Ambac Financial Group Inc (AMBC) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Ambac financial group incorporated third quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone key pad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Gandolfo, chief financial officer of Ambac financial group. Thank you Mr. Gandolfo, you may begin.

Thanks, donena. Welcome to Ambac's third quarter conference call. My name is Tom Gandolfo, the CFO and with me today are Rob Eisman our controller and Peter Poillon head of Investor Relations. Our earnings press release and quarter supplement are on the web and will be mailed out to those of you who requested it. If you did not receive it and would like to please call or visit our web site 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 web site. Please mark your calendars for the fourth quarter 2003 earnings will be released on January 28, 2004, at 8:00 a.m., with a conference call at 11:00 a.m. During this conference call, we may make statements that would be regarded as forward-looking statements. These statements are based on management's current expectations. I refer to you our press release for factors that could change actual results. Let me jump into the highlights for the third quarter. It was another strong quarter for Ambac. Net income was $159.7 million or $1.45 per dilulted share, that's up 20% on a per diluted share basis from the third quarter of 2002.

While Ambac reports net income in accordance with GAAP the research analysts have not adjusted the reported estimates accordingly. Therefore, we continue to 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 net after tax gains and losss from sales of investment securities, and mark-to-market gains and losses on credit derivative contract which in the third quarter were -- amounted to a net gain of 1.2 million, or 1 cent per diluted share. This compares to a net loss of 1 cent -- or excuse me 100,000 dollars and no effect on the share per diluted share in the third quarter of '02. The next item that is adjusted out is after tax accelerated premiums earned on guaranteed obligations that have been refunded or simply refundings. And that amounted to 11.8 million dollars, or 11 cents per diluted share in the third quarter of '03. And that compares to 8.9 million or 8 cents per share in third quarter '02. That is up 38% on a per share basis. Just a reminder, that we did -- we began expensing stock options in the first quarter of '03. And stock option expense of one cent per diluted share is included in the third quarter '03 amounts, but not in the comparative period of 2002, so please be aware of that in your comparisons. For the nine months ended September 30, 2003, cash flow from operations was almost $800 million. I believe this is a statistic that is worthy of special attention. It illustrates how powerful our ability is to internally generate liquidity. In fact, most of this cash flow is simply invested in our investment portfolio to support future growth. This is a net after tax cash flow generated from operations and the amount here I believe continues to be quite impressive. Let me move on to operations. Top line, adjusted gross premiums written, was another good production quarter, with AGP written, coming in at $282.5 million. That's compared to $305.6 million in the third quarter of the prior year. That's down 8%. Demand for our product remains strong in most segments of our markets, as premiums written were up in -- in our domestic markets, both public finance and structured finance. As we've mentioned many times, the international market will be lumpy from quarter to quarter as deals tend to be large and have long lead times. AGP for the nine months ended September 30, came in at one billion, 60 million dollars up 33% from the prior year's nine month period. Let me take you through some of the detail on the three major areas of our business. First, public finance. Ambac's public finance AGP written was 159.4 million, that's -- that grew 26% from the third quarter of '02. Municipal market volume is strong remaining on a record pace for the first three quarters of the year. It came in at 89 billion for the third quarter, and that's flat to a very strong third quarter of '02. Market penetration was again high, coming in at 54%. And that compares to 48% in the comparative period -- comparable period of '02. In the third quarter '03, public finance experienced strong transaction flow, particularly in the municipal lease, transportation and health care segments. Moving on to domestic structured finance, structured finance AGP written was 95 million, growing 11% from the third quarter of '02.

This sector includes mortgage back and home equity ABS. Other consumer finance transactions commercial ABS collateralized debt obligations, investor owned utilities and asset backed commercial paper conduits. The increase in AGP during the quarter in this market was largely driven by two investor owned utility transactions and some attractive commercial asset backed transactions. Moving on to international finance. International AGP decreased to 28.1 million, and that was down from 93.2 million in the third quarter '02. Third quarter 2002 aside, the international market typically displays some seasonality in the third quarter. As typically deals don't close during the summer months of July and August. Although the top line does not demonstrate it this quarter, the international markets are quite robust and deal activity remains solid with several very attractive transactions in our pipeline. A word 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. Capital market activity and the demand for financial guarantee insurance continues to increase in the international market. Global issuance is healthy and the demand for our product is strong. Premium, moving on to premiums earned, in total, net premiums and other credit enhancement fees earned in the quarter excluding refundings increased to 150.8 million. Up a solid 32% from the third quarter of 2002. This growth was led by 44% increase in international, our fastest growing and highest return market. Structured finance continues to strong growth pattern up an impressive 34%. Public finance, our most mature product,, continues to grow as we strive to underwrite public finance transactions where our guarantee brings the most value. Public finance grew a healthy 22%. Accelerated premiums which result from refundings came in at 20.8 million, or 11 cents per diluted share. During the quarter. And that compares to 15.7 million, or 8 cents per diluted share in the third quarter of '02. Municipal refunding activity remains high despite a brief spike upwards in interest rates during the quarter. But interest rates remain low relative to historical levels and refinancing remains attractive to those issues that are eligible.

However, we do expect refunding activity to come down over time as the number of issues eligible for refunding declines and as interest rates go up. Deferred earnings, representing future earnings that are in hand or contractually due us, grew to almost 4.2 billion dollars. That's up 27% from September 30, 2002. These deferred earnings will be recognized in earned premium in the future over the life of the related exposures. -- moving on to investment income, investment income came at 80.9 million, up 7%, primarily due to an increase in the investment portfolio from cash flow from ongoing operations. Investment income also benefited from the 175 million dollar, 100-year debt offering we did earlier this year. Offsetting those two factors are lower interest rates on new money invested and our continued movement into tax exempt securities. Our financial guarantee investment portfolio is very high quality. With 96% rated A. Or better. And an average rating of AA. Moving on to financial services, financial services net revenues were 21.3 million, up 57%, from 13.6 million in the third quarter of '02. Derivative products revenue was 17.2 million, that's up from 3.2 million in the third quarter '02. As most of you are aware, activity in this segment is somewhat lumpy. Quarterly -- the quarter revenue highlights included a large interest rate swap that we executed for one of our financial guarantee customers. Also included in the derivative product revenue is a positive 4.8 million dollar mark-to-market gain resulting from a decrease in the ratio of tax exempt interest rates to taxable interest rates. This gain, this $4.8 million gain recoups a portion of the $12 million mark-to-market loss we reported in the second quarter. Investment agreement net revenues were down 6.1 million. From the third quarter of '02. On lower intrest rate spreads driven primarily from the low interest rate environment. Cash management revenues were also slightly lower quarter on quarter.

Moving on to expenses. Total expense -- financial guarantee expense operating -- excuse me, total financial guarantee operating expenses were up 29% quarter on quarter. And that reflects our growing franchise and is in line with our revenue growth. Stock option expense amounted to 2.4 million during the quarter. Again, there was no stock option expense in the prior year. Losses -- loss adjustment expense increased to 15.9 million. And that's up 9.8 million from the third quarter '02. The quarterly run rate in loss provisioning has ramped up in the past three quarters. This reflects the significant new business generation during the recent periods. As you may recall, as you know, we generated $1.6 billion of AGP over the past four quarters. It also reflects our belief that improvement in the general market cycle will be slow and protracted. We did, however, receive a $6 million recovery on one of our stressed mortgage-backed security transactions during the quarter. Our net insurance loss reserves at September 30 were $184.4 million. And that's a 6.5 million dollar increase from June 30, 2003. To further break down reserves for you our ACR or unallocated reserve increased 10.8 million dollars and our case reserve, or our specifically allocated reserve, decreased 4.3 million. Our year to date loss ratio of 7.9% continues to be impressive. In addition to the insurance reserves, we have a 37.6 million dollar reserve that's been established through mark-to-market accounting on our creditor of this book. Moving on to return on equity, return on equity excluding net investment and credit derivative mark-to-market gains, and unrealized gains on the investment portfolio, came in at a very strong 16.9% in the quater. In summary this was a solid quater top line production, AGP fell short of the production from the first two quaters of 2003, but was a very strong quater when viewed on it's own. Importantly, earned premium continues to grow at a healthy rate, and the pipeline of transactions remains robust. With that Donena, I'd like to open it up to questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone key pad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand set before pressing the star keys. Once again, that is star one to register your questions at this time. Our first question this morning is coming from Rob Ryan of Merrill Lynch. Please proceed with your question.

Good morning.

Hi, Rob.

Hi. You mentioned the recovery on a mortgage-backed deal, could you give us an update on the trouble transactions discussed in the past year or so? And any significant watch list activity, new things coming on, going off, sectors under a little bit more stress or less stress, whatever?

Sure. Let me start with the stress transactions where we're paying claims. Nothing new during the quarter where we're paying claims. It is the same credits that we talked about the last two credit -- two quarters. One CDO transaction, we have not paid any claims, during the quarter on that, however it is a credit that we think we will pay claims before we're done. We've paid $6 million life to date on that deal. We think we could pay another 5 to 15 million before we're done. That deal matures in may of 2005. The other credits are two mortgage -- excuse me, three mortgage transactions that we've been paying claims on, for the total claims paid in the quarter, on a gross basis, meaning before recoveries and after reinsurance, we paid $14 million in claims on those this quarter. On a net basis, we paid $8 million. Because we did receive a $6 million recovery on one of those transactions. That's the story on exposures where we're paying claims. There are no new.

Regarding the book, things haven't really changed in terms of quality. There has been no new significant additions or reductions to our classified list. You know, there's some signs out there that are encouraging on the credit cycle but I don't want you to go too far with that. We've had -- we had one health care -- health care credit that was settled favorably, you know, where we thought we were going to pay a little more and we ended up probably paying about, you know, a $1.5 million on, that he we haven't paid it yet, but we will, but that's better than what we thought and that transaction has been settled so we're hoping we are seeing a bottom but we just don't know. Not a whole lot of change during the quarter. I'm sorry, Rob, did you have a question on the provisioning as well?

No, I think you addressed that. That it is just up substantially year over year. But I would imagine it is relevant to point out that you started the more generous provisioning in the fourth quarter of last year.

That's correct.

But the year over year comparisons is not going to be probably quite as large on a percentage basis going forward.

That's correct. It was in the fourth quarter that we started ramping up the provisioning and I think we're in the $6 million range in the third quarter of last year so it shouldn't be as dramatic.

Once again, your third quarter results indicated that you're not really a big user of reason insurance. But what are you doing in the current environment, given the various downgrades that occurred, how is it affected you in your treaty negotiations for whatever.

Sure, good question. One thing, when you look at our re-insurance number for the quarter, the exceeded premiums is offset by a $4 million refund or $4.2 million refund that we got on a small municipal book that we took back from a small re-insurer. So the run rate would be a little higher. We generally run around 10-14%. But what we're doing, two things, it hasn't impacted us that dramatically because like you said we're not a huge user. It had a -- the axa emery pulling out had a relatively insignificant impact on our margin safety and in our capital models with the rating agencies. We are looking for innovative ways for risk transfer. We're certinaly still using the traditional re-insurers that remain. We are looking at other arrangements including potential capital market arrangements for risk transfer. We think there may be some opportunitys there. And what we like about it, you know once you sold the risk, there the risk is sold and can't come back to you.

Recently, more recently the last six month, the lack of capacity or the limited capacity in the re-insurance market has been a bit of a positive we think to an Ambac who is not a huge user. Because, it prevents others from going out and bidding on whole, large transactions, with, you know, the goal of keeping a small piece and re-insuring out a big piece. We kind of like that, that it brings a little bit of capacity constraints to some of our competitors who are bigger users of re-insurance.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from Geoffrey Dunn of KPW. Please proceed with your question proceed proceed with your question.

Good morning, Tom.

Hi Geoff.

Could you give a little more color on the structured AGP this quarter? It sounded like you really will two deals that drove your overall growth. Are you seeing any beginning impact on the mortgage side of your business? And when we look forward, if we think the origination market is going to drop 50% '04, over '03, does that put enough pressure on your book that maybe we won't see year over year growth in AGP in the structured business?

Sure, let me try. The structured AGP came in at 95 million. That's up from 85 million in the prior year. It is about 11%. One of the things in the third quarter that impacted our AGP, if you look at the first and second quarter, you know, we were running at about $40 million or so a quarter. In mortgages. Mortgage-backed securities. In the third quarter, that was about half. We did about $20 million. Due to a couple of factors. You know, the insured market is low. Relative to history. The senior sub-market is becoming popular. And what's driving that is investor demand for the junior debt appears to be stronger than it has ever been.

I think that -- I guess is a good sign that investors are getting more comfortable with that risk. However, what I would say, even though the insured market has decreased a little bit during the third quarter, the market is still huge. We are not seeing a slowdown in the mortgage market yet. In fact, we haven't even seen a slow down in prepayments. We thought we would, but we haven't. And I can tell you, the fourth quarter pipeline for a mortgage deal, deals that we're working on right now, is reverting back to more of its historical norms so I would expect to see a pickup there. Going forward into 2004 it is real hard, Geoff. You know, we don't like to try to predict AGP, but we thought the mortgage market was going to slow down a year ago and it really hasn't. But, you know, the markets are huge. And what we've -- what our goal here at Ambac is not to be so reliant on any one particular sector. We are focused on the world capital markets, the world capital markets and we think we've built a franchise here that isn't dependent on any one particular segment. So if one segment slows down, we think there is going to be growth in other places. So that's just, you know, the way we're trying to run our business.

Okay. And just to follow-up on that, could you review what sort of prepay assumptions you have currently in your installment forecast? And what would happen to that forecast if we saw maybe another 50 basis point increase in like the 10-year yield or something like that. How incrementally does that change the present value rolled forward?

Sure. Right now, new business, new business we're seeing speeds, you know, pricing it around the 30 range. But what happens is, as the prepayment speeds slow, new business generation of course will slow. I would expect new mortgage written to slow just, you know, throughout the country. But what actually happens is we have a book, you know, 53 billion dollars of mortgage exposure here domestically, that has been running off pretty quickly, you know, we write this business thinking we're going to enjoy five years worth of premium and instead we only enjoy two or three years worth of premium. Well that, you know, the benefit of speeds slowing down is our existing book that we are quite comfortable with will slow down as well and we will get to enjoy the premiums that we earn on that book longer. So it is a bit of a wash there that you, you know, new business will slow, but existing business will stay outstanding longer than we'll earn on it longer.

Okay. Thank you.

Thanks, Geoff.

Ladies and gentlemen, as a reminder, if you do have a question, please press star one on your telephone key pad. Our next question is coming from Robert Hottensen of Goldman Sachs. Please proceed with your question.

Hi, Tom. Just a clarification on the reserving. On the $6 million recovery that you had on the mortgage deals, that is basically comes as a reduction of specific case reserves?

Yeah, what we did there, Bob, that -- we take the entire recoveries, and we put it -- we don't take any of it to the P&L, we put it all into the reserve and that particular deal, we quantify it, we -- actually that is a unique deal in that we actually got paid, we've only paid a couple million dollars of claims on the deal but our models tell us we are going to pay $6 million. So we've actually gotten paid in advance on that deal for our losses. So we put it right into the case reserve. Because we think that we will pay out, you know, a portion of that. So it went right into the reserve.

And on the other -- on the CDO transaction, where you ultimately think you will pay 5 to 15 million and on the other three mortgage transactions, I take it one of those mortgage transactions is this one.

Correct.

But those numbers are already in the case reserves?

Yes. Two things. The -- you're right, one of the three mortgages is the mortgage that we got the recovery on. The other two mortgages are reserved in our case reserves.

Uh-huh.

And the CDO is reserved in our mark-to-market reserves. All the expected losses as run through the P&L, you know, based on our judgment.

So the -- and on these mortgage deals, would a slower prepayment rate on the existing book be better or worse or neutral with respect to how you've assessed and estimated the specific impact?

I would say it would be neutral, Bob, and the reason for that is the problem loans within these structures are folks that are probably not eligible for refinancing anyway. So if rates dropped I doubt they would be refinancing, and if rates increase, I doubt it is -- I doubt it will impact on my other side, so I would say neutral.

So that you know, in response to another question, if there are no new names coming into the watch list, then in effect, your specific reserving activity is, you know, in connection with these credits, and there is no -- and so the higher provisioning level is simply being allocated to the general reserves.

Yeah, of the 15.9 million of provisioning that we did this quarter, about 11 million went to increase our unallocated reserve. So a substantial portion of it.

And the final part of that, so is the -- is the -- you know, general provisioning then, is that formulaec based upon based on earn premium or written premium or is there any other formula that we can look to, to derive an expected number?

Unfortunately, no, it is not formulaec like that, I would like that, but it is not. It is the -- it is a very intense detailed process that we have here, where we sit around, you know, monthly, we meet on our classified names, and we go through and you try to determine what -- where you think it is probable are you going to pay a claim, IE, greater than 51% chance. And you try to book reserves for. That where you know are you going to pay a claim because there has been a default, you allocate case reserves to it. The unallocated reserve is really based on an analysis we do of our book. It is an analysis of, you know, our classified list, our below investment grade credits and it's management's estimate based on a name by name review of those credits of what we think we could pay on those names. But there's been no default. And the names are current currently. So it is -- it is really a management judgment call.

All right. And if I could slip in one unrelated question, on this Pittsburgh situation, it appears that this -- a number of traders and market participants by surprise, and I guess, I'm just inferring, that the reason it took them by surprise is the auditors apparently gave this city a qualified opinion which then prompted S&P to, you know, reduce their credit rating by five notches. Is this a trend within the auditing community or, I mean how do you -- what are -- what do you guys say? Were they prepared for this? Is there any lesson to be learned or any extrapolation in terms of what is going on in the marketplace?

No, I think we -- you know, Pittsburgh, we've been aware of Pittsburgh's problems for quite some time. So you know, the folks here aren't surprised by this, by this action. I do think audit firms though, probably more so in the corporate world are probably going to be more conservative. Let me just talk about Pittsburgh.

You know, we still think, you know, it is remote that Pennsylvania would allow, you know, allow one of its two major cities to go bankrupt and lose access to the capital markets for many years. You know, the discussion of bankruptcy is why, just the mere mention of it, is why S&P downgraded Pittsburgh which you know, I agree with S&P, you know, investment grade credits shouldn't even be uttering that word. We think little of what could be going on here, it is typical, when a municipalities get into stress, to air their dirty laundry and fight it out in the press, and you may be aware that the mayor there is, you know, it is a Democratic mayor, Republican legislature, there is negotiations going on, Republicans want him to cut spending, he wants to raise taxes, and apparently, the state of Pennsylvania has some say over whether the taxes can be raised or not. So part of this could be, you know, a little leverage on the mayor's part to motivate both the legislature and the state. The state of Pennsylvania is a AA rated credit so it is a very solid credit. Which again leads me to believe, once again I don't have a crystal ball, that they would take actions not let one of its two major cities default and potentially impact the credit of other cities in the state. Ambac's net exposure to Pittsburgh we have $218 million. Our average annual debt service on that is about 15 million, so 2004 and 2005 debt service on our Pittsburgh exposure is 18 to 19 million. You know, moody's is till held the rate at A three. Fitch's held the rating at A minus, but I understand they are on watch by both those agencies and just to close on that you know, in the past, these events have proven to be a positive for the industry. They tend to remind investors why we're here. And what value we bring. And if you look at history, you look at Orange county, you look at Bridgeport, you look at others who have either gone bankrupt or threatened bankruptcy, generally, you know, no claims are paid by the financial guarantors, it increases demand for our product, it certainly widens spread, and wider spreads means better pricing, better returns. No idea what is going to happen in Pittsburgh, but that's our view that I just gave you.

Okay. Thanks.

Ladies and gentlemen, as a final reminder, if you do have a question, please press star one on your telephone key pad. For participants using speaker equipment it may be necessary to pick up your hand set before pressing the star keys. Our next question is coming from Alex Orlock of Bank of America. Please proceed with your question.

Good morning. A couple of questions on the international side. Would it be possible to provide a -- some kind of a sweep by territory where the business was generated in Q3? And also, more specifically, do you have any comments on the law that has been presented to the German parliament tomorrow on the municipal and communetive finances in order to increase and quite substantially, I would imagine that would be quite a positive impetus for your industry.

Yeah, sure, this quarter, where you asked the first, I think your first question was geographically.

Sure, uh-huh.

And most of it is coming from the U.K.

Okay.

We have a little bit of AGP coming out of Japan which would be the consumer asset backed. And I think I'm looking at the list here, the rest of it was all U.K. or substantially the U.K. That's in this quarter. Where we are seeing it on a broader perspective, you know, the vast majority of our international bis business is in Western Europe. Japan and Australia, because that is where the capital markets are most developed. We are seeing some interesting things happen in Italy. You know, the PFI, the private finance initiative that the U.K. has embraced, with such vigor, we're starting to see happen in Italy a bit more. And we saw a big transaction we did there last quarter.

Uh-huh.

Regarding Germany, I'm actually not familiar with the exact meeting you're referring to but I assume you're saying -- what you're saying is that the same type of PFI initiative perhaps expanding into Germany?

What's been happening, it is just a part of a the general government reform, there is a one -- one of the for major initiatives is increasing substantially financial authority of municipalities and communities, leaving a lot of budget decisions and financing decisions to them, rather than evolving from the state level.

Anything that pushes funding out of the federal level, down to the state and local level, I believe is a positive for this industry.

Right.

I think the other positive coming out of Germany will be when the Londish banks lose their government guarantee, because right now they participate quite heavily in financings in Germany and I guess that is scheduled to happen in the next year or so. And we think that is going to be quite positive for our industry as well.

Absolutely. Thank you.

Thank you.

Thank you, our next question is a follow-up coming from Geoffrey Dunn of KBW. Please proceed with your question.

Tom, I just wanted to double check. You said there was a $4.8 million mark-to-market reversal from last quarter's loss?

Correct.

Where was that run through on the P&L?

That is in financial services revenue.

It is included in the core revenue?

That is included in the core and it was the $12 million loss we took last quarter was a reduction to core.

Thank you.

Yup.

Our next question is a follow-up coming from Robert Hottensen of Goldman Sachs. Please proceed with your question.

Yeah, I mean how do you look at that, you know, $4 million, on one hand, you know, you had a $12 million impact in the second quarter, and in theory if market conditions simply just reverted to where, you know, there was no impact at all, you've got another $8 million that, you know, is going to come into income. Over the next quarter or two. You know, how do you look at that? I mean in some respects, the marketplace might not regard that as core. On the other hand, all you're really doing is going back to where you were before you had the write-off in the first place. I mean how do you look at it philosophically?

It is a good question, Bob. And here is what we -- you know, it is a dilemma because on the credit derivative mark-to-market, the unrealized gains and losses we exclude from core, and this particular market, we include. And our justification for it, and you know, we need to put some more thought into it and be interested in what the analysts think would be most meaningful to them, but the interest rate swap book is a trading book. It is a book that from time to time we will trade out of to recognize and realize and lock in profits. And as such, we think it is appropriate to include trading P&L, whether it be a gain or a loss in core. The reason we treat credit derivatives differently is the vast majority of that book, in fact all of the book is held to maturity. We don't trade that book. And when we brought -- you know, general credit spreads move and we recognize a $10 million gain, we know that we're not going to sell that position and realize that gain, so we don't think it is appropriate to show it as core. And it is the same for the loss. If there there was a loss in that book, you know, we don't think we will pay the claim, actually cut the check, it is unrealized and just over the passage of time it will reverse back in income, we exclude it from core.

The precedent with that, with other financial companies such as Fannie Mae which has a similar situation holding its mortgage portfolio to maturity.

Correct.

Yeah, but I mean here, you know, you've got this thing kind of bouncing around. This isn't even a core -- I mean this is a core business, but it just is a -- it is a basis adjustment.

It is a basis, but these --

What will happen is in the next few quarters, you know, long since forgotten will be the fact that you absorbed the hit into core earnings, and in effect, you've got the risk that the marketplace doesn't -- you know, that it is considered a one-time write-up. When in fact you're really doing is adjusting the position back to where it was. In other words the way I would like to think about it is in terms of how we assess your growth rate in '04, you know, the basis really is if this thing didn't happen at all.

Understood. Let us put some additional thought into that. I guess what the dilemma is on this -- fortunately you know, once again, it is hard to predict but this number should be pretty well boxed in that zero to twelve million dollar range. I don't think are you going to see things wildly outside of that range because our book isn't that big in these particular types of positions and we're not writing a whole lot of new business in these particular types of trades that have basis risk. But, I hear you. And let us put some thought. We would like to make it more meaningful to the analysts so they can analyze our numbers. And we'll put some thought into that.

Okay.

At this time, we are showing no further questions in queue. Gentlemen, I would like to turn the floor back over for any additional or closing comments.

Okay. Can we just do -- I just want to make sure everyone got their questions in. One more check for questions?

Absolutely. Once again, ladies and gentlemen, if do you have a question please press star one on your telephone key pad. If you are using speaker equipment, it may be necessary to pick up your hand set before pressing the star keys. We are still showing no questions. Thank you.

Very good. Well, thank you all for attending the call. And I will be here all day, as well as Rob Eisman and Peter Poillon. To answer any questions you may have later in the day. Thank you very much.

Ladies and gentlemen, thank you for your participation. This does conclude today's tell-a conference. You may disconnect your lines at this time and have a wonderful day.