Ambac Financial Group Inc (AMBC) 2005 Q1 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the Ambac Financial Group, Incorporated first quarter earnings conference call. (OPERATOR INSTRUCTIONS) . It is now my pleasure to introduce your host, Mr. Thomas Gandolfo, Chief Financial Officer of Ambac Financial Group, Incorporated. Thank you, Mr. Gandolfo, you may begin.

Thank you and welcome to Ambac's first quarter conference call. I'm Tom Gandolfo, the CFO, and with me today is Rob Eisman, our Controller and Pete Polian, head of Investor Relations. Our earnings press release and quarterly supplement are on our website and will be mailed out to those who have requested it. This call is also being broadcast on the Web.

Second quarter 2005 earnings will be released on July 20th at 8:00 a.m. with a conference call scheduled at 11:00 a.m. During this conference, we may make statements that will be regarded as forward-looking statements. These statements are based on management's current expectations. I refer you to the press release for factors that could change actual results.

We jump into the highlights for the quarter. Net income was $185.5 million, or $1.66 per diluted share. That's up 7% on a per diluted share basis from the prior year. While Ambac reports net income in accordance with GAAP, the research analysts make certain adjustments to net income to calculate the reporting estimates. Therefore we continue to provide such information that the 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 and losses from sales of investment securities and marked market gains and losses on credit and total return derivative contracts and derivative hedge contracts, which in the first quarter would net after-tax gains of 5.9 million, or $0.05 a share. This compares to net gains of 7.5 million, or $0.06 a share, in the first quarter of '04.

Some analysts also back out the after-tax effect of accelerated premiums earned on obligations that have been refunded and other accelerated premiums. Total after-tax accelerated premiums amounted to about 18.9 million or $0.17 per diluted share in the first quarter of '05, and that compares to about 8.7 million or $0.08 in the first quarter of '04

Moving on to credit enhancement production or CEP, which represents gross up-front premiums, plus the present value of estimated installment premiums on insurance policies and structured credit derivatives issued in the period, came in at 199 million, that's down 23% from the 258.8 million in the comparable prior period.

Moving on to public -- let me break out the segments. Public finance. Public finance CEP came in at 109 million. That's up 12% from the first quarter of '04. Muni issuance, as reported by third party sources, was up, quarter on quarter, from 85 billion in the first quarter of '04 to 98 billion in the first quarter of '05. And insured penetration remains very strong at about 60%. Ambac's market share in the quarter was approximately 21%. That's down slightly from 23% in the first quarter of '04. Although CEP growth of 12 percent is quite good. We did face a challenging environment.

We continued to see fewer highly structured transactions that tend to be less price sensitive, come to market. The majority of issuance of the past few quarters has been in segments that we classify as traditional business, where competitive pressures have adversely impacted pricing.

Moving on to structured finance domestic. Structured finance CEP came in at 76.9 million, about flat with the first quarter of '04. We continue to close transactions in a wide breadth of asset classes, but the consumer asset backed area remains quite challenging. In the fourth quarter of 2004, it did seem like competition from the senior sub execution was easing. We had a pretty strong fourth quarter. However, recently that competition from the senior sub market came back very strong.

Additionally, we've seen increased competition from other financial guarantors in this segment. We will, however, hold the line on pricing and only focus on acceptable return business which meet our long-established credit standards.

Moving on to International. International CEP in the first quarter came in at 13.1 million. That was down 85% from the first quarter of '04. Obviously, International Business production remains very lumpy and in this quarter there were very few transactions closed. However, we still believe this market will provide good opportunities for long-term growth.

Moving on to premiums earned. Net premiums and other credit enhancement fees earned, excluding refundings, increased to 177.2 million. That's up 10% from the first quarter of 2004. Public finance displayed good growth, coming in at 12%, structured finance group, 5% , while international group, 14%. As discussed in the previous few quarters, earned premium growth in the U.S. structured finance and international has moderated, as those respective books have grown significantly, making comparisons difficult.

Also we are experiencing difficult competition from the market in the form of senior sub execution from the financial -- and also from other financial guarantors in both the NBF -- particularly strong in -- the NBF area and the CDO area. The reduced growth rate in those books of business is negatively impacting our earned premium growth and structured finance in international. We've seen generally tight credit spreads in all areas of structured finance and the CDO market.

Deferred earnings representing future earnings that are in hand or contractually due us grew to 5.29 billion. Those deferred earnings will be recognized as earned premium in the future of the life of the related exposures. Investment income, excluding variable interest entities -- so basically, from the core insurance investment portfolio -- came in at 90.7 million. That's up 4.6%. Investment income was adversely impacted by relatively large short-term investment holdings during the quarter. We do expect investment income to pick up by about 2 million per quarter going forward in 2005.

Losses and loss adjustment expense -- loss provision -- came at 23.5 million. That's up $6 million from the first quarter of '04. And that was driven primarily by increased case reserves on two stressed credits that we have discussed in the past. Net insurance loss reserves at March 31, 2005 were 240.7 million.

To further break that down, case reserves -- case reserves, just to refresh everyone's memory, that's reserves on credit that have already defaulted -- came in at , or stood at, 130.7 million at March 31st. ACR reserves are reserves for credit where the credit has not defaulted yet, but where we deem it probable of default, and that was 109.9 million at March 31st. The case base reserve increased 14 million from the first quarter -- from the beginning of '05 -- increased 14 million during the quarter.

This increase consisted of additional case reserves, a gross basis of 34.4 million, partially offset by 20.4 million of paid losses. During the quarter, we increased case reserves related to a double EETC or enhanced equipment trust certificate exposure, and this is the same exposure we discussed at year end, that was secured by seven aircraft leases, and we increased that reserve by 18.5 million during the quarter.

In late March and early April of 2005, Ambac actually purchased these seven aircraft at auction in order to secure our rights to the underlying aircraft collateral. Just last week, Ambac successfully closed on the sale of four of these aircraft. This sale included the oldest, least desirable aircraft in the structure.

The additional case reserve this quarter relates primarily to adjusting the carrying values of the remaining three aircraft to reflect current stressed market conditions. Additionally, we increased an existing case reserve by 13.4 million for a stressed health care exposure that defaulted on it's debt. The financial condition of that health care institution continued to worsen during the quarter.

One final note on loss reserves. The SEC did recently review Ambac and certain other industry participants' policy for recording credit loss reserves. The SEC has asked the FASB, Financial Accounting Standards Board, to review the policy for the entire Financial Guaranty industry and, as a result, such policies are subject to change.

I do encourage all investors and other interested parties to read Ambac's accounting policy footnote, and management discussion and analysis discussion, regarding our Loss Reserve policy and our methodology, and the possibility for future changes. These disclosures can be found in our 2004 form 10K that was filed with the SEC in March.

A word on expenses. Included the first quarter, 2005, expenses is a charge for expensing stock - based compensation for employees aged 55 and older. Our policy does not require such employees to perform future services to obtain vesting rights, and as such, the expense must be recognized in the period the compensation is granted. The net impact is approximately 3.5 million. Such expense is not expected to recur in the remaining quarters of 2005.

A word on financial services. Financial-services net revenues, excluding realized and unrealized gains and losses, were 15 million, relatively flat compared to 15.3 million in the comparable prior period. Return on equity came in at 14.6%. We're very pleased with our return on equity results, particularly in light of this historically low interest rate environment and the adverse impact that has had on our investment income.

In summary, Ambac remains committed to writing the right business at the right price. We remain confident that there is strong -- that there's a strong global market for our product. However, as we have demonstrated historically, Ambac is willing to wait out difficult competitive environments and make maximum use of our capital when markets improve and opportunities are presented.

Just two further points before I take questions. First, on guidance. Ambac stated in its press release that we will no longer be providing earnings guidance. We are confident that the financial guarantee industry will prosper along with the growth in the world capital markets and our goal is to build long-term shareholder value.

We don't believe quarterly or annual earnings guidance can be provided any longer with a high degree of accuracy. Nor do we believe providing such guidance contributes to the long-term creation of value. Therefore, we feel it prudent to join the expanding list of public companies that do not provide earnings guidance. We will, of course, continue to provide significant information to you on a quarterly basis and that information will include information on the business trends, credit, the competitive environment and other market data.

Just a word on our new CFO. On April 11th, Ambac issued a press release stating that we've hired Sean Leonard. Sean is a partner at Price Waterhouse Coopers and he will be our new CFO. I have personally known Sean for three years. He brings to Ambac an enormous amount of technical accounting skill and financial experience, and we feel very fortunate to add such a high-quality professional to our senior team.

After a transition period, I will take responsibility for Ambac's global structured credit and financial services businesses, as well as the investment portfolios. I very much enjoyed my time as CFO, and I do look forward to the challenges of my new responsibilities. With that, I'd like to open it up for questions. (OPERATOR INSTRUCTIONS) .

Our first question is coming from Geoff Dunn of KBW.

Thanks. Good morning, Tom

Hi, Geoff.

Clarify in your guidance, really, a lot of the issue affecting the growth is current credit spread environment and interest rate levels. What assumptions are you making on those two environments to get to your revised guidance?

Sure. What we've made -- we are in a period now -- you hit the note on the head, Geoff. We had some one time items in the quarter but what's driving the revised guidance is primarily earned premium growth. What's impacting our earned premium growth is a couple of things, tight credit spreads and the low interest rate environment. Because what has happened is, as a result of tight credit spreads, we've seen tremendous appetite for risk from investors out there.

We think it to the point of being silly, the risk that investors are willing to take, and they're driving credit spreads tight which means things like mortgage deals are going out uninsured, they are going out in the senior sub market. You've seen credits that, in the past, would need insurance go out uninsured. You have seen deals terminate as a result of this environment. We think that is going to change because it always does in an economic cycle in the event that happens. But in our projections you we assume the current environment will continue because we think we have to.

What we don't want to do is lose total credibility with you guys and project a beautiful spread-widening situation, we don't think that's the right thing to do. So we projected the current environment, if you will. What's also happened is, and particularly in this quarter, we've been seeing it for about a year but we've been able to keep pace, but this low interest rate environment has caused, particularly our mortgage book, to run off faster the we thought.

Now, we've been able to keep pace with that runoff up until this quarter, and I will just be candid with you, mortgage-backed writings fell off the cliff this quarter. And they -- and it is primarily due to competition from the senior sub market and, to a lesser extent, we've seen competition from other model lines.

But the vast majority is senior sub. We think we are estimating about 90 % of the market went out uninsured, which is incredible. So, that is what is driving the revised earnings guidance and that is what is driving our projections for the remainder of the year, Geoff.

And just -- I am not sure how specific you can get -- but obviously, rates or spreads could change very quickly if there's an event in the market. Given the accounting, and how it takes some time to get those changes into your numbers if, within the next month, we saw spreads and rates change, does that hit '05 at all or is it an '06 event?

No, if we saw spreads widen, the [novada] for this industry, of course, is 2003, right? If we saw spreads widen noticeably and we saw more demand in the CDO and MBS market, in particular, you would get a quicker pick up because -- just like what is working against us now -- is this short-term business that we wrote a ton of this business in 2002, 2003 and 2004.

Well, now we are living with the run-off of that business. At some point that run off has to abate, because these are generally five year deals and, unfortunately, some of them have turned into three years deals because of prepayments and early terminations. So, at the point where -- I don't know what the cross over is, Geoff -- but at some point as that run-off abates and spreads widen, we hope to turn the corner.

Just another question. The option cost the so this quarter, should we expect the same kind of thing first quarter of '06?

Yes.

Thanks.

Our next question is coming from Rob Ryan of Merrill Lynch.

Good morning.

And good morning, Rob.

I was wondering if you could give us a little color on the pipe line, especially internationally, since that was the area of the substantial weakness on new business production?

Sure, absolutely. What happened -- we had, actually -- obviously -- a very good international quarter in the fourth quarter, we did 154 million of CEP. This quarter there was just a noticeable lack of closings across the board. The painful part was, there was just no large deals [floated] in the quarter.

Were seeing a lot of activity. You guys can test this by seeing what's going on particularly in the U.K. and Western Europe, in that governments are still pushing deals to the capital market. The problem with this sector, and it is as pronounced as can be in this quarter, is it's going to be very choppy, very lumpy.

We're still very high on the international sector. What we liked about it is, you don't face the same competitive environment that we're facing here in the U.S., because, internationally we have one primary competitor. And we have two others that are there, but not as pronounced as they are here in the United States. So you have a lot less competition there. ,So although spreads have tightened a bit in the international market, you can still get paid very well for your capital there. But it's going to be choppy, Rob.

OK, switching over to credit. Could you remind us about the net par exposure to the ATA transaction, as well as -- I don't know if you ever told us the total net par outstanding and the current cumulative case reserve established on the healthcare credit in question?

Sure. ATA,we had about 124 - 125 million net par exposure. What drove the additional provision this quarter -- a lot happened in the quarter. In fact, a lot happened in the last week of March, first week of April, in that we actually executed the foreclosure on these seven planes in order to perfect our security interest and retire some expensive debt that was outstanding on this transaction, and we also sold four other planes. So, we feel caution because, obviously, aircraft appraisals are volatile, but we feel, we've got our reserve [inaudible] to very current appraisal, very current actual [team] deals be executed in the markets we feel very good we got our reserved sized on this transaction.

Just stick with that one. Your current reserve is almost half of the total exposure?

Correct. We have about, a little less than half, but almost half correct. Now we of three plants left. Four are gone, obviously there will be no further deterioration or improvement. So we're down to three planes now. Yeah, you're right, it's about half -- we have a little over $58 million reserve on this transaction. But we've also retired a big chunk of the exposure by selling the four planes.

Okay.

Okay. I think your other credit -- and as far as our exposure to other double ATC's, we put those on our website. Those have been there for several quarters now, and I think it's about 1.6 billion. And what we do on our website for you, we show the airline, we show the credit rating, we give a whole bunch of details right on our website of the particular credit. ATA was the oldest, first deal we did and we suffered 9/11 and other things, that the appraisals just declined significantly.

On the healthcare credit, we booked another 13 million, I believe it was, in the quarter. That credit -- we haven't given the percentage reserves, Rob, and the reason we don't is that is still an active institution. It's still open for business and we are still in heavy negotiations with them, and what we don't want to do is show our cards there publicly, but obviously we have -- you saw what we did at year-end, and so we now -- we have a sizable reserve on that credit.

And migration on the watch list in general?

Actually, what is a shame is that [ ... due credit] because migration, in general, I think the ACR actually came down about $10 million so, other than these two credits, migration was neutral to slightly positive.

Great. Thank you.

Thank you.

Our next question will be coming from Mark Lane of William Blair company.

Good morning. Just a follow up on ATA. Can you give us the split in the four planes versus the three planes, and how much of the reserve is associated with the four planes versus the three planes?

Sure, well, the reserve -- the remaining reserve -- we have on the balance sheet, of course, applies to the three that we have left. What we have -- I will tell you what we are carrying these four, it's not a secret. We are carrying these three planes at about $56 million on our books. And what we've done, that's another reserves.

How we sized that, Mark, is -- a few things. We are in negotiations with several parties right now to either lease or sell these planes. We have had offers, we've got firm offers to lease the planes and we have got firm offers to buy the planes. And what we are doing is sizing all those right now and saying, " What's going to the best long-term recovery for Ambac?" But what I will tell you is, based on all these negotiations, the reserve we have right now is sufficient to cover if we were to execute on any of the offers that are on the table.

So, at the end of the year, the reserve on those three planes with $18.4 million higher. Is that because --?

It is 18 million higher than what we had at the end of the year. But the loss was 18 million higher than what we thought at the end of the year, correct.

And within international markets, obviously we know it's lumpy and you continue to get the same message every quarter. But, is there any other detail you can give us in terms of number of deals, or buckets by size of CEP, or something, that you can give us some more objective data that allows us to really believe that there's not anything else going on in those markets, other than just the lack of large deals?

This quarter, you know, we've it said this, and I know it sounds like a broken record and I guess I can understand your questioning, but the story really hasn't changed. We had a super quarter in the fourth quarter internationally, but this is going to continue. I can't promise you --

What you are going to see internationally is, you're going to see strong quarters and weak quarters. You are not going to see consistency, and I wish I could promise you you could. But, what's happening -- and the reason for that, Mark, is, unlike the U.S. -- where in the U.S. municipal market, you have a constant flow of business, right? You just don't have that in the international markets.

In the international market what you are seeing, you got utility deals, you got large infrastructure transactions, you got whole-company securitizations. It's more the structured type of municipal that we do here. It's not that GO, tax back -- at least it's not that flow business if you will.

So unfortunately we're going to be stuck with that, probably for a long time to come.

Okay. What about stock repurchase. This has been debated and -- regarding use of the capital growth versus growth versus basically putting your capital back into your core business versus spending excess capital and stock repurchase.

I mean, obviously, the business is growing more slowly than you would've thought three, six, nine, 12 months ago. And, so are you more seriously considering, now, allocating more capital for that, particularly given where the stock is this morning?

Sure. I think what's -- the answer is we're not going to announce any major type additional stock repurchases. But to be very candid with you, obviously the stock price has our attention. So we do think, as we've always said, opportunisticly, we will from time to time be in the market buying and certainly when we drop below adjusted book value which we have here today, that's got our attention, Mark.

So, we have available about one point -- about 1,650,000 -- shares I believe remaining on our authorization, so we can be in the market from time to time.

As far as our capital position, we just submitted to S&P our annual capital model. As a courtesy to S&P, we don't like to announce that because they actually published it in a book that they will be putting out shortly, and we like them to be the one to do that.

But, I will tell you our capital position has improved from the prior year because, for obvious reasons, we have written less business. So we are sitting in a strong capital position. We will certainly consider stock buybacks at the current price.

Just two other quick ones. Number one is what's happened with spreads in the core U.S. structured finance market just in the last six weeks?

Sure. Spreads have come in a bit in the core market, but what's been more dramatic than spreads -- spreads are still actually, on a relative basis, attractive. They come in, of course, from the 2003 level which were just phenomenal. But, they are still attractive relative to if you go back several years before that.

What's the problem, in that market, is not spreads. It is our competitors. You've got folks out there willing to take less of the available spread. So in the past, where you could get in a municipal transaction 50, 60%, 70 % of the spread, you may be seeing folks going out saying, "Hey, I can beat my return hurdle by taking less than that." That's what is drive -- that's what is hurting that low risk plain vanilla section of the market.

But, we are talking about core U.S. structured finance right now, right?

Oh, I'm sorry, I'm sorry, Mark. I apologize. I thought you said --

Yes, spreads in the core markets, just the last six weeks, structured finance.

I apologize, I thought you meant [inaudible]. On structured finance what we've seen most dramatic is the mortgage-backed area. We've seen spreads -- spreads were tight. They've been getting tighter every quarter. There were extremely tight this quarter.

And now, the mortgage- backed sector is obviously a large piece of that sector. So, they came in to the point where they are so tight that, I think I said earlier, we think 90 % of the market went out uninsured. So, that gives you a sense of how tight the spreads were.

What about just the last six weeks, though? Has anything changed in the last six weeks?

Yes, it's gotten worse. In fact, one of the things that was disappointing to us is in the past, in the last month of a quarter we would get an influx of mortgage-backed deals.

OK, we would get a huge influx the last two weeks of a quarter. We didn't get it this time and primarily because of the senior sub market. Now, we did see some bright spots, in the structured finance market and the bright spots were, we did close some attractive transactions and we did good in structured credit. We actually had a decent structured credit in the quarter. We still did almost $80 million of premium there.

We had good structured insurance and we had good IOU this quarter. So, what's nice is -- it's a nice thing about being a large, diversified company where you don't put all your eggs in one basket. And we like our philosophy of keeping our powder dry.

We could go out and write more business and chase pricing down. We could chase credit terms down. We refuse to do that. When we can -- we will just shift gears and put the capital to use in other markets. We had a terrible mortgage-backed quarter and we still did the high $70's million. We had a strong quarter.

OK, last question is, if you're explaining the lower guidance which, in terms of a growth rate, is basically cut by a half this year in its earned premium growth and [inaudible] income, and, I understand this is somewhat subjective, but why don't you pre-announce?

Well, a lot of this came -- a lot of things happened here, Mark, that happened late in the quarter. We closed on the aircraft May 31st -- excuse me March 31st and April 1st. We sold that aircraft last Friday. We didn't have the reserve size until last week. And like I said earlier we're used to seeing a huge large MBS activity in the last couple weeks of the quarter. Didn't happen. So a lot of things happened late in the quarter that -- where we sat down and said we're going to extrapolate these for the rest of the year here. So we didn't know early enough, Mark, to do that.

OK, thanks.

Our next question will be coming from Adam Starr of CRM.

My question's been answered. Thank you.

Our next question will becoming from Franklin Morton from Ariel Capital.

I was wondering if you could provide additional color in terms of the competitive environment, specifically in the municipal market that is coming from the existing competitors, the bigger competitors, or some of the smaller ones who are being more aggressive?

It's primarily more aggressive competition from -- it's really the big four. It is Ambac, MBIA, FSA and [citric] It is really not the -- it's not the new entrance. It's the big established primaries that are chasing pricing down in that sector.

Thank-you.

Our next question is coming from Mike Grasher of Piper Jaffray.

My question has been answered, but I did want to go back to revisit the earnings guidance.

Mike, can barely hear you.

OK, wanted to go back and visit the earnings guidance. Is that any better?

Yes, much better.

In essence, you're lowering earnings guidance but it sounds to me like the reason or the impact is as much as the current macro environment as it is the competitive environment. Is that a fair statement?

I think it's a fair statement in they almost go hand in hand because, I guess you could -- the senior sub market, the competition from there -- is driven by the macro environment, right? It is driven by investor appetite for risk. We view it as -- that is part of the spread economics but it is also -- we view it as a competitor as well. So, I think they go hand-in-hand.

Fair enough, then. And then, just in, I guess -- to follow up on Rob's question. Is it safe to assume that we -- or that you -- have not seen on anything new popping up on the radar screen in terms of credit?

That's correct. In fact, I said that our ACR actually came down. What drove the provisioning almost exclusively was two credits this quarter. And I think -- but once again -- this credit is part of the volatility, but I think [I feel] very good about because we've taken 60 % of our exposure is gone now on that credit. So, that variability is gone. And, we are getting pretty sizable on the reserve on the other credit, so there is not much more to go, really.

And just a pause or reflect on the competitive environment. Has been a time that you can remember where the competition has had [inaudible] ?

Mike, you broke up there at the end. Could you repeat that?

Has there been a time, if you go back and look, historically, where competition has had this much of an impact in terms of your business model. And is it -- can you see a time, years ago, where maybe this impacted in the short run, but yet, over the long run, it still held in there?

Yes, we have lived through this before. Probably '97, '98 is a good indication of that. It had a little less some dramatic impact because, back then , the mix of the business was geared more toward longer-term, and now, sitting here, in 2005 the mix has changed to more of a shorter -- it is shorter-term.

One thing I guess I would say. Obviously, we're disappointed in bringing guidance down, but at some point what's impacted us the most here is the run-off of the shorter term business, and at some point that has to abate. I can't tell you when, but these are three -- five year deals and at some point that has to update.

Thanks very much.

Thank you.

Our next question is coming from Lisa Hintz of Alliance Capital.

I have two questions. First, on the FASB , do you have any sense of the timing for when they will come back with anything?

We really don't. I can't even guess. They have a lot on their plate up there. Hopefully within a year, but it's hard to say.

And then, since this is the last time you are providing guidance, Just, I want to be clear. Are you changing your long-term EPS growth and/or ROE goal?

Well, we are basically -- did you say ROE as well?

Yes.

I mean, we don't -- yes, yes. I guess we are, because we are withdrawing guidance so if I confirm that --

Well, that doesn't necessarily mean you are lowering it, but it certainly implies it.

Well, it is a tough question to answer, because if I answer it, I'm giving guidance. So, I guess the answer is, we are withdrawing guidance. We will give you as much information as we can, and we are hoping for suggestions, too. We think we are very transparent. We think we give a ton of information. If you guys need to see more, we are happy to give it. But we just think it is a slippery slope. I mean, I wish we never gave guidance.

OK, let me ask you this way. Has the -- have the numbers for compensation and bonuses in your company been changed?

They have not been changed, but it doesn't mean they won't be. Let me be real clear. We get paid here based on budgets and production and obviously if we don't produce, things will change. And, the other thing, we're all senior management team here. Almost every one in the company own Ambac stock. Senior management own a ton of it.

But we still think, we don't like days like today, but we have to be prudent and reasonable. And what we want to do is focus on long-term shareholder growth here and we think it's a slippery slope getting into providing quarterly guidance. And I think a lot of other quality companies are coming to that determination.

Thanks.

Our next question is coming from Darin Arita of Deutsche Bank.

My question had to do also with the long-term outlook. And I was wondering, I guess phrasing it another way, just over the long term, what sort of ROE would you be dissatisfied with if you're not achieving?

Well I think, we want an ROE, and this is not guidance, but our targeted ROE has always been 15 %, so I guess this is an earnings guidance. We are going to be -- we are going to go to markets where we are not going to get that, and we are going to have markets where we are going to get more than that. It is kind of like it is a barbell. We're not going to exit the U.S. municipal market because our competitors are willing to accept subpar returns. We have to be a player there. We can't exit.

So we are going to maintain our market share of 20 to 24%. And, if that market is lower than 15 % ROE, we going to have to accept that because we have to keep our name in that market. However, internationally, and in other markets, we are seeing ROEs north of that number. So, it's a barbell.

We would like to keep the ROE up in that area, but we do have to respond to the market. If ROEs got to the point where they were just crazy low, I think that's the point where we start looking at stepping up the amount of money we give back to shareholders. We haven't seen that yet.

Okay. And on, I guess, the EETC exposures, the loan to value ratios changed in the different [earnings], the EETC exposures at all.

Yes. If you look at our website, we have all our exposures. We have one exposure, and we update the appraisals on these every six months, and we have nice, fresh February 14th appraisals here. And all, except one tranche, has an LTV below one, and the one tranche that does not -- it is about $114 million tranche that has an LTV of 105.

Thank you.

Our next question is coming from Geoffrey Dunn of KBW.

Thanks, Tom, just a follow-up on the expense line. It did have an impact on the loss of re-insurance commission this quarter.

Correct

How does the accounting work there. Is that an issue that is going to now be something we roll forward. Was there any kind of one-time expense impact?

Yes, I think it was about 1.8 million, Geoff, but that was -- is that right, Rob. About 1.8 million? Yes, and I think there is when you buyback -- we had accelerated premium revenue that is up in the accelerated line, and then you have some accelerated expenses that go along with that. So, I think the premium acceleration was about four, four and half million and the expense acceleration was about 1.8 million.

So, on a run rate that's something we should back out?

Correct.

Our next question is coming from Al Copersino of Columbia Management.

I just wanted to follow up one of the time on the question regarding long-term earnings and are we obviously not getting explicit guidance. But I guess my question would be, and tell me if this is improper, but my question would be is there anything that's happened structurally in terms of the development of capital markets or the competitive structure of the industry that made you change your -- what happened to your previous long term view on earnings growth or [your] returns?

No, and this is, please, definitely not a confirmation of that long-term guidance. But, no, structurally nothing has changed. What is changed -- what is driving this and, one of the things is -- what is the definition of long-term -- because we struggled here internally. Do we give long-term, do we not? And what is the definition of long term? Because, what is driving this right now is two things.

Somebody hit on it earlier. It is interest rates and spread, that we believe is cyclical. If history is any indication, this is cyclical not structural. We go to through these credit cycles where there's no fear. We saw that in '98, '97, '98 up until the Russian debt crisis and the long-term capital fiasco, and then guess what? Spreads blew out tremendously. I hate to say it, but more than likely, right, something will happen eventually, if history is any indication.

Thank you.

So it is cyclical, not structural.

Our next question will be coming from Burnett Hansen of Credit Suisse Asset Management.

Hello. Thanks for taking the call. Following up, another way of going on Al Copersino and Lisa Lisa Hintz's question might be, when you start contemplating the dropping guidance?

I'd say probably about a week and a half ago.

Maybe this isn't a --

Part of it, remember, part of this was also driven by trying to settle the loss provision issue here. We took a sizable with hit here chewing up the provision after we sold these planes and the sale just happened last Friday.

Because, given that, it sounds like, from your perspective, from management's perspective, the business is less predictable and less understandable that was a week and a half ago.

No, it's become less predictable. In fact, if you go back three quarters and look at our press release, we've been saying for three quarters, now, that we are struggling with mortgages and CDOs, and that the mix of the business is changing. So, it's becoming -- it's become less predictable as that's devolved of the last couple of years as the mix of business has shifted to heavy CDO/MBS during those very strong years. Now we are up against the [comparables].

Yet management felt comfortable enough managing the business nine months ago or six months ago to keep affirming guidance and keep maintaining it. But, something happened two weeks ago that made management revisit this. Because the trend in companies reporting and not providing guidance has been well over a year in the making.

Well, let me tell you. What happened here this quarter is -- what happened in terms of MBS and other terminations, I think, candidly -- it fell off the cliff. And, that was recent. And, we've been able to, and the fourth quarter is a good indication of this, in the fourth quarter, we were able to keep up with the run-off. And we hoped and thought we could continue to do that, because history showed we could. It fell off the cliff this quarter, and we were not able to keep up, not even close, to that run-off. And, we've seen ithat the spread environment, we've seen in our early deal termination, and that's the story. And we can't promise you that it's going to turn around. We can hope and try, but can't promise you that.

Thank you for taking the call.

Our next question is coming from Al Copersino of Columbia Management.

I think, my guess is that you all are answering a different question from what Jody was asking. I think Jody was asking, when did you decide to no longer provide guidance going forward, and I think the question you were answering, was in the last couple of weeks, we decided to cut our guidance for some time.

When did we decide not to provide guidance? This is something that we have debated for a long time. I personally have never been a fan of giving guidance.

I think best practices is emerging to not giving guidance. So, it's something we debated internally but, what convinced us it was finally the right thing to do is that just the obvious -- the obvious -- which is the financial guaranty industry is less predictable than it used to be, and that became obvious this quarter that we can't predict. What I don't want to do is give guidance to you and then every six months be revising it, I don't think that serves you well. And it was so obvious this quarter that the industry is less predictable than it used to be because of the mix of business.

Thank you.

(OPERATOR INSTRUCTIONS) . Our next question is coming from Geoff Dunn of KBW. I'm sorry about the extra follow-up.

No problem

I just want to confirm as we look at your installment rollouts do you adjust the pre-pays fees every quarter or every month or what is reflected in that now, versus the current conditions for pre pays?

Absolutely, we adjust and we use six month fees. We adjust them monthly, basically. So you see refreshed fees quarterly, when we publish our supplement.

So the current rollout schedule reflects March pre-pays fees, at month end.

It's the last six months prepayments fees, so we updated them in March for the prior six months. Thanks.

There are no further questions in queue at this time.

Thank you very much and Rob, Pete and myself are here all day today, tomorrow. Please call with any questions that you may have and thank you for attending the call.

Ladies and gentlemen this does conclude today's conference. You may disconnect your lines now.