Q3 2020 James River Group Holdings Ltd Earnings Call
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Representation, there will be a question and answer session and instructions on how to do so with a given at the appropriate time. Thank you and tell me if my short cut their nickel over its our first speaker for today Mr., Kevin Kopelman head of Investor Relations, Sir you may begin.
Thank you operator, good morning, everyone and welcome to the James River Group third quarter 2020, <unk> earnings Conference call.
During the call, we will be making forward looking statements.
These statements are based on current beliefs intentions expectations and assumptions that are subject to various risks and uncertainties, which may cause actual results to differ materially.
For a discussion of such risks and uncertainties. Please see the cautionary language regarding forward looking statements in yesterday's earnings release.
And the risk factor section of our most recent form 10-K form 10, Qs and other reports and filings we make with the Securities and Exchange Commission, we do not undertake any duty to update any forward looking statements.
I will now turn the call over to Adam Abrams, Chairman and Chief Executive Officer, James River Group.
Thanks, very much Kevin.
As Kevin.
Set I'm here with Sarah Doran, who is our chief financial Officer, and Bob Myron, Our Chief operating officer, and we're looking forward to answering your questions in a minute before we do that we'd like to set the stage with a few observations about our quarter and about market conditions in general.
This is one of the most favorable market side witnessed in 30 years.
The E.N.S. business, which is at the core of our franchise is growing with more policies in force.
Substantially higher rates and lower loss cost.
We wrote 28% more Ns premium this quarter than in the prior year.
New submissions were up by 9% in the Ns and renewal submissions were up 27%.
The increase in renewal submissions is an indication that standard companies continued to retrench and are not thinking seeking to move accounts from the mass market to the standard market.
We're we're selective underwriters and eight of our 12 E.N.S. underwriting divisions grew.
Trailing 12 month core Ian as premium is $615 million, a 91% increase over the same period, just two years ago.
We continue to be able to get more rate per unit of exposure.
This last quarter was the 15th quarter in a row Weve reported significant rate.
Rate increases and eight of these 15 quarters renewal rate increases on our Dms business have been greater than 5%.
In every quarter this year rates were up over 10% and this quarter rates were up 12.8%.
And already hard market continues to gain strength.
Year to date, our policies in force have increased by 26%.
And while we are growing both premium and policy claims counts in court DNS are down 15% this quarter compared to 2019.
In the most recent months claims frequency has been dropping rather precipitously.
New claims count within E and F were down 18% in April.
31% in May.
18% in June 11% in July 23% in August.
And 9% in September and 32% through mid October.
This drop in claims counts is all the more notable as we have more policies in force than in prior years and earned premium for CWIP from court DNS is increasing.
Core FNF claims counts per million dollar in earned premium through the third quarter, our 30% lower than the three year average between 2017 and 2019.
So obviously these trends bode very well for the future.
Our fully developed core FNF Lawson Elie ratio from 2003 through 2017 is 54.4%.
We're carrying the 2018 through 2020 years at a 65.5% loss and LAE ratio.
Our calendar year paid and reported loss ratios in core NFS is 24%.
0.5% reported through three quarters. These are among the lowest reported unpaid ratios since 2005.
Our expense ratio was 24.8% this quarter down from over 30% in the first quarter, Sarah will speak in a moment about more about this positive trend in expenses.
So weve reported a combined ratio of 85.2% for the initial division.
After adding approximately $10 million to reserves for the run off of the large commercial accounts canceled at the end of last year we.
We raised reserves on the run off book because since September we observed a spike in medical cost.
This unexpected rise in cost seems to be the result of people with mine life threatening injuries, having postpone surgeries inpatient treatment due to concerns about being in the hospital, where surgical clinic during the pandemic.
We continue to close claims rapidly in this run off book and as of quarter end, we've closed slightly more than half the claims outstanding at December 30, Onest 2019.
And at this point, we have roughly 2% of the open claims that we ever received.
From the commercial auto account. So this this is moving out rapidly.
Our growing our rapidly growing and very well priced book of BNS premium can absorb spikes in the run off costs, while still delivering very strong returns to shareholders.
And maintaining our 65.5% loss in LAE ratio from 2018 to 2020.
In this quarter, we were particularly glad that our focus on casualty business allowed us to avoid significant exposure to wear losses from the very difficult hurricane season, the work or from Cove at 19 losses.
At the same time, the large industry losses from these events will tend to reinforce the attractive pricing we're benefiting from.
Our specialty admitted segment is also gaining traction third quarter gross written premiums were 12.1% higher than a year ago. We've.
We've added eight new programs within the segment over the course of 2020.
Three of these new programs have already added $15.4 million in gross premiums through three quarters and many others are just beginning to produce premiums and fee income and we enjoyed a 22.8% increase in fee income in the first three quarters.
Our net retention of gross written premiums in our specialty admitted segment is under 15%.
We are developing partnerships in which while we retain some risks to align our interest with reinsurers were focused on earning fee income.
Year to date, our return on equity in the specialty admitted segment is in the low double digits.
Having developed our sea legs in this division were directing our marketing efforts towards larger fronting programs. We believe the margins from this business already good since still improve.
Within the specialty admitted segment Weve reduced net written premiums from workers compensation policies by about a third as we feel pricing in that area of the market is a little soft.
In our reinsurance division.
We wrote $91 million in gross written premiums through nine months, which was a 21% reduction compared to last year.
Some of that reduction is only a timing differences the renewal moved from the third to the fourth quarter. The reinsurance segment as reported a 102.1% combined ratio for the quarter.
Pricing in this segment is improving and our internal studies show renewal inc. rate increases, including changes in terms and conditions of.
4.3%.
6.4% and 8.7% in 2018, 2019 and year to date 2020, respectively.
I'd now like to address some important and very good news for our company.
We announced last evening that Frank to Rascoe, formerly the Chief operating officer, and Chief of staff to the CEO with Allied World will become CFO CEO of James Reverend next week.
Some of you will recall that I'd retire previously and returned in August of 2019.
Our company is in a very good position thanks to the hard work of all my colleagues.
We are in a rising market.
And it really seemed to me that this was a good time to introduce a new CEO, who can make the transition when we were enjoying great momentum.
The board conducted a very broad search and attracted many holic quite highly qualified candidates I am very pleased Frank will be taking the helm I suspect. Some of you may all on this call may already know him. He has tremendous depth as an executive having run large profitable insurance operations in the us and.
In Bermuda.
His management style and experienced fit our culture, he's an underwriter by training and he has a long history of building successful underwriting businesses.
Keenly aware of the opportunity the hard market presents.
Frank and our team have already begun to work on the transition I will remain as nonexecutive chair of the board and look forward to supporting Frank and his executive team.
I have no doubt we are in very good hands I anticipate over time under Frank's leadership and with the support of the terrific. James River team, we will become even more profitable and demonstrate more capabilities than we do today.
With that let me turn the call over to Sarah.
Thanks, Adam.
I had a few of the financial points on the quarter.
Last night, we reported first quarter third quarter operating earnings of 56 cents per share in year to date annualized adjusted net operating return on average tangible equity of 11.9%.
Adam said market conditions are very attractive for our business and while early still revenue has exceeded our early estimates at the start of the pandemic.
First expenses.
Our expense ratio decreased to 24.8% this quarter as compared to 34.2% in the first quarter of this year and 29.2% year to date.
We mentioned on prior calls that we've been working to reduce expenses and gain efficiency.
The ratio also benefited from strong growth in line, where we see significant premium for attractive ceding Commission.
Such as excess casualty and our unit segment.
Gross premiums written in excess casualty have increased over 85% year to date from the third quarter of 2019.
As rate increases in that line have been either the highest or amongst the highest across our NFPA.
As it's our largest line of business in China. It's also push the retention ratio in that segment down to 60% this quarter.
The expense ratio has also benefited from the offset of the sliding scale commissions in our casualty reinsurance portfolio this quarter.
We expect that our expense ratio for the full year will be close to our year to date figure.
Moving on.
This quarter, we posted a loss ratio of 69.4% and accident year loss ratio of 66.6% largely in line with the balance of this year, despite powerful rate increases low loss emergence and meaningfully reduce claims frequency.
As Adam highlighted DNS renewal rate increases were 12.8% this quarter and have increased 30% cumulatively since the start of 2017.
Reported losses have remained benign for multiple quarters falling again this quarter.
Koreana can.
Continues to make up approximately 75% of the company's net written premiums and close to half of our $1.3 billion.
Sure.
As Adam mentioned, we added $10 million of reserves to our large commercial auto account in runoff this quarter, but had a similar level of reserve take downs from our core DNS book, which continues to run very well there.
The reserve increase relates to the 2017 and 2018 years.
We've continued to close claims rapidly on this block closing, 14% this quarter and are receiving very few new claims at this point almost a year into the run off.
Through nine months of the year as Adam said open claims for all the years of the account represented 1.7% of total reported claims for the account.
At the end of the fourth quarter of 2019 by comparison open claims for all years of the account represented 5.2% of reported claims.
Of our approximately $1.3 billion of total group wide net loss reserve at quarter end.
Ultimately $300 million supports the runoff block of business.
This quarter, we had $12.9 million of favorable development from our core FNF business emanating from the years 2019 and prior as Adam said, we continue to hold the most recent three years of our core Cnf business at a loss ratio of 65.5%.
The adverse development of about $6.2 million in our casualty reinsurance book, the $2.9 million of that with cost.
That by sliding scale commission adjustment, which come through the expense ratio.
The development was concentrated in a few treaties related to general liability and non standard in commercial auto business.
Much of which we no longer right.
We also had $2 million of favorable development in our individual risk workers compensation business.
Within our specialty admitted segment.
Finally on investments that.
Net investment income for the third quarter was similar to last quarter at $15 million a decrease from the same quarter last year, largely due to lower income from our bank loan portfolio and to a lesser degree from our renewable energy portfolio.
We sold about $100 million of our bank loan portfolio back in the second quarter and the impact of that spend to reduce gross yield on the portfolio.
This quarter, our gross yields of 3.2% or about 70 basis points reduced from the third quarter of 2019.
Returns on our $30 million renewable energy portfolios decreased due to the managers revaluation of the assets, which flowed through to us.
Those investments have benefited us well for many years.
Lastly, I know I speak for my colleagues, when I think Adam deep strategic and entrepreneurial insight thoughtful and energetic that generous friendship.
And Bob have let us on a path of success and we look forward to more ahead.
I've had the benefit of working with Frank and Im very excited to welcome and as our CEO.
So with that let me turn the call back to Adam Adam Thank you Sarah and.
Operator, we are ready to take.
Questions.
If there are any.
Thank you Sir at this time I would like timberland, everyone in order to ask a question. Please press star one again are falling again star one if you wish to cancel your question you expressed it back or hockey.
Low cost for just a moment the Canadian roster.
Our first question comes from the line of Mark Hughes from Suntrust. Your line is open.
Yes. Thank you good morning morning, Mark.
Hi, good claims frequency.
Okay. You provided are very very interesting.
Hey judgment you formed about what is causing the are these delayed.
Reports that are going to come later.
Kind of influences you thinking one way or the other about the how of how material the two to the <unk>.
The business.
I think it's really material than what we're talking about our claims from one that was talking about our claims from our core SNS book.
And I wouldn't expect any change in the speed or pattern of reporting of claims I. Just think that frequency is going down I do think it's you know the most likely explanation for that is the continued pandemic.
But we are in a happy position and the industry is in a happy position.
Capital constraints across the industry.
Leading to increases in rate.
On the.
Which we regret the diminishment of economic activity of course, but.
And what's implied by that but that has led to a just fewer events occurring that will give rise to claims. So I think that this decrease in claims.
It is for each period that we have it is not a deferral.
As a.
Oh, it's an indication that the claims will not arise.
Later value always every book as you know.
Late reported claims, but that's never been a huge problem.
Our our book of business because of the layers, we right remember that weve, mostly by primary layers.
So I think this is an indication that these years that we're holding it up.
I think oh.
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You know a cautious.
Careful.
65 five.
Well develop really well they may be some of that they could prove to be some of the best years in our history ever.
The.
Increases on September in the medical costs in the run off reserves.
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I think you suggested that your observation was there is a delayed treatment.
How has that progressed in recent weeks do you give more information that Arizona.
The duration of the step up in expenses.
Yeah listen for the most earlier in the quarter, we weren't seeing it it's just really came up.
In the last couple of weeks of September.
And so we just don't want it.
Was our reaction to that standpoint it.
And we're doing everything we can to unearth. This information early sometimes it's not you know, it's a little bit more difficult than anything.
To do that but we are trying to on Earth and information inkjet to it.
As fast as possible one thing I would say is look I really in the context of our growing core it DNS block.
And our.
Currently the way we are holding our reserves for the.
18 through 20 years, and the fact that simultaneously we have.
So.
Thoroughly reduce.
There really is probably not worth for me, but.
It does so substantially reduce both the claims count and the percentage of open claims.
Im really feeling.
Fine about where we are.
In that run off it doesn't stop us from wanting to react very quickly to.
Very small pieces data because we're staying on top of it.
But.
I'm not I'm not overly troubled by it.
Understood then the one more question on small business has been a lot of question about the.
In Mexico bid on small business, but does that mean for a small to.
You know its underwriters.
Any observations you got about the small business trends.
Yeah, you know look.
We're up in small business and you know that we've.
We've done well in small business, one does one too, but it's not the core of its a small division of our company. So I want to make that point that you know.
Our average premium and casualties about $23000 in our small business division as those is a much lower.
Average premium and.
Not a huge part of though it is a growing part of our book I think.
That was tremendously help small businesses were boosted I think more than some of the rest of our book by.
The stimulus packages.
I'm, hoping and believing that there will be another stimulus package or after the election, but if there isn't it won't.
It won't affect our book I don't think tremendously because small business is relatively minor part of our total CNS premium.
And two because the capital constraints in the industry are what are in the industry as a whole are what is really driving the rate increase that and prior year development, you know that you're you're seeing and the announcements of many many many companies.
And this is a this is Bob Meyer I know, let me just add a comment there you know within.
Our small business Division I'm, probably the biggest class. There is is small really small contractors and we as Adam said, we that continued to be fine from a production standpoint during the quarter and our general Casualty Division not surprisingly you know, we did see a decline and some bars rest.
Starts and taverns, but the other part major part of that.
Other major class of that division is a habitational related risks and there's.
Tremendous demand for Rihanna product and very strong pricing power in that space and so you know its barge are some tolerances not a huge part of that division Mark Yeah, Doug.
Sort of yes.
And just jumping on what Bob was saying sorry, Bob.
But you you're really good point caused me to.
Flipping to page here and just make second a number I do want to say that you know look our small business division for the.
For the quarter.
Is up it's still you know, it's it's a $6.3 million, we wrote but it's up 25%.
So it's not like we're seeing a decline in it is because as Bob pointed sell you know, it's it's got a lot of time small contractors in there and if anybody who's in the room.
Who is watching.
Residential development sales knows.
Theres been a real constrained constraint on built people who can build.
Houses are decks or do renovations for you et cetera.
And our general Casualty Division, where we write larger risks is also up it was up 7.6%.
In the quarter.
Very helpful. Thank you.
Our next question comes from the line has not already from JMP. Your line is open.
Hey, Thanks, good morning.
Good morning.
Adam I just wanted to ask you to two and if you could help impact that the core business a little bit for us I mean, we see a lot of statistics that you gave which are very helpful.
But I know that you know.
Rate increases can bounce around based on mix of business in any given quarter.
We're also getting into the cycle, where I am pretty sure. Your clients are starting to get second round and third round.
Rate increases, we're getting that compounding effect. It can you just help us understand as you look at your business.
Which shows the the dozen or so classes of business and DNS do you view as is really kind of being the most exciting for you guys and then as you think about it not just from a kind.
Kinda price change perspective, but how do you view some of those businesses are the group as a whole you know in terms of absolute pricing.
As opposed to the other point in history.
Yeah.
Okay, well, let me I'm going to start with absolute pricing because.
I want to.
We've had.
Significant continual increases quarter over quarter increases in pricing on a book that was already there.
Delivering good combined ratios before we started the price increases so I want to I just want to [noise].
These price increases.
I think our helping an already healthy.
Healthy.
Book and it's healthy in our case, I think because of where we've selected to play and frankly.
Because of the high quality underwriting that's being done by our underwriting desk in our leadership teams across the company and and.
If it weren't for their skill.
Skill set.
I'd be less confident but they have produced great combined ratios for a lot of years as I was mentioning you know in terms of what the average has been for many years. We grew this quarter a year to date, we have been growing in general casualty life Sciences manufacturers and contractors professional liabilities small.
Business sports and entertainment excess casualty.
And excess property.
Now the excess casualty growth of course, when it helps us with our expense ratio because of the way and so does the excess property because of the way we've got that structured.
By the way, it's probably worth mentioning.
And this isn't responsive to your question, but I hadn't said it before so let me just say it now.
But the way we write our excess property.
The only had $2 million roughly of of exposure to the most recent storms that was absorbed in our in.
In our reported loss ratio, so we're not a big.
One of the things we do is don't expose ourselves to catastrophe losses, and we did the same thing in the excess casualty with a large keeping up a relatively modest line there.
So I think we've been getting.
I don't I do not think we are finished as an industry with the rate increases and if you look at our submission rate and you look at our higher retention rate.
I think you can expect and we do expect to continue this trend.
For some time to come I don't think grip the top.
Great that's very helpful and congrats.
Congrats on the next retirement I hope you enjoy it and very warm welcome to Frank.
Okay and by the way this transition I'll just take this opportunity to say we have been working in the whole team has started working very closely with Frank.
We're in the very early stages of it but this transition.
He is going very well we hit is his management style is just really in tune.
With the.
Attitudes and underwriting focus that we have as a company he's sitting right into our culture and he will bring new skills.
And deep experience to the company he is going to add a lot to our company and I am really excited.
About what we're going to see under his leadership.
Great. Thanks.
Our next question comes from the line of Randy Binner from B. Riley <unk> company.
Hey, good morning, Yeah, Adam Congrats and nice working with you again.
Intel the next time, you come back I guess, but.
And our net investment income I I I wanted to see you said there were some changes there.
What can get that above kind of this 15 million a quarter run rate and.
Yeah are there kind of alternative.
Investments or partnerships or things you can do that are different that possibly get that running higher.
Yeah. Thanks for the question Randy It's Erik so it's tough in the yield environment that we're all living in right now to you to push that much above the 15 million a quarter and that we've been generating for the last little bit.
I do think there probably some things we can do around the edges, but.
Right now you know I think we're trying to manage this interest rate environment as best we can and I know our competitors are well well show you.
Looking to Q.
Consider potentially a little bit more risk over the next year or so but right now are pretty comfortable with the portfolio that we have we're having wanted to de risk that volatility and focused on our underwriting returns in our time.
Opportunity to grow core E N S and all the other things we're doing there.
So we view it as a portfolio in a trade off and while were let's say other things I think.
The environment is is what it is to some degree at this moment.
Fair enough and then.
And I apologize I missed I had them as part of the call, but just on fronting.
Yes, you know.
There's a lot of focus here any unanswered rightfully so but just on the on the kind of the front end side.
Where is that when is that opportunity in and can you. Just you dimension that a little bit more are you are you getting more looks at opportunities and kind of what the demand function. As there is the underlying risk is a little bit different.
We are getting I'm I'm going to get Bob Myron involved in this because he's been intimately.
Involved.
We're all.
Very excited about the advances that false Lake, which is our specialty admitted group has made the new programs, which are really fee generating programs because of the small retentions we keep.
But we think this is an area that has expanded as a percent.
Really well, it's already delivering a low double digits of return on equity, but I think we're just beginning and Bob do you want to you want to jump in here and comment on some of the work that you and the team there had been doing.
Yes, so I do it I think its still the early innings here.
We we certainly have been out for a while but where rob working.
We're continuing to invest a lot of time and we.
On a number of new deals this year I would say that the.
The size of these deals is and is increasing relative to what it's been in the past when we're putting on new deals were getting more interest in rollover deals.
And I think that.
That hasn't in force book of business already and can be meaningfully large when it comes on board for us. So we're going to continue to focus on that.
Working on building relationships and developing relationships on some potentially larger transactions.
And.
The working group is all working together on that and I think also we will get some leverage from Frank in that regard too so.
I think the outlook is positive.
In terms of our ability to really grow that meaningfully in the future and really grow the fee income there.
Great. So I think if running as being more admitted on the cost side, though.
Is there can you roughly break out what your programs are right now between admitted and non admitted.
[noise], Yeah, I don't know if I have that information at hand, I would say because of the fact that we're we're writing a $60 million of gross of individual risk workers comp business, which is 70% seeded away and $140 million of California workers comp related business.
You know, it's there's probably got its meaningfully more than it's probably somewhere 70% to 80% right now that's actually admitted market business right.
Right and but but the percentage of BNS has been has been growing.
All right I'll leave it there thanks a lot.
Our next question comes from the line of Schon rating back from KWB He's guilty.
Okay.
Very heavily on the first million dollars. The primary layer here. So we're not we've already been exposed at first million dollars and that's not where the social inflation is is really being felt.
And so I think these rate increases are helping.
I think they are expanding our margin.
And think it's a really good.
Harbinger for.
Future.
Results.
There was a second part that I missed the second part of your question.
Just how you would think the corporate tax rate height might affect you know right momentum.
That might further and further accelerate.
Right.
Well look taxes are just one part of.
Taxes are just one part of the.
Return on tangible equity.
I think if I look at our increase in rates, there probably higher they are probably better than.
Greater than what we will see in terms of a corporate tax site, but I'm not you know.
Crystal ball reader, we will be.
The whole industry will.
Have to face the same hiking and rates and we'll all have to respond.
Individually to that to make sure that we maintain margins. The industry is very focused if you just see the commentary from Ceos across the board in the U S TNC industry.
You're saying that there is a tremendous emphasis on.
What we have to do as an industry to get March.
So I think that there is a lot of momentum here and while interest rates are low the only place to go.
Is right.
Great. Thank you given you know your comments in the double digit right on top of rate would it be reasonable for us to expect kind of low to even mid single digit improvement in the accident near loss ratio next year.
We're not going to.
Tempting, though it is we're not going to pre announce.
Okay. Thank you.
And we do have a follow up question from monkeys from tools 90, something.
Yeah, they're all the.
Seeding condition in the <unk>.
The typical percentage on that as it twenty-five 30 something like that.
It starts at the three.
Okay.
Yeah.
Yeah and then.
That's a meaningful benefit to the expense ratio and obviously, we've already talked bathroom attention from that segment.
Yeah, the and I'm, sorry, I don't know if you meant.
You mentioned this picture updated thoughts on expense ratio.
Both within.
I actually interested to kind of across the board E&S specialty admitted and then.
Then overall.
Is Q3 a good.
<unk>.
Yeah.
The question Mark I think about the expense ratio I think that the nine month year to date integrated barometer for where we're going to be on the year and so that's kind of hold through to all the segments although.
No I think the real thing that I'm not going to be able to predict what you said is is the real strength any acted cassie market in particular within Koreana.
Because that that's obviously, there's been great right in that line in front of the best rate performers in all of our in our stock. So we've grown it substantially and it had a material impact on the expense ratio. So I think that could continue to to be favorable on the E&S expense ratio I think that there was some one option casual.
Reinsurance this corner, so that's why I'm, not particularly focused on on the quarter.
That really think about that the nine months numbers across the board.
And then specialty admitted you it's kind of the same situation you've got fee income that's upsetting the expensive and the year to date I hear what you're saying, but then I.
The year to date is different than <unk> clearly into some reason why things shouldn't be as good as three Q.
Particularly in specialty admitted and the E&S.
Or is that more conservatism.
No I'm talking about year to date, we'd add the year to date with the full year, so not particularly enough for fourthquarter shell and now I'm mixing and matching a little bit there.
Specialty admitted there was some small one option there's not a lot of premium in that segment again with the focus on the front of business. So I think about the run rate and that segment for where we are now and we'll get a benefit if we continue to grow the business.
Being closer to that that 20, 21%, where we are in a nine month basis there.
I'm happy to follow up in more detail off offline that that's helpful to him.
Yeah, No I think I'm.
I think I'm good I appreciate the help.
Thanks for the questions.
Once again, if you wish to ask a question. Please press the star wanting their phone against are fine.
[noise] against Star one to ask a question.
Oh.
Okay Alright.
<unk> sat up there no more questions operator, operator, thank you and everybody on the phone call. Thank you very much for your <unk>.
Attention to accompany and following us and we look forward to reporting and you'll be hearing from Frank next quarter and I think.
We're very excited.
With the prospect Us is leadership.
Thank you and we'll speak to them.
Thank you did he can't tell them that that sounds good with their conference Party can California, Jamie and beyond disconnect.
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