RAM Holdings announced positive Q1 2011 earnings today, earning $4.8M in the quarter. This comes on the heals of RAM's first profitable year since 2006 based on operating income.
Operating income is also the best publicly available indicator of capital accretion from both a rating agency and statutory point of view. This will help RAM in whatever future business the company pursues, though its probably best for the company not to make any long term commitments that might impair its flexibility in the future.
The company was also mum on new business in the earnings report. Given our stance on the matter, we are heartened to see Mr. Steel display patience. The stabilization of credit factors, subrogation recoveries, and run off bode well for RAM's pricing power in the future in any line of business. Additionally, Assured's incentive to recapture business as propelled for rating agency capital has propelled RAM's wind-down of its riskiest exposure.
While earnings will likely be lumpy in the near and medium term, performance has significantly stabilized. Furthermore, it's our belief that future volatility will be skewed to the upside due to the timing of settlements and other recovery developments. RAM's volatility in this regard will be slightly less muted than the primaries as they capture benefits from three or four companies depending on how you count.
This positive skew could justify a valuation north of operating book value, but we continue to recommend regarding adjusted book value as something more like a zero coupon maturity value. That is after adjusting RAM's ABV to reflect the value of preferred interests.