dividends upstream?

No, the regulator looks at their solvency requirements and their solvency requirements are dictated by the regulated identity and statutory surplus and other dividend tests (audio gap) that they would look towards.

Our next question come from Amanda Lynam with Goldman Sachs, please state your question.

I had actually from Donna Halverstadt, from Goldman Sachs most of us we are touch on, but one thing we want to clarify. You said that you amended your credit facilities, so that you are not into fault of this financial governance, but it is there any sort of max cost that would prevent you from drawing in that line, even though you are not in breach of those financial governance.

From the first point of clarifying we were not in the port of those arrangements. We did amend the covenant to exclude to mark and market, except for the impairment, the impairment charges. We approximately have, when you look at the numbers, we also increase the (audio gap) number, it is part of that the world change, so at the numbers that is stand right now. We have about a billion dollars of, where we are above the network cover in test. There is another test, which is a debt to cap ratio test and we are also in compliance with that test that stands right now.

We realized that you are complains of those two financial covenance, I was curious if there is general material adverse change course, that even though you are in compliance in these specific financial covenance will preclude drawing on that line.

There was only mc clothing at the deep clothing of the facilities there is no mc clothin only drawers under the floor.

Thank you, our next question comes from with John Handcock, please state your question.

Yes, thank you, just want to be queer here on the investment management agreement --- and so, what I think what I heard you said is that there is subsidiary under the main insurance company that basically, writes the agreements and then the UPCO sort of guarantees that, I do not know if that is an insurance contract form and I guess, in terms of your collateral maintenance. I guess can you give us some sent of what that subsidiary looks like, in terms of collateral and agreement and after that fact, I an trying to what … legally how are we regulated in that type of contract versus one of your regulator financial contracts. (Audio gap)

First of all the company is not a subsidiary or underneath of the insurance company, is a sister company. It is a sister company it is a subsidiary of the parent organization, just to clarify that. The have a good snap shot at look at our operating supplement on page 17. You see the investments of that particular business had support those guaranteed investment contracts. Those investments you could see or a very high grade assets we provide detail, as to the various buckets of securities. I think, gentlemen, as before about mortgage product, I believe our third quarter Ten Q broke out, some of that information, as well, so we obviously be looking to do similar disclosures at the end of the year, but I refer back to that for additional information (audio gap) desired.

I guess obviously, in terms of the 8 billion of financial service investment, I guess that is everything at the hour, the 7.8 fair values. I guess that is all that is in the sister’s company. Is that correct? And, so the collateral is being pledge at the sister company level?

Yes, that is correct and there is an insurance contract that guarantees that obligations of that peculiar company.

And, so in terms of the equity of that entity, can you give us all that is capitalized?.. 7.8 billion in fair value assets, I do not know what liabilities are. How may geeks you basically or whatever the investment agreements in. How is that entity capitalized (audio gap) I assume is thinly capitalized.

Yes, but approximately it had little bit less than a hundred million dollars of capital at the end of the year, we could check that number, but effectively the investment agreement, in notional are proximately the same amounts as the fair values of the assets that are been shown at the ends of the year in the supplement.

Okay, and that a hundred million would be after all will be the … I assume you counted here a mark to market basis? Or fair value basis, I guess I should say?

Yes, all these assets are on our balance sheet at fair value through the equity sections, so it was called other comprehensive income.

But, I guess just looking at that entity on a stand along basis on a hundred million would represent a fair value accounting treatment in the assets are collateral there (audio gap) in terms of any shortfalls that would come under the contract. It is only on, once you go through that hundred million, so to speak, and that was my question is, are the assets on a fair value basis?

The assets are on a fair value basis, the liability …

So, when you say a hundred million in capital, I want to make sure that is on an equivalent fair value basis.

I guess I am not clear…I mean what you are saying is the capital inclusive of those adjustments in the fair value?

That is right; I want to make sure it is not like the insurance company, where we book value accounting, for example.

It is mark to market directly; I have to give you the overall equity of that company. I just do not have it, but that would be reflective (audio gap) equity of the company, just like on the insurance company, where the holding company, when you look at our balance sheet, when you look at the equity section. It does include an element of mark to market within that equity balance.

How much of those assets, I guess this is a question for that entity, but also at the insurance company. How much of your assets at each entity are wrap up by other guys and can you give us disclosure, who those other guys are and maybe they are your own wrap, for example.

Very little of our own wrap, but we disclosed with a level of wrap securities and it is just not significant in the context of the overall portfolio also, I know there is a large asset that coming due in the next couple days (audio gap) bring new balances even down even further. From the stand point of other wrap product it is mostly in the municipal sector and our municipal portfolio. I do not have these numbers directly in front of me. Give me a second. I have to track that down. I cannot seem to be finding the report on the stock of my stuff I have here. Maybe we could follow up offline on that particular comment. Thank you everyone, we have gone over our expected two-hour time limit. We understand that they may have been few more callers in the cue with questions. Please call us directly with those questions. Peter and I are available all day today for this week, as well as my colleague to answer your question. Thank you again for attending our conference call.

Thank you. Ladies and gentlemen, this will conclude the teleconference of today. You may just connect your line at this time. Thank you all for you participation.