Q2 2021 W R Berkley Corp Earnings Call
Thank you very much and good afternoon, everyone.
Welcome to our Q2 call.
Along with my co hosting we have our executive Chairman Bill Berkley as well as rich day of group CFO.
Going to follow a similar agenda to what we've done in the past the we're in a moment or 2 I'm going to hand, it over to rich to.
Walk us through the quarter and focus our attention on a few highlights.
And 1 sees through I'm going to offer a few soundbites.
And then we will be opening it up for Q&A.
Rich so if you would please.
Great Thanks, Rob and.
Good afternoon, everyone.
The positive momentum continues to build in our business as evidenced by our growth in premium and expansion in underwriting profits as rate improvements and additional premium associated with increase in exposure all right through the income statement we.
We reported of consecutive.
Quarterly record underwriting profit in the second quarter of 2021, along with strong net investment income, resulting in an annualized return on beginning of year equity of 15% the.
The company reported net income of $237 million of $1.27 per share. The components include operating income of $219 million or $1.17 per share and after tax net investment gains of $18 million of 10 cents per share.
Drilling down into our quarterly underwriting performance you will note that gross premiums written grew by $529 million or 24, 8% to almost $2.7 billion.
Net premiums written grew $472 million or 27, 2% to more than $2.2 billion, recognizing an increase in both segments.
Our overall cession rate decreased in the quarter due to changes in certain underlying outward reinsurance arrangements lower reinstatement premiums and business mix.
Moving into segment production of net premiums written the insurance segment grew 29, 2% to almost $2 billion with an increase in all lines of business.
Professional liability led this growth with 64, 8% followed by commercial auto of 31% other liability of 28, 7% short tail lines of 21, 2% and workers compensation of 15, 6%.
The reinsurance and mono line X X excess segment grew about 11% to $218 million with an increase in mono line access of 29% and casualty reinsurance of 17, 5%, partially offset by a decrease in property reinsurance of 13, 8%.
Underwriting income benefited from the compounding rate improvement above loss cost trends.
Along with growth in exposure and lower claims frequency in certain lines of business. We did experience an above average level of non weather related property losses in the quarter, partially offset these benefits.
In addition, our current accident year catastrophe losses decreased significantly quarter over quarter from $146 million or 8.7 loss ratio points from the prior year to $44 million or 2.2 loss ratio points in the current quarter.
As a result quarterly underwriting income increased almost 800% 2 of record $202 million.
The reported loss ratio was 61% in the current quarter compared with 67, 7% in 2020 per.
Prior year loss reserves developed favorably by about a half a million dollars in the current quarter.
Accordingly, our current accident year loss ratio, excluding catastrophes was 58, 8% compared with 59, 2% for the prior year's quarter.
The continued growth in net premiums earned has benefited the expense ratio, which was 28, 7% in the current quarter compared with 31% the year ago net.
Net premiums earned outpaced underwriting expenses by a margin of more than 8.5%.
We also continue to benefit from reduced costs associated with travel and entertainment, but do anticipate some of this will be given back as the economy more fully reopens.
Wrapping up the full picture.
On the underwriting side, our current accident year combined ratio, excluding catastrophes was 87, 5% for the quarter compared with 92% for the prior year quarter.
On the investment front net investment income increased 96, 9% to $168 million driven by strong results in investment funds.
The fixed maturity portfolio reflected the decline quarter over quarter due to the lower interest rate environment, Although the quarterly GAAP is closing.
We also continue to maintain an above average level of cash and cash equivalents as of June 32021, which has been decreasing over the past few quarters, where we see opportunities to invest at attractive risk adjusted returns.
Our duration remains flat at 2.4 years, while maintaining our high credit quality of double a minus.
Pre tax net investment gains in the quarter of $24 million is primarily comprised of realized gains on investments of $39 million.
The reduction in unrealized gains on equity securities of $18 million and a decrease in the allowance for expected credit losses of $3 million.
The realized gain was largely driven by the sale of 2 real estate properties, which also resulted in the reduction in our debt that was supporting 1 of the real estate properties of approximately $102 million.
Corporate expenses increased approximately $13 million due to debt extinguishment costs of $8 million relating to the redemption of hybrid securities on June 1st and higher incentive compensation costs as well.
In addition, we announced the formation of a new operating unit in the second quarter, which you may recall that such expenses are reflected in corporate until the operation begins writing business and has been moved into the underwriting expense.
Stockholders' equity increased by $164 million to approximately $6.6 billion in the quarter after regular and special dividends of $112 million.
Book value per share increased 2.5% in the quarter and book value per share before dividends increased 4.3% and.
And finally cash flow from operations continued to be strong with approximately $700 million on a year to date basis and with that I'll pass it back to Rob. Thank you.
Rich. Thank you very much. So let me just offer a couple of quick observations and then we'll get to your Q&A and take the dialogue anywhere participants would like to.
I think by virtually any measure it was a great quarter for the company from <unk>.
The perspective, it's been in the making for some period of time.
From here that I think there is a growing amount of evidence.
Yes.
The support the idea of that there is more to come.
It's just again quite encouraging.
It's worth.
Drilling down into the market a little bit more when we look at the major.
The lines with the exception of workers' compensation all of them continue to get rate increases the outpaced our view of loss trend and that is even as we have been factoring in a bit more for financial inflation.
Regarding the workers' compensation.
R again growing but early signs the love.
Will of erosion there.
But having been said we also are paying close attention to of wage inflation and what that may mean for the.
The comp of economic model.
Rich walk you through the top line, obviously of the 27% growth plus.
Pretty healthy.
A couple of observations there, though 1 please keep in mind. If you go back and you look at 2020, we were not an organization where in Q2 of 'twenty. Our top line fell off a cliff we will give or take flat. So this is not just a bounce back to a normal run rate. This was the meaningful growth.
Good.
In addition to the Richard.
Centered around the.
The excess in reinsurance segment, you would've noted, possibly in the in the release and also again in Rich's comments that it was the reinsurance segment were particularly our domestic treaty business, where are we back away from a couple of of deals where.
We just felt as though the rates were good they werent good enough for us to participate.
If you unpack the 27% growth overall give or take about a third of it is coming from rate the.
Balance of it is coming from the exposure as you would've gathered from the rate increase from me.
From just shy of 10%.
I think it's important the people.
Read too deeply into as I suspect some months.
The rate increase and what does this mean relative to what the rate increase was last quarter or at the same time in the prior year.
The simple fact is that when we think about our economic model. It is multi dimensional.
We look at the margins that are available in the business and as we become pleased with the available margins. We start to think about possibly how we prioritize exposure of growth versus pushing further on rate.
And again as we have seen the margins in a meaningful part of our portfolio income, particularly attractive we're still pushing for rate, we are still getting rate by and large ex comp that outpaces trend, but again growing exposure becomes.
Even more of an opportunity that we are capitalizing all of them.
A couple of other comments just as it relates to sort of of top line.
I think of a helpful data point, particularly of our specialty businesses are getting flooded with submissions.
And in particular.
As our E&S businesses, what's driving it to the thing.
And opening of economy, which clearly we are benefiting from across the board and of course, a standard market that continues to revisit its appetite.
As far as the opening of economy bouncing back to workers' compensation as written.
Expressed in the past we are concerned with that product line and where rates have gone, but you would have seen that product line growing in our release and that is really driven by payroll growth and again as it gives the speaks to the health and wellbeing of the U S economy as it continues to recover.
Yeah.
Maybe pivoting of over 2 to the combined ratio of rich gas through a lot of this just a couple of observations from my perspective on the expense front coming into the 28.7 from our perspective. It is a pretty good place with opportunity to improve from here as rich suggested as R.
Our travel and entertainment picks backup satellite some if not all of the approximately 50 basis point benefit that we've been getting as far as expenses due to COVID-19 that is likely to erode them disappear that having been said if you look at the power of the earned premium coming through and how.
It is likely to build from here and you can see that given the written leads the earned there is likely more benefit to the had over time.
Loss ratio pretty good line of 61% of.
The ex cat accident year as Rich mentioned was the 50 a day he talked.
About non cat.
The property and loss activity.
That added relative to where it was running last year about a little over 2 points.
So this was quite frankly, we have a rash of fires.
Some would suggest it's bad luck, we tend to believe that oftentimes you make your own luck. So we're digging into that to make sure that this is not of a new normal and it was more of a onetime unfortunate series of events.
The other data points on the loss ratio from the paid loss ratio came in at a very attractive 44.3.
A couple of comments on the investment portfolio again rich commented on the duration of the 2.4 years.
The book yield is running.
For the incidentally at about 2.4 as well.
We continue to be very focused on inflation.
From our perspective, the inflation is very much here.
Some people that talked about it being the transient that may be true I'm not quite sure when people talk about transient well how long is transient regardless of the cost of things are up today.
But even if you saw inflation return to a 2 and a handful of 3% level. We continue to believe that a 10 year.
130, or less doesn't make a whole lot of sense for the long run.
1 other comment just related to the balance sheet and the capital structure and we can get into this during the Q&A. If people are interested we've done a fair amount of work and restructuring certain things for 1 of rich's comments around the prepayment or the calling of certain of.
Securities and the costs associated with that but as you think about again the earnings power of the business later this year, but even more so for 'twenty, 2 and 'twenty 3 there's very meaningful benefit that will be coming through again savings around the capital costs.
So.
Long story short very good quarter.
And I think what's more encouraging than even just the results is if you look at how the table is set for what is likely not just to be the next couple of quarters.
Quite frankly of the next couple of years.
This is an organization that is going to benefit greatly from the broader macro conditions.
Let me pause there and Suzanne we'd like to open it up for questions now if we took place.
As a reminder to ask the question you will need the breadth shy of 1 your telephone keypad can we draw a question. Please press the pound key.
As a reminder to ask the question. Please press star 1 on your telephone keypad Andouille Dara question. Please breath pankey, we standby will be compile the Q&A roster.
Our first question comes from the line of Elyse Greenspan from Wells Fargo.
Your line is good.
Afternoon.
Hi, Thanks, good afternoon as well Mike.
My first question I wanted to drill down into the.
Some of that in the.
The comment like bad debt factoring in a bit more from.
The place and can you expand on that and what changed in terms of your loss trend assumption in the current quarter.
So.
We are constantly visiting and revisiting of our loss picks and trying to refine them based on all of the available information at any moment in time.
I think from our perspective, it's pretty apparent that there is more financial inflation in the system today, if you will.
There was a year ago.
And as we think about our loss costs.
For example in the property line the.
Costs of building materials or the cost of auto parts or other things like that 1 needs to appropriately factor in the financial inflation and what that means.
And how that impacts.
Any of our percentage of the magnitude of the mobile price on the quarter relative to your line.
Generally speaking we do.
The.
Dissect our loss picks to that extent, but certainly.
Can assure you that when we have factored it in.
Let us too.
To raise some of our picks from what we have been using.
In the past.
Okay and then my second question right.
The going back to Mark.
<unk> ratio on 27 in the quarter.
That is the only 50 basis points from Colgate, but it sounds like.
Given the fact that there is a lot of the leverage to the top line growth.
Perhaps this could be kind of the new run rate expense ratio of bulk when we felt the pandemic savings of even Rami GAAP preclinical data.
The range of the 28.7 can you just help us kind of of the run rate.
Thank you sure so.
What I would suggest you do is if you sort of add back in the 50 basis points for Covid.
The.
Then you look at.
The momentum behind our earned premium in part by looking at our written and how thats going to come flow and <unk>.
Yes, some of that expense is variable.
The commissions boards bureaus and so on the.
A meaningful amount of our expenses is somewhat fixed.
And to Richard's point earlier I think the.
That will certainly offset and probably then some.
The COVID-19.
Component.
Not being part of the business hopefully going forward because everyone is back to a more traditional way of operating.
Okay. Thanks for the color.
Our next question comes from the line of Michael Phillips from Morgan Stanley Your.
Your line is now open.
Unlike okay. Thank you.
Hey, good afternoon, Rob Thanks.
2 questions first question on the loss ratio of pattern.
The COVID-19 for this quarter and insurance it looks like it's flat compared to last year.
That's where I kind of want to get.
Under the clarification.
I think last year, you had some frequency benefit so maybe this quarter actually did improve in insurance and can you remind us of youre talking about the.
I'm sorry, Michael could you repeat the question you broke up a little short of our I apologize yeah. Yeah. So the insurance segment loss ratio ex cat and Covid impacts it looks like the loss ratio of their backing that out was flat year over year compared to <unk> 20, but I think that you had some frequency benefits also that made 2020.
A little bit tougher comp against the wall of numbers. So wanted to see if that was the case and.
And clarify that so actually this quarter did that improve the insurance yes.
I'll give you my true sense and rich may have some thoughts to add to it I think the biggest piece was the comment net both rich and I made around non cap property related losses being a bit more challenging in Q2 of 1 than what we saw last year.
And I think that that would be a.
A leading factor and again that was primarily the fire rich do you have any further thoughts on that.
That's spot on Rob that's exactly right now so I don't have any additional thoughts.
Okay. Okay. So that would get the maybe there was something last year that the.
Kind of dropped out loss ratio, but maybe not so it's more just the elevated this year from what you said so that's.
Thats helpful.
Second question, Rob the did you approach the I guess the way you set reserves the philosophy behind how you set reserves for accident year 2000, given all of that was 1 of our last year of any differently than you otherwise do.
The reserving practices.
Certainly.
All of US are we as a written.
<unk> took note of the impact of Covid on multiple levels of some of it too that was helpful. Some of it was not helpful. But by the big piece of that perhaps youre, referring to is frequency.
And there were many product lines the benefited from Covid as it relates to frequency.
And how we have thought about it.
First off we recognize that that is not the new normal and we're seeing frequency trend virtually across the board, we're returning to a more traditional norm.
And second of all of it as far as what I would define as a unique situation in 2020 and from 1 time benefits that came out on the frequency.
Assumption.
We have recognized some of that book.
As we mentioned last quarter, we're reluctant to declare an outcome prematurely because there are certain things you conclude that they're done and there are other things it's hard to know whether theres just a pinch points in the legal system for example, and there will be of catch up.
Okay. That's helpful. I guess the reason I was asking about because I think it's no secret the theres, probably some cushion in the industry numbers I'm not going to ask you about yours, but the industry numbers because of the 2000.2020 of X noon and I guess, what I was getting at is do you think of any impact of debt on the overall pricing cycle because of what may be more of a cushion because of the COVID-19 results.
I think the different organizations have chosen to recognize that cushion at a different pace.
I think a lot of that cushion came through primarily in the shorter tail lines, which would of been recognized sooner rather than later and fundamentally I think a lot of the drivers that are pushing the market to continue to firm.
R coming about as a result of other things.
Okay. Thank you I appreciate the question is going to.
Impact the direction or the momentum.
Yes.
Alright, thanks for the question so much.
Our next question comes from the line of Ryan Tunis from Autonomous Research. Your line is now open.
Afternoon, Brian.
Good evening Rob.
The pressure on.
The growth obviously strong.
We didn't see that coming back in kind of the pivot towards the growth is.
Has that changed how you see the loss ratio of progressing maybe looking out over the next year relative to what you might have thought 6 months ago.
From our perspective again, nobody knows exactly what tomorrow will bring or Theres always the unforeseen event, but when we look at the data points you can see rates continuing to outpace our view on trend by and large in addition to that when you do the math 1 needs the <unk>.
Factor in the impact of terms and conditions, particularly in the E&S space as well as on the faculty the front.
And even in the broader specialty space so.
When I think about it.
I think that there is further opportunity from here for things to improve and again.
We have a view that our rate increases on a written basis.
On an earned basis will continue for some period of time are outpacing trend.
Got it.
Net inventory.
And in terms of presents a load of the remainder of.
Obviously berkley has a lot of the individual.
The underwriting entities.
These are pretty decentralized generally.
Does it work of the central range.
These are kind of reporting a loss ratio is to you guys and.
Youre kind of counting up the picks or to what extent the centrally.
Are you guys able to kind of.
Actually have control of the assumptions that go into the <unk>.
Like underlying loss ratios.
Yes, so as of <unk>.
Part of our model, it's not in the us and them so to speak.
Our model is much more of a collaborative 1 so things such as of last tests using that as an example that is certainly something that is a collaborative effort amongst really driven very much by the colleagues in the field at the same time. It is collaborative with us here and we worked.
Together, and we try and make sure that we're looking at of the well if you will a more local granular level at the same time, we want to make sure that we're getting the benefit of the broader view of the group and beyond.
So it's not 1 or the other it is really.
A team effort from from my perspective, and there is the what I would define as a very healthy given take.
Understood. Thanks.
Our next question comes from the line of Josh Shanker from Bank of America. Your line is now open.
Yes.
Yeah.
Pretty much.
Great. Thank you Doug.
Don't get angry I got a question, but I'm sure you of a grading in the <unk>.
You guys have the.
Poster child for we recognize.
Bad news quickly and good news, we got sort.
Of.
Thank you.
Moving to support putting it in the numbers.
Just looking through the.
The numbers and it seems like you guys have been releasing of reserves in the workers comp for recent accident years and I'm sure the reason for it.
As you guys sit on reserves, even things of producing favorable and the long tail line for a number of years until you do that the confidence sorry.
Was hoping that you might be able to enlighten me on how it works a little bit.
So.
Josh Let me say it back to you because the line is in great and I want to make sure that I understood. Your question.
And observation around how what our loss reserve development has been in the <unk>.
Workers comp line and philosophically, how we think about that.
I was looking through the schedule opinion I see recent accident years.
Workers comp are throwing off favorable development in <unk>.
I imagine you guys.
The long tail line like workers comp traditionally you would sit on.
Those reserves for a few years before making any changes.
Well.
I think the the answer to the question and again, we're happy to get into a more granular discussion of the offline is the.
We are looking at our picks.
And we're looking at the historical data and we are looking at both frequency and we're looking at the severity and we are trying to adjust the appropriately I think we tend to be particularly cautious.
Early on out of the gate.
And then of course as it as it seasons, we will respond but again I don't have the team in front of me so.
And to try and get into a more granular discussion, but if you'd like to take it up offline. We will be pleased to do that with you or 1 of your colleagues whatever the most convenient for you all.
Happy happy to do that and the other question I had was about the arbitrage market.
Let the fund the bigger from markets more what's your outlook right now given where the market is and the opportunity. There is will you be allocating more more capital or less capital in the future to that in your minds.
I think it will take care of 1 day at a time, we have some extraordinarily of skilled colleagues that run that business and we have no shortage of cash as you would see from our balance sheet. So while it's been pretty steady if they see more opportunity, we certainly in a position to provide them more capital to manage.
Okay. Thanks very much.
Our next question comes from the line of EMEA Shields from <unk>.
Okay.
Your line is from.
Great. Good afternoon. Thanks for trying how are you Rob now.
My pleasure.
So 2 quick questions.
I think if I understand your response to the lease correctly.
Talking about tweaking up some loss picks because of higher financial inflation, but if we take out the non cat weather in the quarter it looks like the.
Underlying accident loss ratio was better than in the first quarter.
So I feel like I'm missing something there.
Well I think obviously.
We're in an industry where.
You price your product before you fully know your cost of goods sold.
And when we are thinking about the impacts of the financial inflation and what that May mean for our claims costs in the future. We're trying to make sure that we appropriately factor that in.
I think of.
If youre like me and the show up at home depot once a month of you'll notice that a lot of the stuff that you buy there is <unk>.
Generally more expensive than it was a year ago.
So we're just trying to make sure that we are appropriately adjusted for the shift in a lot of commodity pricing and just the shifting a lot of costs.
That would come about with claims.
Okay. The.
The examples you gave for the financial inflation all seem to focus on short 10 line are you seeing.
Similar worsening inflation on the liability to the longer tail lines.
Not not as visible as the shorter tail lines, it's using a pretty broad brush.
We'll have to see the impact over time, obviously, there can be an impact on things.
On certain things, but for us on the liability side.
It tends to continue to be more of a social inflation discussion.
Okay Perfect and then 1 last question if I can.
Assume that some of the employment costs you have R.
The fixed costs is inflation, there getting any worse.
I think generally speaking there is wage inflation.
Throughout the country and you know there is likely to be more of that for at least the short term accuracy what it means over time.
Okay perfect. Thank you so much.
Thank you for your questions.
Our next question comes from the line of Brian Meredith from UBS.
Hey, good evening.
Good good good good Hey, Rob a couple of quick ones here. The first 1 just back to the the fire loss yet in the quarter.
Do you expect some level of fire losses every quarter right.
I'm just curious kind of is there a kind of of.
The above a baseline it was last last year's fire losses at <unk>.
The low just trying to kind of establish kind of all the good baseline issue right now for the underlying loss ratio.
Yes.
Well it was a it was.
A series of losses it wasn't just 1 loss yes.
I would tell you.
I don't have the numbers in front of me Richard I would say, it's a little bit of both of what Brian referenced I think last year was a little on the lighter side of this year was particularly heavy in.
Our run rate is probably somewhere in between the book and so I think yes.
The 2.4 over last year, I'd say of point point of the half.
What's your thought on that.
Yes, I think that's right I would agree with that.
Perfect. That's helpful and then another 1 just quickly on the.
The underlying loss ratios and Youre growing our casualty book pretty quickly right now the <unk> is that mix of business going to kind of ask from the sector going forward as we kind of looked at the the.
The combined ratio or the loss ratio.
Because some of the casualty lines, probably carry a little bit higher underlying loss ratio.
Sure.
I think of it is going to improve over time the margin in the business that we're writing is very attractive.
Okay, Great and then my last question I'm. Just curious you said youre concerned about wage inflation with respect to workers' comp, but don't you actually get premium for any type of payroll is that based on payroll.
Why would the big concern thanks for raising that Brian I may have the mischaracterized that are misspoke.
Actually it's the other way around.
So.
As you have to listen to US line for the past several quarters about the workers' comp line.
And how even though frequency may be the industry's friend and certainly it was the industry's friend.
During the Covid.
We continue to be focused on the severity component in there.
Meaningfully concerned about that for the industry, which has led to some of the commentary you've heard.
When you come up with a loss pick for workers' comp. Obviously, there are a variety of components 1 of the components.
Is the medical trend assumption that youre using.
So when you think about a.
The exposure you make certain assumptions around payrolls and to the extent that payroll or wage inflation is driving payrolls up more.
And perhaps medical inflation is going up but not going up by as is not keeping up with the wage inflation that could enter to the benefit of the margin.
Okay.
Makes sense. Thank you.
Thanks for the question.
Our next question comes from the line of Mark Dwelle from RBC. Your line is now open.
Yes, good afternoon.
Let me start with crystals small numbers question.
Was there in fact, any COVID-19 expense within the catastrophes of $44 million of catastrophe that you had this quarter or is that.
No longer booking any of them.
There was a relatively modest from rich do you recall how much of it was.
Yes, we had about 1.2 loss ratio points embedded in the current accident year cat losses for Covid.
Just under $25 million.
Okay.
Thank you.
And then the second question, while I'm tempted to ask you look the last thing you bought at home depot was what I'll actually ask here.
In terms of competition across the industry.
Are you still seeing primarily rational competitive behavior or are we seeing any signs around the edges of.
The call the aggressive competition price oriented competition like you would typically see perhaps from your peaks of the pricing cycle.
There is nothing that leads us to believe let's put workers' comp aside for the moment. There is nothing that leads us to believe the.
The opportunities in virtually every other product line are not very meaningful today, and we will be very meaningful tomorrow.
We continue to see the opportunity to push rates further.
And quite.
Quite frankly, we are seeing the standard market continued to push business out of creating opportunity for the specialty market. So we remain very encouraged by and large as it relates to the opportunities and no. We do not think that this marketplace has peaked in any way shape or form.
Quite to the contrary.
Workers comp again being the 1 outlier.
Are we seeing the rate decreases.
Pending on the state of slowing a little bit yes, there is signs of that at the same time.
It has been.
Surprising to us.
Now there are certain markets that are becoming exceptionally aggressive with things such as commissions and.
Quite frankly, we just shake our heads we've kind of seen the movie before.
How it ends and it's usually a sign that we're getting towards the end.
Thank you that's very helpful.
Okay. Thank you.
Again to ask the question. Please press star 1 on your telephone keypad entering your question. Please press turnkey.
There are no further questions at this time of please continue.
Suzanne Thank you.
So we are free.
First of all thank you all very much to refine the time to join us.
As you would have gathered non of levels at a strong quarter, but we're very optimistic of our debt where things are going for the next couple of years.
From our perspective, the table is set for some pretty terrific returns.
And we will look forward to enjoying those again over the next couple of years. So we will update you again in about 90 days. Thank you for your time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Alright.
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The team.
Okay.
The revenue.
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Okay.