HELOC: Within Prime RMBS, we expect $895 mn of loss towards HELOC. Since bulk of AGO's HELOC exposure is in below-investment grade securities (91.5% of Direct Prime HELOC) and in Countrywide Financial (87.5% of Prime HELOC), we have applied higher than historical default rate (15%-30%) to better reflect the company specific exposure. Under the base case scenario, we have applied a loss rate of 3.5% on AAA HELOC and 52% on BBB HELOC.

Prime Closed End Second: For Prime CES we have estimated loss of $132 mn which is in line (or perhaps more conservative) with the popularly expected loss of $175-$225 mn.

Subordination and default rate: As stated earlier, we have not considered subordination explicitly wherein we don't have subordination information tranche wise. Like for CES RMBS, we have subordination at the group level and not trance wise. Since 38% subordination would most likely be skewed towards AAA securities than BBB securities, we have not assumed 38% subordination for both AAA and BBB trances. Instead we have adjusted default rate for different tranches. Based on historical default rates for each tranche adjusted for current market conditions and company specific factors, we have assumed loss rate (net of subordination) of 18% for AAA CES and 36% for BBB CES (2007 vintage) and loss rate of 0.05% for AAA CES and 7.55% for BBB CES (2004 vintage).

Table below summarizes subordination level (group level), our loss rate trance wise and group level and the implied default rate assumed by my team.

We believe the above implied default rates are more realistic in nature given the high delinquency and default rates witnessed under the current credit market scenario and do not breach the 75% mark.

Wilbur Ross investment: Wilbur Ross investment looks more likely to come through under the current scenario. However, a lot will depend upon the credit market conditions and AGO's ability to maintain an overall AAA rating

among other conditions.

Of note is the perfomance of AGO's investment portfolio. As should come as no surprise to some, extended duraton fixed income securities have taken some capital losses. This should be noticed since strong investment performance is how insurers make money!

Spread Analysis

Relative Valuation

This valuation does not use adjusted book value, which we feel is required to reflect the superior book quality of AGO in comparison to its peers. The final report next week will have the fully adjusted book valution, which I estimate will be between $17 to $19 per share.