Ambac Financial Group Inc (AMBC) 2001 Q1 法說會逐字稿

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Good morning, my name is Amy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ambac Financial Groups' first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during that time simply press the number 1 on your telephone keypad and questions will be taken in the order that they are received. If you would like to withdraw your question please press the tone key. Thank you Mr. Bivona, you may begin your conference.

Thank you, and welcome to Ambac's first quarter conference call. My name is Frank Bivona and I'm the CFO of Ambac, and with me today are Tom Gandolfo who is our Controller, and Brian Moore, In-charge of Investor Relations. As you know, we released earnings today at 8 a.m., and our statistical supplement will be mailed out to those of you who requested it. If you did not receive it and would like to, please feel free to give us a call. This quarter's earning release and supplement, along with historical data, are now 2 available on our website for your review. Our address again is ambac.com. The call is also being broadcast on the web over the next week. You can access this through our website. I ask you to please mark your calendars for the second quarter 2001 earnings, will be released on July 18th at 8 a.m. with a conference call to follow at 11 a.m. During this call, I may make statements that would be regarded as forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations, and I refer you to our press release for factors that could actually change these results. Highlights of the first quarter; it was another solid quarter for Ambac. Our net income was $97.5 million or ¢90 per share versus $85.6 million or ¢80 per share in the first quarter of 2000. That is up 14% on a dollar basis and 13% on a per share basis. Operating earnings, which exclude capital gains and losses, were $100 million or ¢92 a share versus 86.1 million or ¢81 per share, in the first quarter of 2000. That is up 16% on a dollar basis and 14% on a per share basis. Core earnings, which is operating earnings less refundings, were 96.5 3 million or ¢89 a share versus 83.4 million or ¢78 a share, up 16% on a dollar basis and 14% on a per share basis. On a quarter-on-quarter basis, Ambac has had increases in core earnings in every quarter since we went public, since 1991, and over that period, has averaged about 18% core earnings growth. Let's turn to adjusted gross premiums written. Our topline growth for the first quarter was very strong. AGP written in the first quarter was 157.6 million and that compared to 120.6 million last year; that is up 31%. Let me take you through some detail on the 3 major areas of our business, the municipal, structured, and the international areas. First municipal. Ambac's municipal AGP written in the first quarter was 48.3 million that was up 60%. As I am sure you are aware, with lower interest rates, municipal new issue volume picked up considerably in the first quarter, coming in up 48%. Actually, the new money component of that number was up 25%, and refundings represented about 30% of the market, up from 19% last year. Much of the volume in refundings came in the tax-backed portion of the market, which is really not our particular focus. Thus we did not see a proportional share of the refunding volume. Additionally, we did see some deterioration in 4 pricing in the more commodity-like end of the municipal market which has really again not been a major part of market for us, due to the pricing in the past. Thus the impact of lower pricing in this particular segment had very little affect on us. All this said, Ambac was able to achieve a 60% increase at pricing levels that met our return targets. Moving to the structured business, structured AGP declined by 5% in the first quarter, decreasing from 56.8 million to 53.7 million. The last 2 years, we grew structured AGP by 48% and 128% respectively. So this year's comparisons will appear to be modest or perhaps down, but really represent strong long-term growth results. Ambac's writings during the quarter were dominated by consumer asset-backed deals including home equity loan issues, our consistent conduit enhancement business, and we did one auto deal during the period, as we continue to pursue this new product line for Ambac. Turning to international lines, international new business written increased by 65% in the first quarter. International AGP was 55.6 million in the first quarter versus 33.6 million a year ago. The strong international quarter was highlighted by a large Japanese 5 consumer loan securitization, also a U.K. utility deal, and a good structured credit derivative market activity as well. Our pipeline for international business continues to be very strong, particularly in the Japanese consumer asset-backed market. One item of note just on AGP, adjusted gross premiums written, we are now reporting international AGP differently than we did last year, and I just wanted to clarify that. Starting this quarter, AGP will not be net of sessions to MBIA. You might recall that previously AGP was net of premiums related to international fields that were ceded to MBIA and that was pursuant to a joint venture agreement that ceased in 2000. So with the fact that there is no longer a joint venture, we don't report that. For your convenience, we have provided adjusted net premiums written, or ANP, in our supplement, which is AGP net of all reinsurance that we give out. Hopefully, that information is useful to you. Turning to premiums earned. In total, net premiums earned in the quarter, excluding refundings, increased to 79 million from 66.6 million in the first quarter of 2000, and that represents up an increase of about 19%. If I were actually to include our credit derivative business in the numbers, you would see 6 about a 21% increase. The increases were most marked in our newer business with net premiums earned for the structured business being up 30% and net premiums earned for the international business up 39%. To a large extent, the increases for the international and structured finance premiums were high because of the buildup of the installment base resulting from strong new business written in past periods. However, you will note that as base year figures have risen, relative growth rates, although still very high, have naturally slowed. Accelerated premiums, which is the result of refundings, particularly in our municipal book, came in at 6.1 million or ¢3 a share in the quarter, up from 4.6 million or ¢2 a share in the first quarter of 2000. Ambac's accelerated premiums were relatively light when compared to the doubling of refunding activity that you saw during the quarter, in the market. However, as we have always maintained, refunding revenue is so very hard to predict, and not only is it impacted by the overall market activity, but also whether or not this activity relates to the bonds that you've insured by individual companies. So it's going to be a disparity in terms of predicting. Interest rates more 7 recently have actually risen, and we believe that if they decline again, we are not predicting interest rates, but if we did see a decline there again, we would anticipate a pickup on refinancing activity or refunding activity during the year; but again, very, very hard to predict. A note about fees and other premiums earned, that number came in at $5.1 million; that is up 89% from 2.7 million a year ago. The bulk of these revenues is from income associated with structured credit derivative deals, and consequently, most of the increase came from the buildup of that derivative business. As you know, derivative business is marked to market, and derivative income during the period was negatively impacted this quarter by marked-to-market losses of about $700,000. In the first quarter of last year, there was a marked-to-market gain of less than $100,000, so roughly about an $800,000 shift due to marked-to-market changes during the quarter. Investment income was up 12% in the quarter, primarily due to increase in the investment portfolio from ongoing operations. Investment earnings growth has been dampened somewhat by the decline in interest rates this year, and that really just affects the new money, as the old 8 money is invested for the long term. Financial services revenue, excluding gains and losses, were 14.5 million, which is basically flat from last year, and this line or revenue line includes revenues from investment agreements, interest rate swaps, and money management. We did see an increase in swap revenues, and that was offset by lower incomes from our investment agreement business, and the number of investment agreements over contracts outstanding actually declined last year with lower municipal market volume. So, we saw a decline on that side of the business. In summary, core earnings were up 16% normally and 14% for deluded share. Operating earnings were also up about 14% for deluded share. It was a very solid quarter in terms of bottom line, but very positive in terms of topline growth. The business flow for the second quarter of the market is actually quite strong, and the climate in the markets we serve remains very favorable. The long-term growth prospects for Ambac continue to remain attractive. A few other notes before I open up the questions. Ambac has fully implemented FAS133, as is required. Since most of our derivative business was already marked to market, the impact of FAS133 was only 9 approximately $400,000, which you will see on the face of our P&L statement, so, very, very, very minimal impact there. Second, in February of this year, Ambac opened an office in Tokyo, next door to our Japanese alliance partner, Yasuda Kasai Financial Guarantee Insurance Company. In fact, they are the first AAA rated financial guarantor in Japan, and as I said before, we do expect business in Japan to pickup, and we have already seen signs of it this quarter. Also, our Sydney office is scheduled to open at the end of this month. I'd like to give you just a quick update on the California Utility situation. As I am sure you are all aware, on April 6th Pacific Gas & Electric filed for bankruptcy. Ambac currently has about 68.7 million in net par exposure to PG&E, and all of this is secured by first mortgage. According to reports, the CFO of PG&E has stated that it is their intention to continue to make interest payments on first mortgage bonds, until PG&E emerges from bankruptcy. Interest on Ambac insured bonds is approximately 4.7 million annually. No principal comes due until a 1.4 million principal payment in the year 2009. The remainder of the principal matures between 2022 and 2026. Although we do not expect to make payments here, Ambac did set 10 aside a $5 million reserve to cover any payments that might be required by the California Utilities. Finally, before I open it up to Q&A, I would like to discuss earnings projections. Ambac has a 15% core earnings growth target. As we have said in the past, this is really not a projection for a particular quarter, but is rather our comfort level with our long-term prospects, and we remain quite committed to it. We did fall slightly below the 15% core earnings growth this quarter and will likely do so again in the second quarter. For the second quarter, this is mainly due to the fact that the second quarter of last year in year 2000 included larger than usual swap revenues in our financial services business. However, the third and fourth quarters will represent easier comparisons for us, and in those periods, we do expect to exceed the 15%. But I must repeat. Our commitment is to the long-term target of 15% core earnings growth. To be more specific on this, the consensus estimate for operating earnings this year is about 401 right now, and that's operating earnings. This estimate implies a 15% core earnings growth and ¢17 in refunding earnings. On the fourth quarter conference call, we 11 expressed our comfort with the 398, which was the consensus estimate at the time, and that estimate implied ¢14 for refunding. We remain quite comfortable with the 398 level, but recognize that there may well be further upsides from refundings here. That said, we believe that forecasting refundings is very tricky at best and will accordingly leave that exercise to the analysts. We will continue to focus our guidance on core earnings, which as we've said previously, we are comfortable with 15% for the year as a whole. And with that, I'd like to open it up for some questions.

Okay. At this time, I would like to remind everyone, in order to ask a question please press the number 1 on your telephone keypad now. Your first question comes from Robert Hottensen of Goldman Sachs.

Hi. Two quick questions, one on Japan, a more general question, is the business pickup in Japan something that you think is structural as it relates to the banking industry, or is it just an opportunistic development given the opening of the office and the relationship you have with your partner 12 there? And the second question really relates to the structured finance business, a more specific question, and that is while the AGP is down, obviously you are benefiting from the buildup in business over the last couple of years, and so my question really is what is the duration of some of the structured finance activity in terms how the earned premiums will flow out from the business that you have booked for over the last couple of years?

Okay, first the Japanese question. I think, first of all, we've been operating not so much with an office or an alliance, but we've been on focused on that market for some time, and I think it's starting to bear fruit here in terms of relationships that we develop, particularly in the consumer finance area. We have had analysts working hard. They are on planes a lot. The alliance is helpful, and having an office and a presence there is certainly helpful. So I think it's the result of hard work that we have done in developing those relationships, and I think it is somewhat structural in the sense that the Japanese economy and the banks are having a harder time with credit these days in terms of opening up capacity 13 to the consumer's side, and a lot of the consumer finance companies certainly are in very healthy, stable positions, and are really acting as a conduit for consumer lending, and that's our focus, and we have actually been quite successful in working with several different companies there on that front. So right now, as we suggested in the past, that most of the benefit or the potential in the Japanese market will come from the asset-backed sector, and that's exactly what we are seeing now. So we remain confident there, and really, the joint venture hasn't really kicked in, in strength yet, and we'd expect that alliance to really start producing greater amounts of business. So I don't want to excite people too much about that, but we do see some good activity there. The structured finance business, I did comment on the growth there, it's kind of hard to compare to last year since we had just a phenomenal year. We grew 48%. The year before we grew 128%. In 1996, we wrote $37 million the whole year. So being on a pace to write well over $200 million, we still have a dynamic in place here, that we are writing, our earnings is growing at a much faster pace or writings are multiple, a much higher multiple, 14 than we are earning. So, we are still contributing at a very rapid pace to the growth of this particular segment. The actual duration of this book is going to vary by bond size, but there is a component of this, for example, our conduit business, which is a recurring business, which really doesn't have a duration, it's sort of an evergreen type of facility, but the home equity lines of credit, not lines of credit, but securitizations and such, they'll typically have in the area of a 5-year life, and we did start to see, because we have been in this business for more than 5 years now, we did start to see some little bit of runoff there, which has an impact, but overall, still very good growth in that business and good production, and the duration will be a much smaller or shorter than the municipal book, is the high quality of earnings. It does not have that refunding component that is going to change the stream of earnings over time. So, we have a lot of different customers there, and it's a very solid base.

That's great. Thanks a lot Frank.

Welcome. 15

Your next question comes from Bob Ryan of Banc of America.

Good morning.

Morning.

There has been a lot of municipal market share shifts during the quarter, and I know we don't usually focus on that too much from one quarter to another, but specific to Ambac, what's the explanation for the difference in Muni par insured up about 146% and Muni AGP growth, which you detailed at 60%?

Well, yeah, we did see, couple of things here. We did see, I think a pickup in market share during the period. In particular, you might recall the first quarter of last year. We just didn't have a good quarter in terms of share. We don't really track that, as the market share is really not important to us, as we've said repeatedly, but last year in the first quarter we did see a dip in the market and very few of the type of business that we got done, that we do particularly and we focus on, got done. So the shift there is, we, I think, we had 26%-27% type market share, which was up for us. So partly due to that, was part of the 16 reason that you saw the increase to 60% in AGP for us. The other side of that; on the surface, it looks like pricing is down on the deals that we did, but really it gets down to mix, and overall, the pricing on the business that we did, pricing was quite firm and actually quite strong. So the business that we did in the market, the pricing was fine. On a mix basis, depending on the mix of business from period to period and those comparisons, you will see a difference in the rate, the absolute rate, but really, on a risk-adjusted basis, pricing was very good.

Okay, great. Just as a followup, completely unrelated, however. An explanation for the year over year and sequential increase in underwriting and operating expenses, it sort of stands out.

Yeah, first of all much of the increase really came last year in the third and fourth quarters, but you're right in saying there is an increase. Some of that, a little bit of it, is due to higher refundings because we have an acceleration there, but really, the rise in expenses really relates to the growth in our newer businesses. We've been 17 hiring a lot of people, and it's our expense base you'll see in the detail, it comes in compensation. We've been hiring a lot of people, and in the areas that we are growing in, these are more expensive areas in terms of the type of people you bring in and expenses associated with supporting that business. So that particular layer of growth is the international, the credit derivative business, and such, but we don't really specifically target an expense ratio, but our attention to productivity over the years has resulted in us being the best in our business in terms of efficiency. But clearly you haven't seen a pickup, and the thing to note too is that our growth rate in revenues, if you look at premiums earned and you look at our other premiums earned as well, which includes credit derivatives, is about 21%, and that's pretty much in line with our expense growth as well, year on year, and if you would do the math on that I think our expense ratio is about 18.5% give or take, which is still a good ratio for us, and we think we certainly can maintain that kind of ratio, but we really don't target it, and we're going to continue to be very efficient in this market. 18

About part of the issue of refundings, would you consider that new expense level on the dollar basis to be a fairly decent run rate?

I think that's fair. As you know, if you move around a little bit, but a lot of the hiring that we needed to do to build up our business has been done where we continue to hire in areas where we see the potential to grow the business, and from period to period, it's going to move around a little bit based on the ramp up stages and such, but growth in our expense base is supporting a growth in our overall business. So we are making sure that we focus on that and keep our productivity and net margins, which are tops the country, in place.

Sounds good. Thanks a lot Frank.

Thanks.

Your next question comes from David Graifman of Keefe, Bruyette & Woods.

Good morning. I had a followup also on the expense question. You had 19 mentioned that you are going to be opening a Sydney office. Will that, in itself, add anything to expenses, do you think materially?

Yes, but not materially. I mean, we're not talking, when we say we open offices, we really, most of our offices abroad, whether it be in Japan or Australia, are small offices. We'll rent a couple of rooms and really it's a couple of people. As the business expands, so will the people. We've been very prudent. For example, Australia, we've been writing a lot of business in Australia by putting our analysts on planes and sending them over there. We think by having a presence we'll be more productive and actually see more business as that market develops. So really, adding an expense there, is in response to a market opportunity that we see, and that's the way we've conducted our business, but I don't expect that the opening of the Australia office will add incrementally that much in the way of expense, and really won't affect our ratios.

Okay, just another question on, you had mentioned a $700,000 marked to market on derivates, and it was 100,000 last year. Which line were you talking about on the 20 income statement when you were mentioning that?

Yeah, just hold, net fees and other premiums earned that came in this period of 5.1 million.

Okay.

And included in that 5.1, was about a $700,000 marked-to-market loss on our credit derivative book.

So it's really more like 5.8. Is that something that's a sustainable number or is that going to continue to bounce around?

Well, there is going to be a degree of volatility due to the marked to market, although as you can see $700,000 relative to, close to $100 million in earnings is really not a material number for us, but. . .

Right. I was really more questioning the 5.8. Is that going to continue to be steady or is that going to jump around?

It should be. There should be steady growth in that business. There 21 is a very good pipeline for that business, and we are expanding our capabilities in this particular market. So I think you could probably count on that being ex the credit derivative, ex the marked to market. I think you could expect that to be somewhat stable.

Okay, great, thank you.

Your next question comes from Geoffrey Dunn of Conning & Co.

Good morning Frank.

Morning.

Couple of questions, one did you see any pickup in your refinancing or refunding activity towards the end of the quarter or in the first couple of weeks of April?

Yeah, I don't want to mislead people, but we're not trying to be coy in terms of predicting this particular activity, but it's very difficult for us to estimate or predict, because yes, we did see a pickup. We have seen greater interest in refinancings, but there are deals that are hung up. Pricing rates 22 went up 25 basis points in the last couple of weeks here, so there're deals that are kind of hung up, will they go next week, will they go next month. There are a lot of factors that come into play in terms of these deals. So we certainly have seen a huge increase, and if you read the headlines around bond buyers and everything else, there's lots of new activity, and the bankers are focused on refinancings, and issuers are focused on refinancings, but it's going to be very hard to predict when they actually happen, and that's why we're trying to get away from that a little bit because we don't want to give you an impression that we see a pipeline and then because interest rates peak up a little bit, and if we were to decide not to go, you're going to be disappointed, or the opposite could happen. We could see a bunch of refundings coming in and close because of a lot of other factors. So we've seen an increase in activity, and we expect it to pickup a little bit, but it's hard to predict.

Okay, and then following up on Ralph's question earlier, on the Muni side, you said that the change really in sort of the pricing measure of adjusted gross premium, the 23 par was due to a mix issue. Can you provide some comparisons as to a, in better quality this quarter versus past quarters, just some added color there to explain the shift?

Well, it really wasn't credit quality because I think the credit quality has remained quite constant. It's really type of transactions, for example, in the first quarter of last year, without getting into specific deals, there were more higher component of what I would call structured finance or more highly structured type of deals, whereas in this quarter a lot of the activity came in the more normal plain vanilla type activity, which carries a lower premium rate. So I think it's really the mix of the type of deals, rather than it is the credit quality.

Do you have any idea as far as the pipeline of structured deals coming for the remainder of the year versus, I guess, what you saw last year? Has the mix changed? Is it just for this quarter really in your eyes, or is the pipeline changing on you?

Hard to predict, but I think a lot of the business that was done, new 24 money was up 25%, and as I looked at the bond buyer and looked at the categories, the tax-backed areas were up a good chunk. So what happens in lower interest rate environments, if you tend to get the people, and the bankers focus on the big names and the big issuers, and those tend to be the tax-backed areas, and they are easier to do, so they tend to get done first, and then it's the more complicated credits that lag a bit and get less of the focus. So I don't know, but I do sense that we should see a little bit of a pickup in the rest of the year, in areas where we have particular strength.

Okay, great, thank you.

Your next question comes from Vinay Saqi of Morgan Stanley Dean Witter.

Good morning, couple of quick questions, and. . .

Yeah.

I know this might be difficult to answer, but within the press release, I guess Phil comments that as long as interest rates cooperate, you should see an 25 increase in refundings. I was wondering, is there a level within the firm that you guys look at where interest rates, long-term rates, need to be, or within a range, so that we can get a feel for what the sustainable level of refunding should be at a certain level?

Again, hard to predict, but we've actually cut the numbers a couple of different ways here, and I think we are, rates were, about 25 basis points lower than what they are today. We did see the potential for some very robust activity, but then, first of all, that went away, and second of all, again, if you get through all the factors we talked about before, the potential is there. Whether they get done or not is quite another issue, and it's not a matter of whether; these municipalities will take the opportunity to refinance. A lot of psychology comes into it, as to when. If you think rates are going to go down a 100 basis points, well you might wait. If you think they are going to go down 100 basis points, then all of a sudden they go up 25 basis points, you might think that you missed an opportunity, so perhaps when they come down again, and I caution with a perhaps here, that the trigger for refinancing 26 particular issues might be sooner than we think, but again, it's a very hard area to predict, and I really don't want to set out expectations that we know anymore than the market.

Right. The other question was on the backlog. I guess the last refinancing boom that we had was in 1998, and prior to that, it seemed like rates were relatively high for a few years. Between 1998 and 2000, we really haven't had that period of time that we had prior to that to build up a time for refinancings. Is the backlog as large as 1998, or is it significantly lower than 1998?

It's not as large, although our absolute numbers are larger, so I think we have about $1.3-1.4 billion of unearned premiums on a net basis that has the potential to be refinanced out. So the number is larger, but I think the potential as a percentage is probably considerably lower, but the one thing to note here is that refundings take away from our core growth rate. So the fact that there is an acceleration of earnings would actually hurt our longer-term growth rate, and I think it's just something to consider here that the quality of earnings are somewhat impaired by higher levels 27 of refundings as well. So I think we are not overly disappointed that there is not too much in the way of refundings.

Okay, just 2 quick followups. One is just in California, if you could just give us a feel for what the business conditions there are like these days? Whether you are actually pulling back from that market or you're continuing to go into that market, and last thing is, just an update on what your unallocated reserve stands at?

Yeah, California, I talked about the utility situation, but of course, the utility situation has actually put in other things. It puts some stress on the California market in terms of their economic condition, and the market has begun to recognize that, particularly in areas, for example, the California GO credit, the spreads on that have widened out, and we have selectively, at very good pricing levels, participated in that market, but once again, we are not going to take big bets on any one particular part of the world and remain quite diversified and look for opportunities to put our capital to work at very 28 good returns. So this is the kind of situation that we think over the long term will heal, but we want to get in there when we think the timing is right, and so we will be judicious in terms of the use of extra capital, and your thought in your last point was. . .

What's the unallocated reserve?

It's $102 million.

Great, thank you very much.

Your next question comes from Rob Gebhart of Merrill Lynch.

Hi, good morning.

Morning.

. . . if it's still morning. Actually, I just really have one remaining question on the structured credit derivative business. Just wondering if you could, you have seen huge activity, huge volume out of that business in the last several quarters. A lot of the growth I think in the international par has been through this line. I'm just wondering if you could talk, it sounds 29 like you have got hiring, you've staffed up to meet the demand, but if you could talk about the competitiveness of that market, maybe kind of refresh our memory on the returns that you are looking for from those deals, and that's it. Please.

Well, we view the, we call it structured credit derivatives, and that's exactly what we do there. We structure CDOs or CLOs, pools of assets, in the sense that we are taking the senior-most portion of the risk, and we are doing that in credit derivative form, but really that's an area that is not particularly a new area for us because we have done it in the cash market for years, but really represents an area where we can deliver in a different form of execution. So yes, we have built up our systems and capability and staffing in that area, as the business has grown, and as you can see by the net fees and other premium line, the revenues are growing nicely from there. But on a competitive front, other than the other primary financial guarantee companies in this business, the competition tends to be financial institutions or in some instances multi lines, but we remain in a very strong competitive position there, largely 30 due to the fact that we are a very good counter party that in many instances, these banks that require this service don't necessarily have a whole lot of exposure to us, and the fact that we are AAA doesn't hurt either. So our market position is very strong there, and the business itself, meaning the credit derivative business as a whole, is a huge market, nearly a trillion dollars. So it's a huge market, and our ability to compete is still very, very strong. So competitive position is good, as anything, as we do business here it's going to get a little more attention and a little more competitive, but the returns on this business are quite high. It's hard to give you exact numbers, but well above the 15% numbers that we've seen historically in our more traditional business.

Great, thank you.

Sure.

Your next question comes from Marco Pinzon of Salomon Smith Barney. Mr. Pinzon your line is now open.

Can you hear me?

Yes. 31

Well, I'll start off then, couple of quick questions. Number one, last quarter you characterized the problem list of your insurance portfolio as virtually unchanged. Would that view still hold today?

With the exception of, well I guess the last quarter's PG&E and SoCal Ed were on there, so I would say that is pretty much the same. I think there has been one name off and one name on. I won't give you the names, but there is always a few names on and a few names off as we turn through our portfolio that's quite active, so the portfolio is in very good shape, and again, the most recent additions have been the two utilities in California, which I think I have explained, so very good shape.

Okay great, and just a second question. Could you provide some broader comments on pricing in a competitive environment, beyond, I think you had mentioned before about the more commodity-like Muni products pricing is coming down and you just talked about the credit derivatives, but can you just talk more broadly about the rest of your market? 32

Yeah, I think broadly speaking pricing is good and has been good. So you know there are always going to be some segments of the market that are not so good, but generally, we are getting paid well for the business that we do, and in certain areas, getting paid very well, and a lot of that has to do with discipline, but a lot of it has to do with the fact that spreads have widened out in certain markets, and people really value who we are and what we bring to the table. We are getting paid for our structuring skills, and all that translates into very good returns. What we have seen again, pricing pressures have been in the more commodity-like areas, and again, although we don't participate in a big way in this market, in the municipal market, the plain vanilla GOs and tax-backed, that's an area that the pricing is not good, but that's not a terrific change from the past either, so other areas it's pretty good. We don't see any real problems.

Okay, great, thanks.

Thank you.

At this 33 time, there are no further questions.

So if there are no further questions, I'd like to thank you all for calling in, and we will be here for any additional questions you might have. Thank you. Bye.