Ambac Financial Group Inc (AMBC) 2002 Q2 法說會逐字稿

Good morning, my name is Cameron, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ambac Financial Group, second 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 this time, then please press star, then the number one, on your telephone keypad.

If you would like to withdraw your question, press the pound key. Thank you Mr. Bivona, you may begin your conference.

Thank you and welcome to Ambac's second quarter conference call. My name is Frank Bivona, I am the CFO of Ambac, and with me today, I have whose our Contoller, and whose head of Investor Relations.

As you know, we have released earnings today at 8 am, our earnings press release and the statistical supplement are on the web, and will be mailed out to those of you who have requested it. If you do not receive it, and would like to, please feel free to give us a call, or visit our web site at ambac.com.

This call will be replayed, beginning this afternoon at 2 PM. Please give us a call if you would like that telephone number. This call is also been broadcast on the web, you can access it through our web site.

I ask you to mark your calendars, the third quarter of 2002 earnings, will be released on October 16th at 8 am, with a conference call to follow at 11 am.

During this conference 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 change actual results.

Let me focus on the highlights of the second quarter, it was another strong quarter for Ambac, net income was 119.8 million or $1.09 per share. That was up 10 percent on a per share basis, from the second quarter of last year.

Operating earnings which excludes capital gains and losses, and unrealized mark to market gains and losses, were 122.3 million or $1.12 per share, that was up 14 cents on a per share basis from the second quarter of last year.

Core earnings, which is operating earnings, less refunding were 115.9 million, or $1.06 per share, up 15 percent, and I will note that on a quarter on quarter basis, Ambac has had increases in core earnings, in every quarter since we went public in 1991, and has averaged 18 percent growth over that period.

Looking at the top line, as you may recall, the second quarter of 2001, was a very difficult comparison, a great quarter. The second quarter of 2001 last year was, came in at a record 307 point eight million 80 P in the second quarter of this year was again very strong coming in at 276 point seven million all be it down 10 percent from that recorded quarter last year.

Let me take you through some of the detail of the three major segments of our business, the public finance business, the structured finance business and International finance so you can see what happened in each of the area's regarding AGP.

First Ambac's public finance AGP written was 135 point four million that grew seven percent from the second quarter of last year. Over all units of volume was higher than last year it came it at 90 almost 95 billion up 23 percent. While market penetration was relatively flat yet the high end of the range at approximately 52 percent and that continues to focus on the more highly structured segment of this market that carries certainly higher premiums and higher risk late returns and importantly we accomplish this with out compromising our historically strong under righting standards.

Public finance this quarter experienced very good and strong transactions flow in the following areas, housing, transportation, fact stacked issues and also had a good quarter in student loan segment of the markets as well.

Moving on to structured finance, structured AGP had a great quarter coming in three percent higher at 101 point eight million. This sector includes mortgage backed and home equity ABS, other consumer finance transactions, CDOs are classified dead obligation, some lease back scuritization, investor own utilities and of course, and also after that commercial paper as well.

The increases that we saw in this market were driven by again strong asset backed issuance, CDO issuance and also investor own utility activity. It was partially off set by lower premiums written in our consumer mortgage backed segment however I will say that the structured finance pipeline for the future or for the rest of the year continues and remains strong.

International.

The International AGP declined this quarter it came in at 39 point five million compared to very very strong 82 point seven million in the second quarter of last year. As we have stated in the past, the International markets because of the nature of the transactions that we do in this market meaning that there, they tend to be very large premium dollar transactions and carry very very long lead times, sometimes up to two or three year's.

The premium activity or the top line activity in this segment can be very very lumpy and this will cause variability in the top line. Deal activity was strong in the asset backs segments of the International markets particularly in Japan and the U.K. but certainly very slow in the U.K. infrastructure finance segment of the market. I will say that we are currently mandated on several International deals that we certainly do expect to close this year and although we are down this quarter in AGP on the top line this still is our highest growth sector of our business by quiet a wide margin. If you look at our press release you'll see that earn premiums year on year grew 57 percent year on year, so very good growth sector a lumpy top line.

The demand for our product continues to be strong and solid in the International markets and we find pricing and structure to be very strong as well.

Over all as a general market commentary on pricing and competitiveness, as I did state in the first quarter and really nothing has changed, the competitive and pricing environment for our product remains very favorable and throughout this year, we have generally been able to achieve our pricing objective throughout, throughout all the markets we have anticipate.

Moving on to premiums earned, in total premiums earned in other credit enhancement fees earned in the quarter, excluding refunding or accelerated premiums related to refunding increased to a 109 million, up a very strong 24 percent in the second quarter, so we have seen a slight acceleration of the growth from the first quarter, coming in at 24 percent.

Accelerated premiums which resulted from refunding, in the public finance remissible market were 11.2 million or six cents a share in the quarter as compared to 10.6 also about six cents a share in the second quarter of last year.

Remissible refunding activity remains high in the current interest rate environment and as we pointed out last quarter, the impact of refunding on our bottom line has dramatically declined over time as we've expanded our business, as we have expanded our business lines.

Even in this high period of refunding activity, earnings from refunding represent only about five percent of operating during the second quarter and actually year to date as well. In 1993 by comparison, earnings from refunding represented almost 30 percent of our operating earnings.

The next to focus on is investment income, investment income was 73.6 million, that was up 13 percent in the quarter. Primarily, this increase was due to increases in the investment portfolio from ongoing operations, as we continued to generate very healthy cash flow.

The income line also benefited from our £200 million debt offering, that we did in October of 2001. Partially off setting investment earnings growth however, is the lower interest rate environment that exists out there, in fact that we are investing that, those free cash flow at lower interest rates.

Financial services, financial services revenues were 11.0 million, 11 million down about seven percent on, from the second quarter. It was actually a very strong quarter for investment agreement business, with revenues, where revenues improved by about 3.9 million as spreads improved and volume was also strong.

In our swap business, we close several profitable transactions during the period, however, we did have a one time isolated adjustment to revenue, that reversed 3.8 million on a single interest rate swap, written in the first quarter of year 2000, that actually terminated early during this period.

It is important to note here that, this was an adjustment to a mark to market asset that does not represent an economic loss and will not result in any type of cash payments. Had we not had this revenue adjustment on the swap, financial services would have had improved 25 percent on a quarter to quarter basis.

In summary, it was another strong quarter, with quarter earnings up a solid 15 percent and operating earnings up 14 percent on a per share basis. Our top line, line of AGP came in at 277 million, but we'll benefit, benefit from our international, that represents a real strong performance and demand for our product continues to be strong.

Before I open it up to any Q & A, I'd like to discuss a couple of items. First, as you may have seen in our press release, starting in the first quarter of 2002, so next quarter, we will no longer be reporting operating earnings as I just did actually for this quarter. Further, we have changed the definition of our quarter earnings to comply with the recommendations as published in its' report titled ''Measures of Corporate Earnings'', which was released in May of this year. Clearly, efforts are designed to improve the consistency of financial reporting across all markets, and I think the driving principle that is incorporated into their definition is to consider all items that are related to the core operations of your business, as part of core earnings. And as such, we feel that it's appropriate that we'll no longer deduct out net securities, gains or losses on credit derivatives or investment, and also that we won't deduct out the effect accelerated earnings from refunding, as these activities are most certainly part of our core operations.

The decision to eliminate operating earnings and re-define core earnings, has been under consideration for some time, Ambac, as you know, introduced its' own definition of core earnings in the early '90s to assist investors and analysts in distinguishing between earnings from normal premium flow and the more volatile accelerated premiums that result from refunding in the municipal market. As I reiterated various times, and again, on this very call, as Ambac has expanded into new markets, and the impact of refunding has certainly lessened distinction between core earnings as previously reported, has become increasingly less relevant. I will say that the principal grey area in 's proposal is the inclusion of estimated cost of stock options granted.

We are not adopted FAS 123, which relates to the accounting or expensing of stock options through your , we're not going to adopt that until there is more clarity on the exactness of any potential accounting changes on this topic. However, to arrive at core earnings, Ambac will deduct the full theoretical cost of options, of stock options, as if they had been expensed or income statements over the years.

Ambac management believes that the current stock option cost methodologies are theoretical and tend to overstate the impact, but there can be no question that the stock options, that stock options in fact do represent valuable corporate resources that should be prudently utilized and managed.

This step towards providing a more consistent measure of our corporate earnings, is another example of our desire to be as transparent as possible to the investment community, and we hope that this step of ours in this direction will lead others to do the same. Again, in the future, Ambac will only report net income in conformity with , and its' newly defined core earnings, core, and in the press release that we issued today, we've actually provided you a table that reconciles that for your purposes.

Next, I want to talk a little bit about guidance, and then I'll open it up for questions. A comment on earnings projections. Ambac's management, is first of all reconfirming its' top range of operating earnings of 460 for 2002, while raising the bottom end of the range from 450 to 454. Since Ambac will eliminate the reporting of operating earnings and change it's definition of core earnings to conform with definitions. Ambac's guidance will of course change accordingly.

This guidance will include year to date net realized gains and losses on investments securities and net mark to market gains on losses on credit but will be exclusive of such future gains and losses. Since management cannot forecast market factors, factors such as interest rates and credit spread with sufficient accuracy to make such useful - make such forecasts useful, we will not provide guidance in that area.

That said management currently anticipates core earnings exclusive of securities and gains and losses for the remainder of the year, per diluted share to be between $4.36 and $4.42. So, to help you reconcile this with our old guidance start with the 4 50 to 4 60 - we just upped that to 4 50 to 4 60 - 4 50 sorry - 4 54 to 4 60 and then you adjust for estimated stock options which we're saying is roughly 13 cents for the entire year and the year to date securities gains and losses which is five cents per year so you back out 18 cent and you come up with $4.36 to $4.42 so essentially no change to our guidance if not an increase in the bottom end of the range.

And with that I'd like to open it up for any questions you might have.

Operator, do we have any questions in the queue?

Operator?

your first question is from with Morgan Stanley.

Good morning.

Good morning .

Just a couple quick questions - Frank one just on the reporting format - I assume that the reporting format itself won't change outside of the fact that you won't be giving us operating numbers and the core number will have changed but the line items will be the same going forward.

Yeah, you know this represents absolutely no change to our accounting at all it's just really headlines. We're gonna - you're gonna see the same statement you always say the same disclosures you always seen the key difference is that there won't be a headline on the top of our press release and we won't be giving guidance along operating and old core earnings and we just think it makes a lot of sense to certainly in this environment to conform, so there's little confusion out there.

But we'll give you all the information we previously gave.

OK and then just two other questions - one is if you could just tell us what's going on in the market these day s given what we've seen with and has there been any dislocation there or are deals getting priced and getting done as they have been in the past and secondly if you could just give us a little bit more detail in terms of the revenue adjustment on the financial services segment that'd be great.

Sure, first up with regards to we do not have any direct exposure to or to any other Corporate. Ambac does guarantee certain CDOs with our pools of large numbers of diversified cooperate debt obligations. Ambac's exposures generally to senior of CBOs so we are generally well protected by layers of subordinations.

On three or four separate deals, Ambac has taken some very, very small first loss positions, that are fully reserved for. To date we have not paid any claims against these positions, and they are fully reserved. If we had to pay a claim in the future, there would be no effect.

So, our book, in general, is operating very well in this environment, although, you know, layers of protection have been somewhat diminished by the general activity out there. I will say, also, that activity is - in the new market, is - is somewhat robust. There's a lot of deals being done, still and the demand or the need for protection, is still there.

And our ability to act in the very high level senior trounces is - is still a very valuable product in this environment. So, we continue to see deal flow and our portfolio is holding up quite well.

On the financial services, swap adjustment, just to give you a little more color. Back two and a half years ago, we booked a unique swap deal for a client, this deal was unique in that it terminated at par, versus a typical swap that terminates at market. Since this swap terminated at par, we should have recorded - we should not have recorded any mark-to-market gains and losses on it and you might know that this is a mark-to-market business.

However, we in fact, did recognize $3.8 million, over approximately a 30-month period. Upon termination, which happened during this quarter and that's when we recognized it, we discovered that we made this - that his had happened and we made the appropriate adjustment first-hand.

I just want to say, this was a unique deal and there are no other deals like this, of this nature, in our book. And as I've said, it's a one-time, isolated event and it's important to note that this was an adjustment to a mark-to-market asset and really does not represent any kind of economic loss to the company. In fact, we made money on the transaction. So, that's the swap.

Great. Thank you very much.

You're very welcome.

Your next question comes from Rob Ryan with Bank of America.

Good morning.

Morning.

Could you give the unallocated loss reserve of, considering that you said you now had fully reserved for certain positions?

We're at 121. One-twenty-two Tom?

Yeah, 121.

One-twenty-one, $121 million.

OK. And any issues or implications, that you can see, of the recent downgrades of your Japanese partner?

No. You know, I think we do use them, in a very slight way for re-insurance. I shouldn't say slight, it's important, but it's a very small percentage of our re-insurance strategy.

You know, the key there is that, our relationship with them is more strategic, in terms of the generation of new business. Which actually is doing quite well, in Japan, we continue to have good quarters there. Where, you know, where we have re-insurance relationships, instead of triple-A they're double A now and a that doesn't necessarily bother us, we still think they're very good credit and we'll continue to work with them.

But the generation of business ideas doesn't cease because of that.

OK. Great. Thank you.

You're welcome.

Your next question comes from Jeffrey Dunne with Keefe, Bruyette & Wood.

Morning Frank.

Morning.

A couple of questions on, just some of the operating segments.

First on . You know, a year ago, generically speaking, those would have been in pools of high quality credits where you probably had a cushion of, say, eight to 12 companies, or something like that.

With the number of, sort of, fallen angels in the past year, when do we start to get nervous, if we lose a couple of two or three more big companies out there, how much of that cushion has been eaten through, with all of these sort of unique events that has happened over the last 12 months?

Well, certainly, you know, as we all read the headlines, there has been some, certainly some erosion but, I think you have to step back and understand that most of the business that we do in this segment, segment are rated, the segments that are taunted that we are insuring are Triple A, and have, you know, have very large layers of protection.

Some of that has been eroded away, but these are still even with that erosion, very highly rated transactions, most of them are still Triple A, a couple of them have been notched down to Double A, but, you know, Double A means that the probabilities of default is still very very remote and the thing you got to remember too, is, as erosion happens in these things, time elapses as well, so, to the extent that there's, you know, the time has shortened, that improves your risk situation as well, so, we are generally very very comfortable with the book, we do have one or two credits that are closer to, to potentially paying a claim then we would like them to be, but, their fully reserved for, and we feel good about them.

OK. And then it seems the topic in recent weeks has been, on the credit card sector, are there any generics underwriting details that you could provide us about sort of, protection levels against default rates, or anything like that, for general credit card deals?

You know, we do very very little credit cards, you know, we did disclose that we did provident acts of that deal, were performing quite well. So, that the protection that we still have there, those provident loans are still not triggered any kind of rapid amortization or anything of that nature, is still very very high, so we feel very good and don't expect any losses there, but we do expect, and we saw some headlines today, that reserves and such will pick up against this segment, but again, we underwrite deals that anticipate, you know, very very stressful situations, that we're not anywhere near anything ugly there.

OK. Thank you.

Your next question comes from with .

Hi, good morning.

Good morning.

A couple of questions, number one, have you changed your underwriting approach at all with respect to CDOs given recent developments in the bond market, number two, can you give us some color on the slowing in the public, UK public infrastructure market, and then lastly, I just want to get clarification on the revenue adjustment in your slot, is that, was there any related expense adjustment to that?

OK. I'll handle the last first, there was no related expense adjustment, it was just a revenue item, again one time and isolated. On the other end, the CDOs, I guess it's fair to say that we have learned from the past a little bit here, in terms, you know, the rapid level, un present and rapid level of corporate defaults that we've seen out there, but, we reconfirm our underwriting standards, we really haven't changed anything, I think what surprised everyone, in this market, is the rapidness of the movements, but, you know, the cushion levels and the fact that we're playing in the most senior trances, is really not, required us to change anything about how we underwrite, so, we have learned that things could happen a little quicker, but that the appropriate cushion levels that we do have are proving to be appropriate.

So nothing material there in terms of change.

Color on the U.K. infra-structure side, you know you've heard this a lot out of us and some of our competitors too, this is a business that is very unlike the U.S. business where the U.S. public finance infra-structure business is so regular, we get a very large deal for MTA, this particular quarter.

The mass transit authority here in New York city, and I think it took us about three days to underwrite it and approve it for credit and we probably got a week's notice on it prior to that, it was coming to market and such and you know that's pretty ordinary in the U.S. public finance infrastructure market when municipalities want to come to market they just hire a banker and the next week they are in the market.

In the U.K. and throughout Europe and throughout international, there is very very long lead-time; we've been working on a transaction that will most likely close this year that we've been working on two years.

It will be a huge premium when we close it, and we'll all be happy for that but its going to create some degree of lumpiness and this happens from period to period, so you know I think its important to note that the business is very strong over there and there is great demand, we're hiring people, we continue to be very very optimistic and our growth rate is great, it's just going to be lumpy and people should not focus on just the top line there.

I understand why you do, and I'm not trying to dissuade you from doing that but you can't look at one without looking at the other.

Look at the 57 percent earnings growth we have there, and judge us at the end of the year on how we're doing.

OK, great that helps, and if I can just add one more question, a follow up question, can you give us some of magnitude on the P and I to the one or two credits that you were talking about that are close to maybe a claims payment.

No, I, they're really small, you know we're talking in expected loss areas of $5 to $10 million.

OK, great thank you.

Your next question comes from with .

Good morning Frank.

Morning.

a couple of quick questions, on the disclosure issue again, will we be able to pick out what we currently define as operating earnings, in other words, will we be able to take net income back out, capitol gains, and back out refunding's even to get to old core, or are you just not going to disclose those at all.

No, most certainly we will give you all that information Katelyn, and I think the effort here is for you to do that and not me.

You know I think its the company stance and certainly my belief that you know in this environment we are better off reporting net income and I hope what will become a definition of core earnings that will be widely accepted in the market and then as it has always been Ambacs' practice, is to give you enough information for you to draw your own conclusions on how we did during the quarter, from, by giving you the earnings per share impact of refunding's, securities gains and losses, and stock options and anything else you want you know to talk about, we're happy to give out that information and we will give full disclosure on that.

We just don't want to get into the headline stuff that, particularly if you think about it, SMPs coming out with SMP core and in fact business week published Ambacs' earnings for last year, they did every company in the SMP 500, on a recalculated basis to have that number out there, that's called core earnings and have us report another number, we think would cause confusion and in this environment clarity and transparency is more important.

Yeah that's fine. OK. And then, could you also talk about what your domestic gross, domestic structured finance gross expectations are this year, especially that, given that a chunk of your business has come from IRSC in Merrill lynch Mortgage and in sort of the non conforming mortgage market, is there any risk that there could be a slow down in the domestic market, if their mortgage market closed down?

You're talking pretty much about the structured finance...

Yes, domestic structured finance.

OK, and yeah, I think, we have seen a little bit of a slow down there and also we have seen a fair amount of prepayments, on old business, so, we're, that segment is growing about 18 percent in earnings, which is certainly a good number, but a lot of that, believe it or not is been propelled by some newer type deals that we're doing in structured finance, so, yes, we do have a big home equity and we are leaders in that particular market but you know, we are also doing other types of certification, whether they be, insurance company's or equipment leases or cars, we've been quite successful at doing more auto type deals, in a very selective way, so, I think as we certainly develop new product lines here, and we have done so, that's going to offset our dependency on, on purely the whole equity market, if that were to fall off in any regard, but, we do think, that the rest of the year looks pretty strong for that market, and feel pretty comfortable in the prospects for that market.

OK. And along those lines, what's Ambacs reaction to the draft proposed accounting changes on special purpose entities in terms of the impact that may have in the next 18 months on your business?

We just support exactly what they're doing, again, there's going to be common periods in everything else and this could take a while, but, we generally support, you know, the full disclosure and consolidation where appropriate, and the impact, I think, that, that will have on our business, generally will be if anything slightly positive because it will require company's to use financial guarantees to help them to remove risk off their balance sheets if necessary, and I think that could be a positive for us.

And then final question, again on the domestic structure...

OK.

Again on the domestic structure market, what's your outlook for the multi lines, given what's happened in given MBIAs announcement this week, do you think there will be a in the use of Multi line financial guarantees, in the domestic market?

Well, you know, we, as we insures?

Yes, and as, well as players in your deals generally?

Generally, we don't see them in our deals, you know, we, just to be clear, sometimes we use a multi line reinsure, if the you know, for example, earthquake insurance or something of that nature, where they're required to pay if there is a catastrophic event or something of that nature, we do have some risk to the multi lines in that context, but you know, I don't know exactly what happened with MBIA and their deal, and I think, with respect to that type of risk, we are comfortable that PNC company's will pay on traditional PNC insurance and we select high quality reinsures to do that.

We do have reinsurance with, with, in some case, multi line reinsures, although, it's very very small, most of our reinsurance are with typically Double A or Triple A rated financial guarantee reinsures, that have combined in some cases with others but generally I don't think it changes anything in terms of what we do on the re-insurance side, we have to be very selective and we are about the credits we take there on the business generation side we don't typically take that kind of risk.

OK, great, thank you.

Your next question comes from with .

Just wondering if you could shed some light on, of the total loans in force that you have guaranteed, what percentage of those do you have re-insurance protection on? Then I have a follow up or two.

When you say loans.

Well the bonds.

Or just general, we have about $41 billion of re-insurance about 11 percent of our book is re-insured and that is concentrated in very, not concentrated, it's diversified but it lists a very high quality of re-insurers across the board. I think our largest re-insurers tend to be someone like Radian or Enhance, Enhance was acquired by Radian.

Ace American Re, which is a sub of Munich Re. MBIA is a large re-insurer of Ambac as we are of them, names like that Axle another name, high quality names.

To the extend that you re-insure MBIA what size some of their books, do you decide to get included when I look at the statistics of the total whatever, book of business or loans in forced or not?

Yes if we re-insure in that would be included in our numbers of course, if we re-insure out it would be excluded from our numbers but

So that's a net number when I look at reported

Correct, correct and just a note on why we would it as an MBIA typically in the past we did have a joint venture where we shared a lot of large credits internationally and I think both of us have very good risk management practices in terms of making sure we're not too exposed to any single risks so by deals from time to time that is very helpful.

OK so just to be clear the 500 and 2.9 net financial guarantee's in forces, net of risk that's been re-insured away and then also bonds or guarantee's that you've re-insured.

Correct.

OK and then the second question and final question that I have would be. What's the average underlining credit quality of the book of business that you've guaranteed?

I think about 80 percent is air better rated so the underline rating before we insured of the bonds we insure is generally 80 percent A or better before we insure it and about one percent or less than one percent is what I would call falling age or less than invest and that is our policy is to insure only invest in great securities to begin with but clearly if they were to fall below investment period after we re-insure them that what's we're counting there.

OK, sorry I have one final question and last one. What percentage would be municipal and what percentage is otherwise?

The percentage of the book. Yeah, about 85 percent of the book, sorry let me just get the exact for you. About 58 percent of the book, sorry, 58 percent of the outstanding at the end of June is municipable or public finance, 27 or 28 percent is structured finance and the balance 14 and half 15 percent is international.

Thank you.

Your welcome.

Your next question comes from with Merrill Lynch.

Good morning.

Good morning.

I wondered if you could just add a little color to the international business just kind a thinking you know you've talked about the very high level drivers of growth in that business you know privatization and the development of secularization and structured finance markets and that sort of thing and I'm just - I'm wondering in looking at that at that market and here I guess I'm thinking more not so much in the businesses maybe the deals that you do say in Western Europe and other developed countries.

How much of the growth is kind a being driven by those very high level factors and how much of it is being driven by you know regional factors like economy, like interest rates and then kind a if you could give us a sense for - you know where we are in terms of those you know economic - you know the economic position of some of those markets - you know is that a positive driver of growth relative to the last couple of years or is that kind of detracting from it?

Yeah, I don't attribute any real growth in the international markets to what I would call interest rate growth or economy growth in a local level - you know we're not even into that ball game yet - you know 10 years down the road we'll be worrying about what is GDP growing at in Germany and how is that gonna impact the growth rate of issuance of bonds.

Right now we are at the very, very early stages still of the development of those markets and any deal that we do see is still what you would call the higher level it's the evolution of finance in those markets turning to the capital markets and you know in the infrastructure it's activity for example in the U.K. that needs to be solely done by the U.K. central government that is now being farmed out to the private sector to take care of, so as they improve their sub ways and their airports and their utilities and their housing more and more of that's gonna go out to the private sector and that's a change in a very high level of dynamics that's driving the growth in our market.

You know I think if we had to rely sorely upon the more regional economic factors I think we'd see a very, very slow growth business I don't think financing activity has generally increased in the international market that are at a rapid pace.

What's happened is there's been more penetration of our product into those markets and obviously as develop or skills to the point where we can - you know deliver more product and deliver more complete service over time - we'll be able to extract more out of those markets.

OK that's helpful and then I guess I don't know if you'll be able to answer this question or not but I'll throw it out there. Total AGP in the year to date I think for all three businesses total is up about five percent - you talked about the pipeline being strong - I mean are we talking for the full year about seeing AGP growth in the mid teens giving kind a where the opportunities are and giving your expectations for what could close by the end of the year.

You know I think - you know and we're guilty of this we've placed too much emphasis on that and you know the fact of the matter is we're sitting here on July 17th - 99 percent of our earnings are kind of baked in at this point in time and writing a lot of AGP probably a little less than 99 percent but you know my point is some much is baked in that that fact - we had a great second half in writings, it wouldn't have a whole lot to do with impacting earnings, this particular year. So, we were up five percent or up 15 percent.

And we are still writing premiums at two and a half times the level or - or - or rate that we're earning 'em. So, we're really contributing to growth, you saw accelerated growth in earning premiums, during the period.

So, I guess my answer to that is, you know, it could be up five percent, it could be down five percent, it could be up 20 percent or down 20 percent. That's not going to matter too much to us, we're going to write as much business as we can, within the risk parameters we have and are fully confident in our ability to hit earnings targets.

I guess that didn't answer your question.

Yeah. I wasn't asking so much from an earnings perspective. More just from, you know, I mean you're not providing a lot of detail on the pipeline, other than the fact that it's good. And I guess I was just.

Yeah, and I, you know.

Trying to get a sense for if it's better than what we've seen in the first half or worse than we've seen, you know?

Yeah, I guess implied in the fact that we've stated repeatedly that we think we can grow our base business, you now, at 15 percent, is that we have full expectation that over time we can grow our premiums at a rate at which is enough to create that earnings growth.

And what I guess I'm saying is that's not going to impact a whole lot, this year, in terms of the earnings growth, 'cause most of that was already baked in. And I just don't think that we should pick a number for you to compare it to, as we go here. It's going to be lumpy and we're going to do what we can in the markets we can do, but over the long-term, we think we can grow this business 15 percent.

OK. Fair enough, thanks.

Great.

Your next question comes from with JP Morgan.

Hi Frank.

Hi.

: Just a clarification on the core earnings and the net earnings that you will be reporting.

You said that there is an 18-cent per share difference?

Yes.

: Part of that, you know, the eight cents is from the net realized gains and losses and including the mark-to-market losses on credit derivatives.

It's five cents for

: What were - what were the other components?

Let me just give you the components.

: Right.

Eighteen cents in total.

: Right.

And 13 cents, 13 of the 18 comes from stock options, which is pretty much right out of our annual report, that we disclosed last year, but it's - that's roughly the cost of stock options that we expect. The theoretical cost of stock options that we expect.

: For the full year?

For the full year.

: Right.

And five cents of related to securities gains and losses, which includes both capital gains and losses on investments and gains and losses on credit derivatives.

: OK. On the stock option number, that theoretical number, under different methodologies, would it change a lot?

Yes.

: different methodologies have been discussed.

Yes. And I think this is exactly why we are not adopting a , as some companies, and I applaud them by doing so. I'm not criticizing anyone for doing whatever they have to do, but the reason we're not adopting is because there are lots of different methodologies, including some that say you only count options that you issued in this current period.

So, we could have reported a much lower number here, if we wanted to, but again, in an effort to be as transparent as possible, we're reporting what we already reported in our annual report, on that same basis and it's three years of stock options that equates to roughly three cents.

: OK. What are the new guidelines? I'm a little ignorant of that. What would how would that number change if you adopted the new proposal?

Let me just use Coca-Cola for example.

Right.

Coca-Cola has come out and said they will only account for options that they issue in the year 2000, sorry 2002.

Right, only one-year right?

Yeah, one year option that might vessel for three, four or five years so, if it would invest over three years you only count, you calculate the cost of the options in that one year and divide by three to come up with the impact.

Right.

So ...

The story would be the 13 cents.

Correct, if we were to go that route it would roughly be a third of the way of the number. The other thing to note here is that Coca Cola has decided to value them differently as well by going out and getting broker quotes and we are using black shawls in our methodology so, again the reason we're not adopting this is because there's a lack of clarity and if there ever becomes clarity, of course we will but we still wanted to give the information to people.

Yeah, but if you do it's probably not a material difference one way or the other would be my guess?

It would be most likely much lower than what we're reporting.

Right. On this whole issue of the top line. I know from time to time your focus discussion of just because we're, all eyes are on that number as an indication of growth, but is it still fair to say as you said, because your volume today is so much higher and it's how it is seized into premiums earned that your volume would have to go down quite a bit to change the general momentum in the way, the urn pattern, so that when you have a big bump the way you have in the last few years, just makes comparisons difficult even though the underlying growth rate has overall ramped topped. Is that a fair way to say it?

That's very fair but you know absolutely right. But just take one fact here, we earned about $114 million in net premium earned during the period. We wrote or generated 277 so ...

So, the relationship ...

The relationship is far more important, far far more important than the absolute number and you know, that's what we've been trying to emphasize and that's what drives earnings. It's the relationship of how you write it or generate it to how you earn it and we have over $3 billion today of future earnings that's just waiting to be with the clicking of the clock, to be earned to premium.

So, it's really the relationship and it's not to say that no one should look at the top line, they should but, you know, one should not read too much into any one quarter or even for that matter, any one year in terms of the implications or the growth rate. You should moreso look at the relationship between and earned premium and if that is eroding, then I'd be concerned but, in fact it's been accelerating.

You know, a quarter or two ago I forget exactly what the timing was, when MBIA had a pre-announcement about the top line and I think the was different, the implications that they are greater competitive pressures and such in the international area. You are not at all saying that and you're not saying that there's been any slow down in overall activity other than as you said, in the UK is it the UK infrastructure area or something? But, other than that, are you generally saying that the international arena in total remains strong and competition has not gotten worse, is that the message?

The message is we had a great quarter. International was slow but the forward outlook for international is vast in terms of the opportunity there and we're going to have a strong second half we believe based on the mandates we have so there's absolutely a healthy environment in all markets including the international market.

Then why, why not in answer to the prior questions, oh yes the outlook is pretty good for AGP for the full year, I think you had said it oh, it could be up five, down five, up 20, down 20, wouldn't you already be able to see the pipeline?

Yeah we do but we don't know what we'll close and

OK.

And if this is a business that's going to be judged on if we close a deal or we don't close a deal, that we aren't over 30 years, then I think people are missing generally the point, and what we want people to focus on is what we can deliver with degree of certainty which is earnings, real earnings, net income and the top line which is business production, I'm not saying people should ignore it, but if we don't close a deal on December 31st, and we close it on January 1st, I don't think, I think people should discount that some, or not be too concerned about.

We can rest assured though that quote, unquote the pipeline is strong, the business activity is strong.

Yes.

OK, thank you.

Your welcome.

There are no further questions at this time Sir.

Well great, if that's all then I thank you all for joining us and we'll be here certainly for any questions you might have, thank you, bye.

Thank you for participating in today's teleconference.

You may now disconnect.

If you'd like to make a call please hang up and try again, if you need help hang up and then dial your operator. Thank you.