Assured Guaranty Ltd (AGO) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Second Quarter 2004 Assured Guaranty Earnings Conference Call. My name is Christie; I will be your call coordinator for today.

[OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today's call Ms. Sabra Purtill, Senior Vice President, Investor Relations, Assured Guaranty. Please proceed ma'am.

Thank you Christie. Thank you all for joining us today for Assured Guaranty's second quarter 2004 earnings conference call. We released our earnings yesterday evening and our press release operating supplement and second quarter fixed income investor presentations are available on our Web site at www.assuredguaranty.com. The speakers on our call today will be Dominic Frederico, Chief Executive Officer of Assured Guaranty Ltd., and Bob Mills, Chief Financial Officer.

Following their presentation they and other senior members of management including Michael Schozer, Head of our Financial Guaranty Direct Business and Robbin Conner Head of our Financial Guaranty Reinsurance Business will be available to address your questions. A replay of this call will be available on our Web site as well as by telephone at 1-888-286-8010, pass code 925-269-91.

Before turning the call over to Dominic, I would like to remind you that our commentary today will contain forward-looking statements, such as statements relating to our financial outlook, business strategy, growth prospects, ratings goals, personnel, demand and other market conditions.

Actual results may differ materially. Please refer to our most recent SEC filings, as well our earnings press release and operating supplement for more information on factors that could affect the forward-looking statement. With that I would like to turn over the call to Dominic.

Thanks Sabra. Today I am going to update you on some of our accomplishments at the end of the first quarter and touch on a few items related to new business production and employee conditions. I will then turn the call over to Bob Mills, our CFO for a more detailed discussion of the financial.

The last few months have been dedicated to completing the launch of the company and executing our strategy. Since the beginning of April, we have completed the IPO roadshow and senior debt marketing; and priced our 49 million share IPO and $200 million senior debt offering, participated in numerous rating agency meeting with all three major rating agencies, which culminated with receiving financial strength rating upgrades from Moody's on our two principal operating subsidiaries and new debt ratings from S&P and Moody's; substantially completed the formation transactions associated with the IPO including the separation from ACE and the exiting or close off of our other segment business, re-negotiated our principal bank liquidity credit facility, received authorization to form and capitalize our UK financial guaranty insurance operation, Assured Guaranty UK Ltd. and also completed the ratings review process for that company; launched a recruiting effort to expand and grown our underwriting teams in certain key markets, such as public finance and structured finance in Europe; and closed new financial guaranty direct business of almost twice the first quarter’s volume, even though we had a relatively short transaction window between the announcement of the rating agencies conclusion in mid May and the close of the quarter.

Clearly we have been busy and I am pleased with the progress we have made in achieving some of our strategic objectives necessary for Assured Guaranty's long-term success. We accomplished a lot in a short time, however we still have many challenges. We were disappointed that Standard and Poor’s maintained a negative outlook on Assured Guaranty Corp., our AAA rated financial guaranty insurance company. As for their process, S&P will review their outlook in the fourth quarter of 2004.

Additionally, on the reinsurance business side, our 2004 reinsurance treaty renewals, as detailed in the press release, were not renewed in prior levels or at our own expectations. Bob Mills will talk about the potential financial impact of these reinsurance changes. Please keep in mind that these changes only affect business on a prospective basis.

Our future premiums do from previously ceded installment business as well as the earnings from premium ceded in prior years from the old treaties, continue to our benefit in the future.

On the direct side, we have made good progress in entering new market during 2004, markets in which Assured Guaranty was not an active participant in the past, notably in the CLO and other securitization markets. For example, compared with 2003 where most of our business was synthetic CDO's and Residential Mortgage-Backed SecuritiesIn the first six-months of 2004 we have completed three Credit (inaudible) on AAA, A RMBS transactions; five Secondary Market AAA, A, CLO transactions; two Primary Financial Guaranty auto deals, totaling $450 million in par insured, one private structure deal worth $850 million in par insured; and six Secondary Muni Policies totalling about a 180 million in par insured.

In the first six months we did not complete any Synthetic CDO's due to pricing and credit spread. However, we did execute five additional financial guaranty Residential Mortgage-Backed Transactions, one of which was public and four of which were private.

Looking forward, overall market conditions are reasonable. Corporate credit and ABS spreads remains tight, which continue to pressure the CDO and the RMBS business. We have successfully increased the asset classes in which we are active and our pipeline continues to develop.

The municipal market is the most rating sensitive and the most difficult for us to operate in. There are,however, select municipal markets where we can be competitive and we are building our public finance team to focus on those opportunities.

Internationally, we were very pleased to receive authorization for our UK Company and have begun the process of stepping up that office. The overall PFI market continues to be good, although there is a long lead-time for these deals. While we are hopeful to have some direct volume in the UK in 2004, it remains more of 2005 opportunity.

And I also would like to address one other issue that has been of concern to us: our people and, specificly, turnover. We significantly restructured our company in connection with the IPO. Lay-offs at that time were necessary to reposition the company and to exit certain lines of business.

Nevertheless, post-IPO we have had a level of unplanned turnover above what I would have liked or anticipated. We are active in the market to rebuild and expand our bench strength and we have good response from people. We anticipate announcing some exciting new hires in the near future and will continue to see highly qualified candidates to add to our team.

Looking forward I remain excited about the prospects for Assured Guaranty. We look forward to building on the many strategic accomplishments we have achieved in the second quarter and achieving our goal of building a dynamic and diversified AAA rated financial guaranty enterprise.

Now I'd like to turn the call to Bob Mills, our CFO, to cover the financial highlights for the quarter and I look forward to taking your questions later in the call.

Bob?

Thanks Dominic. The second quarter included not only our April IPO but also the financial impact of all the other transactions associated with the strategic repositioning of the company and the separation from ACE.

The net result is that it has made our consolidated financial statements difficult to analyze. I would encourage all of you to refer to the press release and operating supplement for segment level details and explanations of some of the one time impact of these transactions. We will also file our 10Q shortly. In management’s discussion and analysis, we diligently worked to provide you with the information that explains the results. We had a good result in the second quarter. Net income was $0.57 per diluted share equal to our results in the second quarter of 2003. Our operating income was $0.37 per diluted share compared to $0.45 per diluted share in the second quarter of 2003.

Our operating results included a one time after tax charge of $9.6 million, or $0.13 per diluted share for the conversion of ACE's equity base compensation plans. In addition the other segment had an underwriting loss of $8.8 million, which is due to the accounting requirements for unwinding the IPO-related transactions. This underwriting loss was largely offset by the unrealized gain on assets transferred to ACE as part of the transaction.

However, this gain is not included in our calculation of underwriting gain or operating income which enhanced with the drag on our operating results. Consequently the segment reduced our operating income by about $0.08 per diluted share compared to a loss of $0.07 per diluted share in the second quarter of '03, accelerated earnings from municipal bond refunding, net of expenses also contributed about $0.02 a share in the quarter versus $0.04 a share in the second quarter of 2003.

Regarding loss activity in the quarter, positive developments related to specific cash reserves, improving credit trends and the continued run off of our quota share mortgage book and single name CDS book reduced our reserve requirements for loss expenses in the quarter.

The accounting for the transfer of loss reserves in the other segment led to a loss expense benefit of $74.8 million. This unusual loss expense activity does not reflect any changes in our methodology. Our underlying portfolio reserve expenses were simply more than offset by the accounting for several specific transactions.

Turing to revenue, the PVP or present value of gross financial guaranty premiums written grew by 36% this quarter versus the last quarter overall. PVP for the direct business was $14.4 million down 6% from the prior year and up 82% from the $7.9 million of PVP generated in the first quarter of 2004.

We are pleased with this result showing increased post IPO activity. PVP for the reinsurance segment totaled $39.3 million up 65% from the first quarter of 2003. The 65% substantially benefited from a treaty enforced in 2004 for which there was no comparable revenue in 2003. In the third quarter of 2003, we finalized a substantial reinsurance treaty covering business incepting from January 1, 2003 forward. As a result, third quarter 2003 PVP for the reinsurance segment was significantly impacted by this premium boost, which will not have comparable amount in the third quarter of 2004.

In addition the change in our reinsurance relationships with two of our clients for perspective business will close our PVP for the second half of 2004 to be lower than originally expected. This excludes any potential benefit from additional facultative sessions or the potential for new reinsurance contracts that may help to offset part of the decline in new business volumes.

The investment portfolio now reflects all of the IPO formation transaction activities, which reduce the portfolio by about $133 million during the quarter. In the second quarter we generated positive cash flow from operations totalling $33 million. Yields were down slightly from the 2003 levels to a book yield of 4.7% reflecting the lower rate environment through the second half of 2003 and the first half of 2004, as well as some minor changes in the investment mix. The duration extended slightly to approximately 5.6 years.

Operating expenses were high, totaling $26.6 million for the second quarter of 2004 compared to $7.5 million for the second quarter of 2003 and $12.6 million for the first quarter of 2004. This significant increase was due to the pre-tax charge of $11.3 million for the conversion of ACE's equity-based compensation plans, significantly higher rating agency fees related to the cost of rating transactions and books of business, and the cost of establishing and operating a holding company, costs which were not previously pushed down by ACE.

Our book value per share now reflects all of the IPO-related transactions and was $18.96, or $18.19 excluding accumulated other comprehensive income. Higher interest rates and the realization of capital gains in the quarter partially due to the other segment reduced our net unrealized gain on investments by $41.4 million, or $0.55 per share compared to the end of the first quarter.

Adjusted book value, which is used by management and investors to evaluate the growth per share in the company's equity and in-force book of business, was $25.42 at the quarter, $24.65 excluding accumulated comprehensive income.

The company's ROE for the quarter was 12.4% and 13.2% year to date. Our operating income ROE for the quarter was 8% including the one time $9.6 million after tax operating expense for the equity based compensation and the operating loss of the other segment. Excluding these expenses, operating ROE was 12.5% for the second quarter and 12.3% year to date.

Although these returns exceed our target, the results benefited from on off and close-out transactions in our principal business segment. Based on our current analysis of market conditions, a split ratings and the change in our two of our reinsurance relationships we still expect our 2004 ROE, excluding the second quarter charge for stock compensation and the operating loss of the other segment, to approximate 11%.

Looking ahead in to 2005, the aforementioned factors will place significant pressure on our ability to improve ROE although we will be better able to assess this after the fourth quarter is completed. I agree with Dominic we have accomplished a lot and we are very hard at work generating new business for the third quarter, which will be our first full quarter as a public company. We expect to release our third quarter earnings in the first week of November and we will update you on the time and date, as we get closer to that point. With that I would like to turn the call over to the operator to call for questions.

[OPERATOR INSTRUCTIONS].

And your first question comes from Geoffrey DunnGeoffrey Dunn of KBW. Please proceed sir.

Thanks, good morning. Two questions, first can you give a little bit more color on the excess of loss coverage in the mortgage segment that benefited premium. Specifically, is there any partial offsets on the expense side?

And then second on the reinsurance business, can you tell us when the other two major primaries treaties come up for renewal and given the developments that you saw there in the quarter with the other two treaties, does this make you rethink at all the attractiveness of pursuing a dual strategy over longer term?

I will take the second question first and turn the first question over to Bob. In terms of the reinsurance, as of this point in time all treaties have been through their effective dates. So, they are all either been renewed, cut back participation or non-renewed.

So, we are finished for the '04 year and the reinsurance market place will always be a function of a lot of factors and a more specifically where the expectation of premium volume is, where the expectation of prices is, each of the individual ceiling companies risk management perception in terms of accumulations and aggregations and although treaty volume has changed that we still believe, and getting back to your question on strategy that there is still going to be a need for portfolio shaping and it might take the form, in certain cases, they are more facultative opportunities as opposed to treaty.

As you know volumes were perceive to be down this year and therefore lot of companies who view their capital strong, were going to take whatever measure is necessary to continue to build volume and I think we are seeing a lot of that.

Additionally we are active in the market on the direct side, so whether that has an impact on the treaty participants is an issue but we don't really see that. So, we are still quite comfortable with the reinsurance operation, we still believe in its attractiveness from the stand point of providing assistance to portfolio shaping. We like obviously our structure where principally we are going to do the reinsurance business in the offshore company. So, all those are still very strong positives for the company.

In terms of the impact of your excess of loss question, I'll turn it over to Mike.

The principal reason for that change was the computation of existing contract and I think that's going to laid out in the press release. Do you have a follow up question about the new business in that area?

I wanted to get a feel, I think there was $0.10 impact from the premium add, was there an offsetting expense? Or is it just a pure premium impact in the quarter?

There was an effect on the loss line, because there were reserved associated with computation. I would have to check the numbers on -

I can follow up off-line, and that's helpful.

Yes, when we talk of off-line we would like - the offsetting was in the loss line.

Great, thanks for your comments.

And your next question comes from A. J. Grewal (ph) of Smith Barney, please proceed sir.

Is it safe to assume that your balance sheet is now, in more way a run rate balance sheets, meaning that there is no other adjustments to be expected from some of the exit businesses?

That's ---

Yes, that's correct. The balance sheet is pretty much where it is from run rate basis at this point, but

And the only activity we would have is based on the session that we made to a certain of those that sort of business that if there is any activity on the specific underlying business. That would be the only additional activity you would see from IPO and other related transactions.

OK, relative to your losses, could you give us an idea of what you expect on the loss ratio for the three segments going forward? Thank you.

In the industry obviously loss ratios are a little bit different if you go - if you talk about the direct business from company to company, the average is somewhere in a 6% to 11% of earned premium, which obviously if you go back on a formulated basis represents some calculation based on par and readings.

Bob Mills, I think in previous discussions kind of outlined in our portfolio reserve process, which we consider conservative and therefore if we look at our results expectation going forward barring obviously true underlying economic experience should ultimately follow in line and hopefully be at the upper end of that range. You know, we are still recognizing, because in our legal vehicles, we still have reinsurance business in the direct company where the company, we call the direct company.

So, you will still see even in the current quarter reserve additions for some reinsurance of CLO or CDO transactions of prior periods. But on a normalized basis looking at perspective business, we should fall more in line and as that reinsurance business mix shift for the Yorkshire Company; the US Company then become more purified on a pure direct FG basis.

Well I guess, let me ask a question different way, what were your losses in the reinsurance mortgage guaranty business would have felt some of this one time items?

Well, we do start off with negative losses in the quarter and I guess Bob want to attend this.

I mean, if you look at the other segment, produced a - in my commentary a negative loss expense of $74.8 million. The on going business produced a differential coming to the total of $77.4 million of negative expense.

So, there was some positive expense during the quarter but the run off of the single line CDS book and the run off of the quarter share book actually resulted in lower reductions in portfolio reserve. So, losses during the quarter in the continuing business were actually extremely low and but on an ongoing basis, I think it really need to look at what Dominic said about expectation.

Thank you.

And your next question comes from Mark Lane of William Blair & Company. Please proceed sir.

Good morning. Can we just go back to the changes in the two reinsurance relationships, the non-renewal on the change in recession levels? Can you tell us exactly the reasons in both instances why those changed?

All we can tell you Mark, you know our view of it but that's you know half the story. But in one, we had tremendous dialogue, a lot of back and forth negotiation and in principle, we couldn't agree to the treaty specifics. You know we had a certain view of the type of risk we'd like to take. The treaty did have this variable quarter share element into it where they could change dramatically the percentage of a given piece of business ceded to us that obviously causes us concerns.

We really try to look at you know exercising we think it is the proper underwriting discipline and actually trying to balance our own accumulations or aggregations. So in that case, we couldn't come into an agreement of terms. On the second case, there was all host of factors. We obviously have benefited in the prior year from an increase on a percentage basis in that session because of market conditions at that time.

Today obviously, we have a different market. We are a different company in the market. There are rumors of new players coming into the market. The company itself had its own expectations of its view of its capital, its accumulations and what it saw as pricing in volume. So in that case, they kind of brought us back to a previous year 3 level participation and as I said you know we look at that as subject to a whole host of factors.

But in the first instance, the negotiations where you non-renewed, was that similar to the expiring conditions or did the customer impose stricter conditions relative to what there was last year? And why you know why would they, if that's the case?

Yes, as I said we had many, many negotiations starting out with our view of what we wanted the terms and conditions to be, based on what we felt was our underwriting guidelines and in standards and requirement. And the negotiations went back and forth from there and at the end, we could not agree on a proper set of terms.

OK. Maybe I'll follow up. I am still not clear on that. But second question is, on the direct side, Mike, maybe you can talk a little bit about what are the reactions you are getting from issuers when you are going out into the market, meeting with them? What's been better than expected, what’s been more disappointing?

I would say that what’s been better than expected is just the general overall reaction. When we went and talked to fixed income investors as well as clients, the bankers, they are the ones who arrange transactions. We get a uniformly positive reaction. The people, as we said during the initial eye-view process, people really wanted alternative and it goes back to my core belief that as people want diversification, they also want diversification with somebody with very large capital base which we have.

So the reaction is very positive. The challenge has been in that right now our trading differential with the split ratings makes it harder for certain types of transactions to execute. We had a couple of cases on a couple of US mini-transactions where the price which we did lose; a couple of ones we did on, where the pricing from our competitors was more 1aggressive than we thought. So I think we have seen high level of competition increasing with some pricing less than we hoped it would be.

On the other hand, we have been pretty successful at getting in new asset classes. We are very pleased as you saw in the Dominic commentary to have closed our first two auto-securitizations for $450 million, which I thought outstanding. So I am very pleased with the fact that we were getting a positive reaction with bankers, we are getting a positive reaction from the market and we are getting to execute additional asset classes and its just you know building it one brick at a time. So I hope that answers the question.

And what about bringing in additional people? Would that be in current businesses you are in or are you finding opportunities in maybe some non-traditional areas that you can compete more effectively right now?

We are proactive. We have brought in some number of people. We have brought in one very senior guy to run our structured credit business, who has got a huge amount of experience that he has brought with him you know, a number of potential transactions in the pipeline.

We have a number of offers out to some other very senior people, are actually finding that you know very, very good quality people who want to come here. We are getting a very, very positive reaction because as we talked to candidates and you know people whom I am very interested in hiring, we get a very good story because of very good reaction because people look and they see that strategically we are very well positioned.

So there is a positive, selection bias if you will, we attract the people who are interested in building something for the long term, which is exactly the kind of people, we wanted to attract. So I would say I am extremely pleased at the kind of people we are getting that we A) have hired and B) have gotten indications that they intend to join the firm.

OK. Thank you. And then last question is on Bob, in your comments, are we guided to see 11% excluding other comprehensive income? Just to verify what that includes and what it doesn't include. That is assuming in the first quarter $0.58 per share and in the 2nd quarter, $0.58 per share. Is that correct?

Bear with me just a second. Yes.

OK. And what is the assumption of the average book value per share excluding other comprehensive income given that you know there were a number of adjustments in the first quarters that impact the denominator?

As reported.

As reported? OK. As reported. OK. Thank you.

And your next question comes from Rob Ryan of Merrill Lynch. Please proceed sir.

Good morning. The year is sort of shaping up to be what I call the year of the commutation on the reinsurance side. Could you just review for people under what circumstances you would be exposed to you know losing a portion of your existing book of business?

Sure, as I said, the activity we had in this quarter relative to reinsurance cessions has no impact on any prior year cessions. And typically in only some of the treaties, there is a claw back provision based on a downgrade and that typically is the only issue or activity that could happen, that could force the return of the reinsurance previously ceded.

But currently are there any outstanding commutation rights?

.No.

OK. Switching over to mortgage, just I am trying to get at this, but I am going to just be little more, I think straight forward. Can you provide, based on you know so much volatility and that just trying to get a feel for run rates. Some basic ballpark type normalized run rate earnings for that mortgage guaranty segment going forward?

Let me actually really go back on the question that was asked earlier if I could. My great finance colleagues here has passed over dated this thing, which shows some positives. If we answer the question on the net premiums earned, it was an $8.8 million positive impact offset by total of 3.3 million of cost most of - some of which was in the last -most of which was in profit commission expense and so the net of those two is 5.5 million pretax.

OK, thank you.

OK, so our - I hope if we provide you know kind of earnings expectation on a segment basis I will tell you that we you know we have written a number of transactions in that segment this year and we have you know several others in the pipeline. You know we underwrote one recently and there are several if you are looking at.

So I would say that being able to write that excess of loss mortgage insurance is a very positive thing and I will also tell you that you know we have took a little of bit time, but we have worked through Moody's the process of rating those on a deal by deal transaction basis, which as you know typically would not – isn’t now the way mortgage insurance is handled but its very important to us as the financial guarantee company. In addition I have no further commutations are expected in the mortgage insurance area.

Great thanks.

And your next question comes from Alain Karaoglan of Deutsche Bank, please proceed sir.

Good morning, couple of questions from our return on equity point of view I just want to make sure, I get what you said accurately the ROE, I think in the first quarter you mentioned was 13%, the second quarter 12.5% and then you expected to be 11% for the full year. Does that mean you are suggesting a 9% return on equity around that for the second half of the year?

I am not exact - I don't know, exactly the percentage, but it's naturally it's -I think it will be at 11; it will be less for the second half.

OK, but if I do just - if I am doing the arithmetic right, it's 13%, 12.5% and then for the full year 11%?

Right, OK.

Then the question that I already mentioned is no-it's going to be more difficult to improve the return on equity in 2005. How about the prospects of achieving an 11%? How do you feel about that and about business opportunities and the capital that they will let you have?

Well you know, as we have said in Bob's commentary you know, there are still a lot of open items that will have significant impacts on not only the remainder of '04 business, but obviously '05 and we do realize that there is a earnings trail to the business that we write in this industry.

However, you know there are enough unknowns at this point in time that we would rather provide further guidance in the fourth quarter with some issues relative to this split ratings were some relative to what we see is activity and then facultative volume in the reinsurance market, as well as we continue to still build up our capabilities on the direct side. Those things have obviously fairly significant impact and although you know we provided guidance around the IPO 11%.

We want to make sure that you are comfortable that still are estimate of achievement. We have had some aberrational things both on the income and expense side in the first six months, that obviously impacted and we wanted to be very clear about that. But in terms of the expectation of '05, there are too many variables right now that's still need to be resolved priority to us really feeling strongly about giving you a number.

Thank you.

And you have a follow up question from A. J. Grewal of Smith Barney. Please proceed sir.

Yes, could you give us an idea or some more color on what's driving the attrition and the turn over and also in what - are there specific areas within the companies that you are seeing more turn over relative to the others? Thank you.

Sure, you know turn over as we said was higher than we anticipated. Yet stepping back, we have gone through a rather you know significant change. We have changed the company's ownership, we've changed the company's business direction. Virtually every one in the company has a new manager starting from the top down.

So obviously that kind of creates a little bit of a dynamic environment, which we are trying to manage through. That's the bad news, offsetting that to some extent is that the turnover has been pretty much spread across virtually all departments.

Some departments it was a lot easier to fill the needs quickly. So in those cases we are today probably better staffed or have a higher quality staff than we had in the past even in spite of the turnover in another areas like in the business areas. Obviously those candidates are not as easy to find you are looking for very defined skills.

We need to need to find people that actually fit in, we believe, with our strategy and kind of business process and then you know with the company and we have made in the last week four offers. We have tentative acceptances on three. So even in the business sense we are quickly rebuilding that and we will continue to look for highly qualified people to add to the team.

Thank you.

And you have a follow up question from Mark Lane of William Blair & Company. Please proceed sir.

Yes, actually my follow up was related to the turnover as well, but just to add on to that. Specifically in terms of senior transaction people just in the last, say, just in the second quarter I think. How many senior transaction people have your new business people have you lost in the second quarter?

In the second quarter I will be more generous in the second quarter because I am not going worry about today here or there - if we really look through the losses we've lost four people that we would identify as transaction people. Obviously we have lost none of the senior people, the management and the sub-management on each department level are obviously also there. So it's at the lower level, but they were four people that obviously we would love to still have on our staff and we are actively in the market recruiting to replace those folks.

OK, and just another numbers question. So do the other segments stand any variability either positive or negative going forward? Should there be or is there still potential for something to come through there?

Well the only thing you can come through there would be timing in nature. You know the recognition of anything else should be de minimus. Timing really relates to the way you account for loss recognition and then reimbursement, recognition of you know the amount offset in reinsurance. That's pretty well explained in detail in the 10-Q, but there could be something that could be timing-wise because we are could be affected by reinsurance accounting.

Is there an unearned premium reserve or the present value installment premiums anything like that? Do you have any idea if that has to be recognized?

No all that is being ceded. So any of that activity is in terms of the normal run off for the business is on their books.

Yes.

As Bob said, because we have this unique accounting treatment for the retroactive reinsurance that obviously has to go through us first then the way the accounting rules work. There is a timing difference in loss recognition. You cannot claim credit until you repay.

Right, right, OK. Thank you.

We even believe that is probably at de minimus impact you know as far as variability quarter-to-quarter that it is possible whether it could happen and that's why it's reasonably well explained.

Meaning basically there was adverse development on that, you would be covered by you wouldn't be covered until it was paid?

But you would look at you're covered but what you are trying in that is, it is timing of the recognition of our loss, which is immediate and then you recognize the income offset for that one you repay.

Right.

And this is also a short tail business anyway, so it's not going to be - this is not something that were going to be looking at, you know for that next many years you know it may go out about the 18 months reserve.

Thank you.

[OPERATOR INSTRUCTIONS].

You have no questions at this time.

Thank you very much Christie, and thank you all for joining us today for the call. If you do have any follow-up questions, please feel free to give me a call or send me an email, my contact information is on the press release. Otherwise, we look forward to talking to you again for our third quarter 2004 call, which as Bob mentioned we have planned to have during the first week of November.

Thank you all very much and good day.