Q3 2019 Earnings Call

Greetings and welcome to the Ambac Financial group Inc. third quarter 2019 earnings calls.

It's time all participants are in listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ms., Lisa <unk> head of Investor Relations, Claude Laval, Chief Executive Officer.

And David trick Chief Financial Officer, I'll, now turn the call over to Lisa.

Thank you good morning, and thank you all for joining today's conference call to discuss Ambac financial group's third quarter 2019 financial results.

We'd like to remind you that today's presentation may contain forward looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances.

Any forward looking statements are not guarantees of future performance of the that.

Actual performance and events may differ possibly materially from such forward looking statement.

Factors that could cause. This include the factors described in our most recent FCC filed quarterly or annual report under management discussion and analysis.

Financial condition results of operation in under risk factors.

And back is not under any obligation and expressly disclaims any obligation to update any forward looking statements, whether as a result, new information future events or otherwise.

Today's presentation contains non-GAAP financial measure the reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website and back dotcom.

Please note the presentations have been posted to the events and presentations section of our IR website, which support our comments today I.

I would now like to turn the call over to Mr. close the block.

Thank you Lisa and welcome to everyone joining todays call.

Yesterday, Ambac reported net income of 66.1 billion or $1.41 cents per diluted share and an increase of book value per share of $1.66 to $34 at 44 cents as at September Thirtyth.

Adjusted earnings were 76.8 million or dollar 63 per diluted share for the third quarter, resulting in an increase in adjusted book value per share of 74 cents to $30.31 as at September Thirtyth.

This quarter's favorable results include the realization and recognition.

142 billion dollar cash settlement in connection with the FCC auction I guess citigroup.

Strong third quarter net income.

All proceeds received from the settlement will be used to pay down the secured notes issued in connection with a holistic restructuring transaction the payment.

Which will be applied or the next scheduled payment date wallets to further delever, our balance sheet and reduce future interest costs.

David trick will speak to the financial results in greater detail in a moment.

During the quarter, we continued to make significant progress and the de risking of work short portfolio.

Or short net par was reduced by approximately 3.2 billion.

39 billion.

With 1.5 billion that decline representing adversely classified and watch those credits.

Active de risking that's been the primary driver of the accelerated decline of weren't short portfolio, which stands at 70% year to date or the overall portfolio and approximately 21% year to date on adversely classified in watchlist credits.

Whenever a key de risking and portfolio shaping transactions completed during the quarter included a significant reinsurance transaction for portfolio a public finance credits sitting 1.2 billion are performing par exposure, we're almost 3% of work total insured par at June Thirtyth.

This transaction also included approximately 509 million of adversely classified and watch list credits.

Our reduction of adversely classified and watch those credits in particular further optimizes our insurance platform.

Facilitates our goals to significantly reduce our shirt risk exposure.

Improve the quality of our book value and increase our optionality with respect to our remaining insured portfolio.

Turning now to Puerto Rico.

At September 27, the oversight board filed the Commonwealth part of adjustment in court rather than the negotiating a consensual agreement with the majority of the creditors before filing the board chose to proceed with a deep we bought plan of adjustment would you add back believes is a step backwards that risks embroiling, Puerto Rico, and many more years <unk>.

Protracted litigation.

And back cannot support this plan because it just regards revenue bondholder rights and liens entirely.

It appropriately allocating all pledged revenues repayment of Commonwealth expenses.

Yeah, Mike also oppose the Commonwealth part of adjustment as its simply shows a lack of willingness to pay.

Given it is premised on demonstrable eat incorrect <unk> fiscal plan projections and estimates of debt capacity that severely underestimate the Commonwealth ability to pay.

If the oversight board word to reconcile cash balances.

Correct politically incorrect fiscal plan assumptions the Commonwealth true debt service capacity would become evident opening the door for a reasonable holistic debt restructuring.

Evidence of the oversight board splitting theirs and unsupportable assumptions were shared with the market on October 17, that's part of an information for lease agreement with creditors.

We urge the oversight board to revise the Commonwealth fiscal plan and platinum adjustment to reflect the actual economic performance a realistic financial expectations.

Doing so would be a start to facilitate the process to arrive at acceptable and consensual restructuring deals.

And back we'll continue to aggressively litigate to defend its rights in Puerto Rico, So long as creditor rights and economic realities continued to be ignored the oversight boards current path will only prolong the increasingly destructive effects of a long term bankruptcy all the people of Puerto Rico.

Switching now to our RMBS loss recovery efforts.

In September the appellate division of the first apartment decided the appeals that were argued in may in our main case against Countrywide and bank of America.

The decision was very favorable to add back in affirming that we may proceed to trial on our contract claim with respect to all bridging loans and that our fraud claim remains viable.

The first department also issued decision as a three other RMBS cases in September and October that were favorable to the plaintiffs in those cases and helpful to our own case.

Consistent with past practice Bank of America continues its efforts to put up a trial and filed with the first apartment emotion for re argument and or leave to appeal to the New York Court of Appeals the highest court in the state.

It is not clear whether the first apart and will grant. This motion. Nevertheless, we do not believe this latest legal maneuver warrants additional delay and moving the case for implant to ask Justice Sherwood to said he trial date at our upcoming conference scheduled for November 12.

As it relates to new business, we continue to see and evaluate attractive new business opportunities in various sectors and will provide an update what it is appropriate.

In closing, we had another strong quarter with measurable success in reducing our insured portfolio achieving a significant recovery on the FCC City settlement.

Favorable decisions on our main case against Bank of America Countrywide.

As our results demonstrate we remain keenly focused on pursuing and executing on our strategic priorities, which we will continue to progress during the remainder of 2019.

I would now like to turn the call over to David trick to discuss our financial results in greater detail David.

Thank you Claude and good morning, everyone.

During the third quarter 2019, Ambac reported net income of six to 6 million or $1.41 per diluted share compared to a net loss of 128 million or $2.79 per diluted share in the second quarter of 2019.

As a quote noted the main driver of net income for the third quarter was the recognition of $142 million gain from the FCC Citigroup settlement proceeds from which were received in September .

Second quarter results in comparison were adversely impacted by the Ballantine commutation, which while economically beneficial contributed in the 83 million dollar GAAP loss.

The entire 142 million of settlement proceeds will be used to pay down. He sees secured notes at the end of the year, reducing annualized gross and net interest expense by approximately 14 million and 10 million respectively based on current three month LIBOR rates.

Adjusted earnings for the third quarter were 77 million or $1.63 per diluted share compared to an adjusted earnings of 86 million or $1.88 per diluted share in the second quarter. The main driver to the difference between GAAP and adjusted earnings for both quarters was the amortization expense associated with.

With our insurance intangible asset.

Now some now for some more perspective on the third quarter.

Premiums earned were 10 million versus 8 million during the second quarter. The increase resulted from 6 million of negative accelerated premiums experience in the second quarter, resulting from the Ballantine commutation.

Offset by in short portfolio run off.

5 million dollar increase in uncollectible premium during the third quarter.

Investment income for the third quarter is 45 million a 41 million dollar decrease from 86 million for the second quarter of 2019.

The decrease in net investment net investment income was mostly due to the inclusion in the second quarter of accelerated accretion on own ballantine nodes associated with the Ballantine computation.

Net realized investment gains were 18 million for the third quarter, which included gains from the sales of uninsured COFINA bonds at AC and foreign exchange gains Ambac UK.

Proceeds from the sale of COFINA bonds and cash on hand are being redeployed into an expanded range of investments, which are designed to create great greater diversity in the portfolio and generate more attractive risk adjusted returns to the fees, our insurance and other obligations.

Loss and loss expenses incurred were 37 million in the third quarter compared to a benefit of 133 million in the second quarter.

Expense in the third quarter was due to an increase in public finance reserves, partially offset by favorable RMBS and student loan development.

Public finance losses in the third quarter 77 million due to an increase in non COFINA, Puerto Rico reserves, driven mostly by lower discount rates assumption changes in higher loss expenses related to our ongoing aggressive efforts to mitigate our remaining risk.

The benefit in RMBS of 25 million was primarily driven by the impact of lower interest rates on excess spread.

As the benefit from student loans $16 million was primarily due to improved credit experience, particularly with regards to recoveries.

Net losses on derivative contracts were 10 million for the third quarter compared to 35 million for the second quarter.

Losses in both periods due to declines and forward interest rates and a reduction in hedge sensitivity in the third quarter.

Interest rate derivative losses in the third quarter were more than offset by 65 million of gains recognized in the carrying values of the insured and investment portfolios driven by forward interest rate movements.

Operating expenses for the third quarter decreased 3.5 million from the second quarter to 26 million.

The decline was driven mostly by lower compensation expenses.

Compensation costs were lower by 3.2 million, mostly due to the inclusion of incentive based compensation in the second quarter of 2019.

Related to the Ballantine restructuring.

The absence of these costs in the third quarter was partially offset by approximately 1.7 million a severance expense in connection with our continuous rightsizing initiatives.

Noncompensation expenses were down modestly at 11.5 million for the third quarter compared to the second quarter.

Lower legal and consulting costs were offset by the final redemption of certain junior surplus notes the quarterly redemption of which had offset a corporate headquarters rent expense from 2000 until until June 2019.

Rent expense in the third second quarters also included the short term overlap of our new and old headquarters lease.

And in November 2019.

Beginning in the first quarter of 2020, we will experience approximately 1 million per quarter reduction rent expense relative to our third quarter cost as a result of our space consolidation.

Our focus on reducing core operating expenses.

As noted previously will be met with volatility as a cost cutting actions often result in short term overlapping indoor upfront cost.

Nonetheless, we are disciplined in our approach and such short term expenses all incurred if the payback.

Hannibal, an absolute reduction to longer term expenses.

Turning to the balance sheet.

Shareholders' equity increased a $1.66 per share from June Thirtyth 2019 to $34.44 per share at September Thirtyth 2019, primarily due to the net income for the quarter.

Adjusted book value increased to 1.38 billion at September Thirtyth 2019 from 1.35 billion at June Thirtyth 2019, primarily driven by third quarter adjusted earnings partially offset by premium ceded under the reinsurance transaction executed this quarter.

Adjusted book value per share basis increased to 74 cents.

$30.31 per share at September Thirtyth 2000, 2019.

On a standalone basis as of September Thirtyth 2019.

I have G held cash investments and receivables of approximately 473 million or $10.39 per share.

I will now turn the call back to Claude for some brief closing remarks.

Thank you David.

Accomplishments year to date reflect our commitment to our shareholders to take measurable steps to strengthen our platform and position and back for the future.

Thank you for joining us on todays call operator, please open the call for questions.

Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.

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Our first question comes from the line of Giuliano below note with BTG. Please proceed with your question.

Good morning, and congratulations on another good quarter execution.

Thank you.

I'm thinking about on the Rep and warranty side of the World obviously.

He is based on the courts, but it didn't seem to get your take on.

Any read some of the recent rulings that come out and other related cases, and if there have been any developments on the legal fees related to rub warranty claims.

Thanks, Julie Yeah, there have been a number of other decisions in the first apartment relating to the notice a matter that a the first to prevent ruled in our case that were similar.

And those rulings were ruled favorably in favor of the plaintiff. So we view those cases as also highlighting.

A uniform view that a number of the judges on the panels in the first apartment have agreed with our perspective alongside these other cases, so again I think its supportive stopped a deterministic of our case, but there seems to be a very consistent.

Pattern with all the decisions that were related to our case, a really a favorite the playoffs.

That sounds good and thinking about where do you guys are doing on the de risking side are there any other large opportunities for other reinsurance transactions or working with servicers to clean up some of the legacy structure deals.

Yes, we've got a pretty deep pipeline of opportunities that we are pursuing and aggressively and looking to implement its a.

The timing of these opportunities very Ah, yes in terms of their availability and pricing.

We do have a very rigorous process in terms of evaluating.

Individual transactions, but we do see the opportunity in particular with the at the low interest rate environment.

And some of the.

Issues relating to the timing of where we are in a credit cycle that will introduce opportunities to de risk Oh, the reinsurance side, we continue to evaluate opportunities that.

I could.

Be significant to scoping and shaping the portfolio.

And we believe on a de risking or whether its reinsurance alternative risk transfer or other former de risking that the.

Number and types of opportunities continue to expand a as the market you know evaluate different options that we've been able to develop over the last number of years. So we are.

Excited to believe there will be a number of other opportunities that will help us sculpt the portfolio and continue to approve the overall credit profile otherwise business.

That sounds and then.

You guys mentioned that you plan on taking out a portion of the secured notes with this.

So the studio versus are there any other opportunities to pay down those notes sooner.

I know, there's my eye. So obviously there was more extensive cost spend a lot of.

Sounds good isn't the and the investment portfolios are there would be some accretion by paying off some of those notes earlier are there do you think there any other opportunities in the near term to do that or is it more so focused on de risking.

Yeah, that's something we evaluate regularly giuliano of when we.

How about allocating capital as it is this capital needs with regards to the de risking activity quite frankly.

Like frequently sorry, and so we weigh those all the time, we have Oh seven number investments that when you kind of break down the portfolio and allocate.

Against the various different liabilities as we do that are generating.

Positive carry relative to the to the debt. So again a day, but as you know the average yield on the portfolio is below.

The average yield on the on the debt, particularly the the secured notes.

But of course, we don't recognize a significant asset that we have on the balance sheet with regards to rep and warranty, which ultimately causes that negative carry.

From a interest accretion standpoint, so ultimately the short answer is that yes, there are opportunities, but there that we're thoughtful in terms of how.

How we.

Spend liquidity and allocate capital.

But since we've had that no outstanding we've paid down.

Around $200 million of the note.

With this 142 million.

That would significantly increase that amount and will continue to selectively pay down of the note when the opportunities arise.

Sounds good thank you very much for answering questions.

Thank you.

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