Bermuda-based bond reinsurer Ram Holdings Ltd.'s share price shot up 16 percent on Friday after it reported second-quarter profits of $126.3 million.

Net income broke down to $4.63 per share, compared to $9.1 million, or $0.33 per share in the second quarter of last year.

The company put the huge increase in profit down to unrealised mark-to-market gains on credit derivatives of $151.5 million.

Ram announced an operating loss, a measure which is unaffected by the non-operating gains or losses, of $116.2 million, or $(4.26) per diluted share, compared to operating income of $9.1 million, or $0.33 per diluted share in the second quarter of 2007.

Net adjusted premiums written fell to $6 million - an 86-percent fall compared to the second quarter.

Ram's shares closed at $2.03, up 28 cents, in regular trading on Friday.

The company, which has suffered from exposure to the sub-prime mortgage debacle, reported a deterioration in the collateralised debt obligations of asset-backed securities (ABS CDOs) that it reinsures.

Like most of its peers in the financial guaranty industry, Ram has suffered recent downgrades from credit rating agencies, Moody's and Standard & Poor's.

"The residential mortgage market continued to deteriorate in the second quarter, resulting in increased reserves and credit-default swaps (CDS) impairments in the quarter," Ram chief executive officer Vernon Endo said.

"Consistent with many financial guaranty insurance companies our reported net income of $126.3 million for the quarter largely resulted from a net unrealised gain recorded on our credit derivatives of $151.5 million.

"This gain included a positive adjustment of $213.2 million which related directly to the widening of Ram Re's estimated credit spread during the quarter. As we have said in the past we expect CDS unrealised fair value gains and losses to net to zero at contract maturity absent impairments.

"While our recent downgrades from S&P and Moody's are disappointing we made significant progress in improving the risk profile of the Company subsequent to quarter end by commuting about $1.0 billion of troubled 2005-2007 vintage RMBS (residential mortgage-backed securities) and ABS CDOs. Recent ratings actions in the industry have caused significant uncertainty. We remain focused, however, on improving our capital position by prudently reducing high capital charge segments of our insured portfolio and writing well-priced business with our two remaining treaty customers."

Ram reported an increase in gross mark-to-mark losses on credit derivatives of $61.7 million in the quarter.

The net unrealized gain was offset by an increase in loss and loss adjustment expenses of $45.8 million, relating primarily to continuing deterioration in the performance of RMBS.

Last month Ram paid $94.4 million to Syncora Guaranty Re, formerly known as XL Financial Assurance, a unit of the company formerly known as Security Capital Assurance, to commute business assumed from the bond insurer.

Taking into account the effect of the agreement, Ram would have recorded an extra $22.8 million of net income, as of June 30, 2008, Ram's earning statement added.

The company expects "new business production will be minimal for the remainder of 2008 because Ram's two remaining treaty customers are on review for downgrade by Moody's and there is minimal activity in the industry".