Ambac Financial Group Inc (AMBC) 2003 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Ambac Financial Corporation Q2 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief Q&A session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Gandolfo, CFO of Ambac Financial Corporation. Thank you, Mr. Gandolfo. You may begin.

Thank you. Welcome to Ambac's Q2 conference call. My name is Tom Gandolfo. With me today are Rob Eisman, our Controller, and Pete Poillon who heads up Investor Relations.

As you know, we released earnings today at 8:00 a.m. Our earnings press release and quarterly supplement are on the web and will be mailed out to those who have requested it. If you do not receive it and would like to, please give us a call, or please visit our website at ambac.com.

This call will be replayed, beginning this afternoon at 2:00 p.m. Please give us a call if you want the telephone number. The call is also being broadcast on the web. You can access it through our website.

Please mark your calendars for the Q3 2003 Earnings Call, which will be released on October 16 at 8:00 a.m., with a conference call at 11:00 a.m.

During this conference today, we may make statements that would be regarded as forward-looking statements. These statements are based on management's current expectations. I refer you to our press release for factors that could change actual results.

Let me jump into the highlights of the quarter. This was another very strong quarter for Ambac. Net income came in at $162.6m, or $1.48 per diluted share, an increase of 36% on a diluted share based from the second quarter of 2002. While Ambac reports net income in accordance with Generally Accepted Accounting Principles, the research analysts have not yet adjusted the reported estimates accordingly. There [inaudible] provide information on the items that analysts adjust out of GAAP net income to arrive at their current estimates to eliminate any confusion. Those items are, first, net after-tax gains on the sales of investment securities and mark-to-market gains and losses on credit derivative contracts, which in the second quarter of 2003 amounted to net gains of $17.9m, or $0.16 per diluted share. This compares to a net loss of $2.5m, or $0.03 per diluted share, in the second quarter of the prior year.

The second thing that's adjusted out is accelerated premiums earned on guaranteed obligations that have been refunded or simply refundings. That amounted to $21.1m on a pre-tax basis, or $0.11 per diluted share in the second quarter of 2003. That compares to $11.2m, or $.06 per share, in the second quarter of the prior year. That was up 83% on a per share basis.

Note that Ambac also took a $12m charge, and that $7.8m on an after-tax basis, or $0.07 per diluted share, for a mark-to-market adjustment in our Financial Services segment. This item has not been adjusted out of this second quarter 2003 amount, as we deem it to be from normal operations. I will discuss that item in more detail later.

Also note that we began expensing stock options in the first quarter of 2003, and the stock option expense of $0.01 per diluted share is included in the second quarter 2003 amount, but not in the comparable period, as we started in the first quarter. So, please be aware of that when you make your comparisons.

First the six months ended June 30, cash flow from operations was just over $500m. Most of this strong cash flow from operations is invested into our investment portfolio to support future growth. I'd like to emphasize, this is net after-tax cash flow generated from our operating activities, and the growth in this line item continues to be quite impressive.

Let me talk about production, adjusted gross premiums written. Just a refresher of memory: adjusted gross premiums written is gross up-front premiums written, plus the present value of installment premiums written, during the period. This was another very impressive production quarter, with AGP written coming in at $455.2m, versus $267.7m in the second quarter of the prior year. That's up 65%. Contributing to this strong performance is significant issuance, overall strong demand for our product across all product lines, and an large insured transaction closing in our international market.

Let me take you through some of the detail on the three major areas of our business, Public, Structure and International Finance. Ambac's Public Finance AGP written came in at $223.3m, growing 65% from the second quarter of 2002. Municipal market volume remains robust. In fact, it was at a record level for the first six months of 2003. It came in at $114b in the second quarter, up $20% from the second quarter of the prior year. Although we obviously cannot accurately predict market issuance, we do find it difficult to presume that it can continue at this pace for the remainder of the year.

Market penetration was relatively flat, period-on-period, but remained high at approximately 52%. In the second quarter of 2003, Public Finance experienced strong transaction flow, particularly in the transportation, healthcare and municipal lease segment.

In the Domestic Structured Finance area, AGP written came in a $144m, growing 41% from the second quarter of the prior year. This sector includes mortgage-back and home equity asset-back and other consumer finance transactions, collateralized debt obligations, lease-back securitizations, investor-owned utilities and asset-back commercial paper conduits. Increases in this market were driven by strong flow in consumer asset-back, primarily mortgage-back and auto transactions, as well as commercial asset-back.

International AGP increased to $87.9m, up 123% from the prior year. This was, again, a strong quarter for International, driven by a wide spectrum of transactions across many segments, and one large transportation transaction. We re-iterate our caution as to the lumpiness of this segment. However, [dural] activity remained solid across several sectors, and we continue to view this as a favorable growth market for Ambac.

Let me say a few words on pricing. Pricing remains acceptable across most segments of our three major business lines. And we remain optimistic that this will continue. Municipal credit spreads remain wide, relative to historical trends, and we expect them to remain so as state and local budget deficits are scrutinized publicly. Issuance is healthy and demand for our product is strong.

Moving on to the earnings side, premiums earned. In total, net premiums and other credit enhancement fees earned in the quarter, excluding refundings, increased to $143.2m. That's up 31% from the second quarter of the prior year. This growth was driven by a 52% increase in International, our smallest market yet highest return market. Public Finance, again, grew at a healthy 16%. I remind you that this segment's earnings grew at only 3% a few years ago. Structured Finance continued to display strong growth. It was up 32%.

Accelerated premiums, which result from [refinance], were $21.1m, or $0.11 per diluted share in the quarter, as compared to $11.0 per quarter of the prior year. Municipal refunding activity remains high because of the low interest rate environment. We expect this refunding activity to reduce over time as the number of issues eligible for refunding declines and/or as interest rates go up.

I'd like to again highlight an important characteristic of our accounting model. Ambac defers premiums received and certain direct underwriting costs, and recognizes those premiums and costs over the life of the guaranteed exposure. The net result is the deferral of significant income that will be recognized in future periods. Our [store up] of future earnings grew to $4b, representing future earnings that are in-hand or contractually due us. It is up 30% from June 30 of 2002.

Investment income came in at $79.9m, that's up 9% in the quarter, primarily due to an increase in investment portfolio from the cash flow from the ongoing operations that I mentioned earlier. The investment income line also benefited from the first quarter debt issuance that I spoke to you about earlier. Offsetting these factors were lower interest rates on new money investment and our continued new investments into tax-exempt securities. We continue to target the tax-exempt market with our new money because tax-exempts currently generate a higher after-tax return than taxable securities.

Our Financial Guarantee Investment Portfolio remains very high-quality, with 96% of the portfolio rated 'A' or higher, and an average credit rating of 'AA'.

Moving on to our Financial Services segment. Financial Services revenue came in at -$900,000, down from $11m in revenue in the second quarter of the prior year.

Investment Agreement net revenues were $3.2m, down $1.1m from the second quarter of the prior year. And lower interest rate spreads driven primarily from this low interest rate environment.

Cash Management revenues were flat, quarter-on-quarter.

In our Derivative Products business, revenues came in at -$9.6m, down from $1.3m in the prior year. As discussed in the past, the Derivative Products segment can be lumpy. The decline in the second quarter was primarily driven by a $12m gross, or $7.8m after-tax, mark-to-market adjustment, resulting from an increase in the ratio of tax-exempt interest rates to taxable interest rates. Interest rate swaps are derivative products and are marked to market in accordance with Generally Accepted Accounting Principles.

A brief reminder -- We do provide interest rate swaps to tax-exempt municipalities, swapping fixed for variable rates, or vice versa, in the tax-exempt market. We hedge the interest rate component of that risk with other professional counter-parties, typically investment banks in the taxable market, while retaining basis risk, being defined as the relationship of tax-exempt to taxable interest rates. The ratio of tax-exempt rates to taxable rates is currently high, based on historical levels. We believe this is caused primarily by the historical low interest rate environment. However, the large supply of municipal debt is also a contributing factor.

Moving on to expenses, total Financial Guarantee operating expenses were up 13% quarter-on-quarter, reflective of our growing franchise and well within the growth of our top-line and revenue growth. Stock options expense amounted to $1.5m in the quarter. Losses and loss adjustment expenses increased to $10.9m, that's up $5m from the second quarter of the prior year. The amount compares to $9.8m recorded in the first quarter of 2003. The quarterly run rate in loss provisions has ramped up the past three quarters. This reflects the significant new business generation during recent periods. You will recall, over the last three quarters, we've written approximately $1.3b of adjusted gross premiums, so you would expect our loss provisioning to increase along with that type of production. The provision also reflects our expectation that improvement in the current general market cycle is assumed to be slow and protracted. That assumption suggests a modestly higher probability of claims from weaker credit. We believe that the benefits to our business of such an environment, which is why credit spreads and increased demand far outweigh the risks. Our year-to-date loss ratio of 7.1% continues to be quite impressive.

Moving on to return on equity, ROE excluding net investment and credit derivative mark-to-market gains, and unrealized gains on the investment portfolio, came in at a healthy 16.2%.

In summary, again, it was a very strong quarter for Ambac. Our AGP in the first two quarters of 2003 have surpassed our total AGP for the full year 2000. More importantly, this healthy rate of top line growth has stirred strong growth in the [normal earned] premiums and other credit enhancement fee lines.

Before we move on to the Q&A, I'd like to discuss a few items. As people in the financial community are aware, the Financial Accounting Standards Board has issued Interpretation No. 46, known as FIN46. FIN46 provides accounting and disclosure rules for variable interest entities, formerly known as special purpose entities. This is a complex accounting standard, so I'll discuss it at a very high level. The main purpose of FIN46 is to make sure that certain off balance sheet entities are consolidated.

Ambac is involved in variable interest rate entities in two forms. First, as discussed many times, we sponsor two medium-term note conduits. Both are classified as qualifying special purpose entities, or QSPEs. QSPEs are not subject to the requirements of FIN46. However, an exposure draft was recently issued by the FASB that would require certain QSPEs to be consolidated. If the exposure draft is finalized in its current form, we expect that we will consolidate the QSPE assets and liabilities. The result will be a gross up to our balance sheet for assets and liabilities of approximately $1.2b. This is similar to the way we've always accounted for investment agreement assets and liabilities.

Consolidation of QSPEs, it's important to know, has no impact on our exposure, as we wrap the assets and liabilities in these QSPEs, and we've always considered this exposure in our loss provisioning.

The second way that Ambac is involved in VIEs is, of course, as a provider of financial guarantee insurance to various securitized asset obligations, such as mortgage-back securities and collateralized debt obligations, which are typically issues by SPEs. Ambac structures its guarantees of these transactions with various types of protections to ensure that it underwrites to a remote risk of loss. For the vast majority of our insured obligations, this protection is adequate to ensure that Ambac does not absorb a majority of the expected loss and, as such, is not required to consolidate. However, we cannot give you assurance that we will not, from time to time, be required to consolidate the VIEs that we've issued a guarantee for. It's important to note, however, and I want to emphasize that consolidation would not impact the risk profile of these transactions at all.

Just a word on financial reporting. Please note that we've combined our statistical and fixed income supplements into one document this quarter. We feel that one document will be more convenient to our investors and our analysts. You will note that we have expanded certain disclosures as well. This includes providing additional detail on our largest domestic Healthcare Structured and International exposures. We've also provided additional detail on our below-investment-grade exposures. We hope you find these changes useful.

And finally, just a word on dividend policy. Ambac today announced that it is increasing its quarterly dividend by 10%. Amabc has raised its dividend every year since going public in 1991.

And that concludes the presentation. At this point, I'll open it up to questions.

Thank you. Ladies and gentlemen, at this time we'll be conducting a brief Q&A session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in question queue. To remove your question from queue, please press star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from Mr. Robert Hottensen from Goldman Sachs. Mr. Hottensen, please state your question.

Hi, Tom. The question is really on the loss on your derivatives in your swap activity. I understand why the loss occurred, because of the basis change in the municipal yields versus tax-exempt. My question is that, at this point going forward, should that relationship stabilize, you know, that ratio between yield on tax-exempt versus taxable? What would be the run rate of swap income on a quarterly go-forward basis from here? Would you simply revert back to the prior level of revenue, now that you've trued up the mark to market, given the change in the relationship? Or would there be further pressure on that revenue line going forward?

If the ratios stayed where they are now, Bob, and didn't change, you would pretty much revert back to what you were seeing in the past. However, I just want to caution you, that business, as we said in the past, tends to be lumpy, in that, you know, there's not a huge transaction flow. It's not a business that-- You know, it's a bit of an add-on that we do for our bond customers, and you may see in one particular quarter a very large transaction being done, and then the next quarter you may see just a few small transactions. So, I would say 'yes' it would revert back to its historical performance, but that business has always been lumpy.

Thank you.

Thank you. Our next question is coming from Geoffrey Dunn from Keefe, Bruyette & Woods. Mr. Dunn, please state your question.

Thanks. Good morning, Tom.

Hi, Geoff.

First question. On the International piece, there's a big difference between the AGP and the adjusted net premium. Did you get a big session of business this quarter? Can you give us some detail?

Yes. On the that business, because the deals happen to be so large, you'll see that, what we did, we-- Some deals that were actually closed in the first quarter were actually seeded in the second quarter. And also, the mix there, one of the premiums that we received this quarter happened to be very large, and it was received all up-front. So, the session there, there's tiny differences, Geoff, on the session. You may see adjusted gross premium come in, in one quarter, and the session happen in a different quarter. And because those-- That happens in all our business lines, but it's more pronounced when you're looking at the International sector because the deals are so large. As single deal can be so large, it jumps out at you there.

Thanks. And then, looking at the ratio of AGP to par in the Muni segment, and understanding it bounces around, there was a pretty big jump up this quarter. That has to either be, you know, credit or pricing or a mixture thereof. Can you give some detail on that front?

Yes. In the Muni sector, if you look-- Look, what Ambac's doing there, and what we said before is, we're maintaining a very strict pricing discipline. What we look for is, we don't care about market share of par; we care about market share of premium ... and care about ROE. So, we are looking at, you know, deals that are providing us higher ROEs. Where we can't get that target, we walk away from the deal. And I think that is discipline is shown if you look at our market share of par in the quarter. It's only 19%. We're quite happy with that because the deals we are winning, we're winning at price tags that we're quite comfortable with.

And the other thing, you know, as we've talked about in the past, two things. One, we are looking at deals that are more specialized. But also you've seen continued spread widening in the Municipal sector. As you know, we get paid by taking the percentage of that spread, so as spreads widen, we're going to get paid more. So, you're seeing some of that as well flow through that line.

Okay. And just another question on growth. It looks like CDO spreads have narrowed. And also, when looking out over the next 18 months, I think there's a fair estimate to see mortgage origination declining. Both CDOs and MBFs have been big areas of growth for Ambac. How do you see those segments developing? And where's, maybe, offsetting growth opportunity to replace any declines there?

Sure. Let me talk about CDOs first. We have seen spread narrowing in that sector this quarter. And as a result, we ended up recording a mark-to-market gain of $10m. The bad side of that is, as those spreads tighten, you see less opportunities to participate. So, we have to become more selective. You know, three months ago, six months ago, we were writing a fair amount of [to get paid handsome], like you know, we always said at the point when that stops, we'll slow down writing business. And we have in that sector. But that's okay, because we've also ramped up quite a bit there. You know, we have $60b of exposure. So, there are capacity limits in any sector.

In the mortgage sector, if interest rates start to go up, we would expect to see a slowing of new business. But once again, we have $53b of domestic exposure there too. So, at some point, that would be-- We would do that regardless of where rates go. But one thing to point out, as rates go up and new business slows in the mortgage sector, pre-payments will also slow. So, the earnings that we get off of existing deals we get to enjoy for a longer period of time. One of the problems in the mortgage sector, although we've been writing good business, and we've been keeping ahead of the run-off, the run-off has been significant. Pre-payments have been significant. So, you know, a deal that you think you're going to get five years of premium on, you end up getting three to three and half years of premium on. That would mitigate a bit.

Where we would make up that business, fortunately, we've got the business structured here now such that about one-third of our revenues comes from each major segment: Public Finance, Domestic Structure and International. This is much different from where we were eight years ago, when the bulk of the business came from [Uniland]. What's great about this mix now is that, when we do have one particular sector slow down, you've got two other big markets that you can play in, so it mitigates the risk of, let's say, the mortgages or CDOs flowing.

And where do we see the growth? Right now, the US Muni sector has been phenomenal, as you know. We had $223 of AGP in the Public Finance sector this quarter. That's up 65% from a pretty good quarter the prior. And the other area is International; we think that's going to be the fastest-growing area. As banks are being dis-intermediated internationally, the Private Finance Initiative is continuing to get great support in the UK. We're seeing it expand into other countries, like Italy. The capital markets are developing rapidly internationally. The rating agencies' expansion is developing. So, we see great opportunities there for growth. I apologize for that long-winded answer, but there's a lot to talk about in the three markets.

Thanks, Tom.

Thank you. Our next question is coming from Marco Pinzon with Smith Barney. Mr. Pinzon, please state your question.

Thank you. Good morning, Tom.

Hi, Marco.

A couple questions. The first one is, the premium accelerations from refundings were robust in the quarter, and have been pretty high over the last several quarters for obvious reasons. You mentioned in your prepared remarks that forward-going refundings would depend on interest rates, as well as the number of available issues. What kind of visibility do you have on the latter? What are you guys looking at internally as to how many available issues you might have?

You know. The problem with refunding has always been the lack of visibility, which is why we adjust that number out of operating-- Or we adjust that number out to kind of give you what we deem to be more of a core earnings, which is something we can predict. Refundings have always been very difficult to predict. So, you know, I guess the answer is, we don't have a whole lot of visibility there. It's something that we've tried to predict and have failed. So, we've given up trying to predict it. We can do it at a broad level, based on level of interest rates, but it gets difficult when you try to take it to a level of detail below that.

I guess, put another way, in terms of the $21m number, that number looks like it's going to be pretty tough to sustain. I mean, do you revert back to kind of a mean of maybe low to mid-teens from here?

Once again, very hard to say. I would agree with you. The $21m number, we believe, would be hard to sustain. However, we said that a quarter ago, and then again we said it the quarter before that because we really thought that interest rates would start to mildly trend upward. You know, we could be sitting here three months from now and interest rates could be at 3%, ten year. And we could have another-- That's why we try not to predict refundings, because it's impossible to predict interest rates. Now, let me say, if you saw interest rates stabilize, I think, you know, you would see that number go back down. I hate to throw a number out, but it certainly would be less than the $21m.

Okay. Fair enough. And then, we've seen credit spreads narrowing now for a few quarters. And in the first quarter, you actually continued to take a charge on the mark to market of your credit derivatives. This quarter, you took a positive change. What should I read into that, as far as replacement costs, changing second quarter over first quarter?

Sure. Good question. What drove the mark to market in the second quarter-- Remember, we have two types of deals. We have the deals that it's very easy to go out and get credit spread information on. Just go out and look at the underlying names, you get credit spread data and you mark it to market. The bulk of the $10m gain this quarter came from those types of deals. We did see significant spread narrowing in the corporate sector, which gave rise to that gain. The other component of our book are the deals, we call them the super senior deals, where you have a significant subordination in front of you, and in fact the underlying deal that you wrap is either AAA or super-AAA. Those deals are a lot harder, because what you try to do is you go out and look at replacement costs in the market, and you have to look at deals that are being executed. Last quarter and the quarter before that, we took a little bit of a hit on the replacement cost. This quarter, we know the replacement cost has probably come down because it just would only make sense in this environment. But we didn't have a whole lot of visibility because a lot of transactions weren't getting done. So, we did not take a benefit for replacement cost coming in this quarter. The reason for that is we want to have better visibility to transactions. So, we left that part of the mark unchanged. So, most of the $10m just comes from the deals with the, you know, specific names that we can observe.

Okay. Just one more question, and then a numbers question. I saw that, and also you mentioned that healthcare business is up. It looks like it's actually, you're kind of doubling the share of your Public Finance book, relative to last year. That historically has been a very difficult class. I think it accounts for the largest amount of your below-investment-grade debt. Could you help us better understand what you guys are seeing there?

Sure. Healthcare, as we've said in the past, it's certainly one of the higher risk sectors of our book. So, it's a sector that we have to underwrite differently than we would, you know, a municipal GO. We only write the cream of the crop. And that we-- You know, in fact, most of the deals that we underwrite now are at the A+, AA level. We look at hospitals that are absolutely essential to the communities they serve. Hospitals that don't have a whole lot of competition. That's how we underwrite hospitals now. We're not looking for market share, by any means, there. The credits that you see, the below-investment-grade, are-- Most of those credits are credits that came over with the [Connie Lee] book. When we purchased [Connie Lee], as you, we purchased at a pretty deep discount. We factored those credits into that purchase price, but now we're stuck with those on our below-investment-grade list. But you're absolutely right. It's a higher risk sector. Higher risk for two reasons. One, the enterprise nature of that business. And two, when you do have a loss, the loss severity tends to be higher in healthcare than it would be in the Municipal book or the Structured book. So, it's something that we have to apply a different set of underwriting standards to.

Okay. And then finally, how large was the International Transportation deal closed in the quarter?

In terms of--? What we don't want to give is the premium number for competitive reasons. But I can tell you the par on that deal was $800m. That's the gross par.

Okay. Thank you very much, Tom.

Thank you.

Thank you. Our next question is coming from Rob Ryan with Merrill Lynch. Mr. Ryan, please state your question.

Good morning. Please provide an update on the previously discussed exposures that have given you some concern, whether there was any new loss activity during the quarter, and just how much of the new $11m loss provision, which is the growth addition to the unallocated reserves, actually ended up as a net addition to the unallocated reserves during the quarter.

Sure. Let me start with just the credits that in the past I've given, that were disclosed. Basically, you know, the portfolio continues to hold up well in this challenging environment. In fact, the problem deals, which I'll define as deals that we're paying claims on, or deals where we think a claim payment is imminent, are really the same names that we talked about last quarter. Nothing new has popped on the radar screen. And to refresh your memory, those deals, one is a CDO transaction that we wrote in 1998. It's a seven-year deal that matures in May of 2005. To date on that transaction, we've paid $6m in claims. Based on our review of the book, and we know every single name in the deal, we think that between now and the time that deal matures, we could possibly pay another $5m to $15m in claims. We have that fully reserved for our expected loss there.

There other deals are, we have three mortgage transactions that are clear outlyers in our book. The vast-- All the other mortgages in our book are performing very well. These three deals combines, we paid $5m in claims during the quarter. And we fully reserved for our expected loss on those transactions.

And the third area is with one healthcare transaction, same one as last quarter, that we haven't paid a claim on, but we do think we will before we get out of that transaction. Once again, that deal is fully reserved for.

Moving on to the reserves and the provisioning, we did book a $10.9m loss provision this quarter. That compares to $9.8m last quarter, $9m in the fourth quarter, and then it was up $5m from the prior year. So, you are seeing some ramping up in our quarterly loss provisioning. Like I said, that's for two reasons: the amount of business we're booking, and it's also the fact that, you know, we think the recovery is going to be slow. That relates to-- What did we pay actually in claims? In the first quarter, we paid $7.2m in total claims. Year to date, we've paid $11.5m in claims. We think that's quite modest relative to the $500m of cash we took in for the same period, although we don't like to pay any claims.

Talking about reserves, we have a total reserve on insurance portfolio of $178m, $58m of that is specifically identified. In other words, that's our case reserve. In addition, we have $34m of reserves that have been established on our creditor book through mark to market accounting.

And then you asked what's the increase in the specifically identified, and that was, I believe, $6m, Rob, during the quarter. I think we had $52m case reserves last quarter. We're up to $58m now.

Where did the unallocated stand at the end of the second quarter, versus March 31?

We're $120m unallocated at June 30, and let me get you the-- And we were $121m at the end of the prior quarter. So, it's down $1m, which we do, Rob, as a very bottom-up analysis to develop our reserves. We look at every credit on our watch list. Our surveillance group looks at them on an ongoing basis. They write a detailed report. Senior management, credit finance and risk management sit around the table and do extensive reviews monthly. And that's how we build up our reserves from the bottom up.

Did I answer your question?

Well, just a little bit of confusion of, essentially, a statement about no new loss activities, other than claim payments, which would come out of the previous case-specific reserves. And essentially no progress on the unallocated, despite an $11m loss provision.

Well, the reason the unallocated didn't-- Two things happened. We added $11m to the loss provision, which is in addition to the unallocated reserve. But at the same time, when you pay claims and change your case reserve, that number comes down. So, you know, we added $6m-- The $6m or $8m that we took out of the general reserve -- excuse me, that we used to build up the case reserve -- came out of the general reserve.

Essentially, you have [interest decretion] on previous case-specific losses?

Correct. And that discount rate, just FYI, is 7%.

Got it. Thank you.

Thanks, Rob.

Thank you. We have a follow-up question coming from Robert Hottensen with Goldman Sachs. Sir, please pose your question.

Yeah, my question is really on the backlog. You know, you've talked about the Transportation deal internationally. Are you seeing any change in the geography of the backlog on International, or size or--?

Sure. Actually, no. The backlog-- The pipeline in the International sector is strong. But as far as the mix or geography-- We're seeing a little-- You know, we're starting to see some transactions in Italy, which we haven't seen in the past. As you know, we did a big transaction in Italy, the Rome Airport, in the first quarter. We're seeing some pretty interesting opportunities there. As I said earlier, this Private Financing Initiative that started in the UK we're seeing expand to other countries. The UK government is very dedicated to this initiative. So, we're actually seeing more opportunities. So, we're seeing pretty good pipeline, although the mix of deals continues to be large, large with long lead times. We haven't seen that flow business of, you know, smaller deals develop yet. But pipeline's good.

And then on the US Public Finance market, what are your guys telling you, sort of, about activity in the second half? You know, what some of these clients are thinking? And how much of a backup in long-turn rates would, you know, begin to affect the backlog and demand and so forth for Public Finance volume?

Sure. Well, I mean, the pipeline in Public Finance is actually very strong now too, as you can imagine what's happening. What's interesting in that business is, if interest rates go up, certainly that would mitigate some of the refunding volume. But with the budget issues that are going on across the country, you know, we believe municipalities are going to have to issue debt, regardless of interest rates to close a portion of their budget gap. So, we don't think, at least certainly in the next foreseeable future, that that business is going to be impacted dramatically by interest rates. So, we think the pipeline is good. It should be a good year there. However, you know, we're just-- The last year, with $350b of issuance, this year $200b so far, at some point that has to mitigate. You know, it's just been huge, the volumes there. But the pipeline is good.

Okay. Thanks.

Thanks, Bob.

Thank you. Ladies and gentlemen, as a reminder, if you do have a question at this time, please press star 1 on your telephone keypad. Also, if you're using a speaker phone, it may be necessary to pick up the handset before pressing the star keys.

Mr Gandolfo, it appears that there are no further questions at this time.

Okay. Well, thank you very much. Please free to call Pete Poillon, Rob Eisman or myself if you have any follow-up questions or you need any additional detail on anything. We'll be here all day and happy to take your calls. Thank you very much.

Than you, sir. Thank you all for participating. This concludes today's conference. You may disconnect your lines at this time.