Q4 2019 Earnings Call

Greetings and welcome to the Ambac Financial Corp, Financial Group Inc. fourth quarter 2019 earnings call. At this time all participants are in listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As it might have this conference is being recorded and it's now my pleasure to introduce your host Ms. Lisa Council head of Investor Relations closed block.

She find <unk>, Chief Executive Officer, and David Trick Chief Financial Officer.

Well now turn the call over to Lisa.

Thank you. Good morning. Thank you all for joining todays conference call that it's got the in back financial group's fourth 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.

Her subject to certain neat and changes in circumstances.

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

Actual performance been events, they differ possibly materially from such forward looking statements.

Factors that could cause. This includes the factors described in our most recent FCC filed annual report under managements discussion and analysis of financial condition results of operation under risk factors and.

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.

Reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website at Ambac Dot com.

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

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

Secondly, yourself and welcome to everyone joining today's call.

The year ended December 31, 2019 add back reported net loss of 216 million or negative $4.69 per diluted share.

Earnings of 66 million worked over 44% weren't sure.

During the first 29 chain.

He was 1.5 billion was $32.41 per show.

And it just volume was 1.3 billion or $28.83 for sure David trick will discuss these results in more detail a little later.

Overall 2019 was a very strong focus your forever back as we continued to successfully deliver.

Acute all key strategic partners.

Further material appointments to add backs financial strength through the additional do leveraging our capital structure, resulting from work de risking activities at significant litigation related to accomplish.

Well with regard to drill de risking activities, we began the year with the execution of the computer to plate of adjustment you significant transaction that allowed came back to full we address.

Charlie reduce its largest risk representing approximately 70% of buybacks total what try to Puerto Rico exposure.

Another key de risking transaction completed in 29 gene was a bell tried restructuring and commutation one of our largest ambac UK credit exposures.

Transaction reduced or adversely classified credits net par exposure by 900 million.

Charlie enhancing ambac UK is regulatory capital levels to Neal compliance falls into reported.

Joining me are we also expanded our use of reinsurance to reduce scope or insurance portfolio.

In one transaction, we shoot at 1.2 billion, a public finance par exposure, representing almost 3% or total insured par.

This transaction, including over 500 million adversely classified and watch credits.

During the fourth quarter, we executed a reinsurance transaction seeding 228 million.

Perhaps par exposure.

Including over 150 million watchlist products.

Lastly in December 29, gene, we negotiated the removal of Ambacs guarantee from a trough of notes on an adversely classified and watch credit not park in excess of 270 million.

On a full year basis. These another efforts combined with portfolio run off decreased our insured portfolio by 19%.

46.9 billion to 38 billion as of December 31st 29 team.

Decrease or adversely classified and watch credits by 28%.

19.9 billion to 14.3 boys.

Notably our active de risking efforts accounted for 50% of the decrease in total net par at 65% of a decrease in adversely classified and watches credits.

Ongoing de risking a virtual portfolio remains a key focus and 2020.

We will use all options at our disposal to manage aren't sure before with the goal of reducing tail risk and improving the overall credit quality.

Turning now to Puerto Rico.

We're actively pursuing nurse de risking strategies with respect to where we're many exposures and Puerto Rico, namely one last recovery and mitigation through restructuring negotiations.

To.

The exercise of contractual legal rights and three active litigation.

And 29 team this rhodri positioned us well to take the lead and be successful resolution of our casino related exposure.

The computer resolution validates help in central transactions can be arrived at what point exact reasonably respect legal rights and avoid unreasonable an extreme scorched earth approaches that could lead to secure long term consequences for the entire U.S. municipal market.

This past Friday, the oversight board filed its amended Commonwealth quite a bit Jasmine reflective of the key terms.

The plant support agreements.

Unfortunately, the plan of adjustment reflects the continued failure by the oversight board to engage and gain to support a key long term stakeholders, Puerto Rico.

And back to went the other financial guarantors issued a statement highlighting the deficiencies and risks probably about a flat support agreement.

Following the joint statement, although large creditors and major stakeholders, including the but he said still patio.

Group Long island bondholders and the government, Puerto Rico also voice the lack of support for the amount of plant support agreement.

There's also a month or why the oversight board chose to move forward with applaud amended Commonwealth Platinum adjustment that is premised on demonstrably incorrect Commonwealth discipline projections and insufficient public information about Puerto Rico's cash assets debt capacity and pension expense liability.

To an extent the oversight board continues to understate, Puerto Rico's debt service capacity and its ability to pay ignore legal rights and fails to engage with Puerto Ricos true stakeholders, we will have no choice, but to continue to vigorously cerner legal rights.

As I've stated previously we haven't continued to be prepared to engage and productive central negotiations with the oversight board and its advisors to avoid costly protracted litigation.

Not acceptable recoveries to a broad set of cardinal of creditors and restore access to capital markets.

Turning now to or loss recovery efforts on our outstanding RMBS another litigations.

During third quarter of 2019 received proceeds of 142 million related to a cash settlement in connection with the FCC action against Citigroup that allowed us to further de lever our balance sheet and reduce future interest costs.

And in our main case, I guess bank of America Countrywide, we received favorable appellate decisions in September.

And in November the judge scheduled a four week trial to began on July 13 2020.

Consistent with their past practice Bank of America is now seeking further apart review and that has asked the judge to postpone the trial to allow for potential appeals in our case and decisions are pending appeal and two non add back from B.S. cases.

Got a status conference last week, the judge maintained the status quo.

I think has consideration of the banks request and scheduled another status conference in May.

Legal teams continue to actively preparing for trial as we look ahead to a final resolution of this case.

Moving on to operational developments.

Journey here, we took further steps to streamline our operating platform and capital structure, including additional headcount reductions and the consolidation of our New York headquarters to a single 4.1 World trade.

We plan to continue to evaluate your is a realignment within the company in 2020, as we progress the run off or weren't sure portfolio.

And lastly, with respect to new business opportunities. During 2019, we actively progressed a reference of evaluating potential opportunities in certain business sectors that meet criteria that we believe will generate long term shareholder value with attractive risk adjusted returns.

As part of these efforts, we identified and evaluating a number of new business opportunities progressing some to advanced stages.

Through this process, we have a bit enhanced our capabilities.

Further narrowed our focus on key market opportunities that we believe will lead to attractive actionable opportunities.

In conclusion, I'm very pleased with a tremendous accomplishment and 2019th driven by the strong leadership of the board and senior management as well as the dedication and hard work all over employees.

As we turn our attention to our 2020 goals mindful of the challenges ahead, we will we will remain vigilant in our efforts to execute all key priorities, which are aimed at enhancing long term shareholder value.

I would not want to turn the call over to David tried to discuss our financial results for the quarter David.

Thank you workload and good morning, everyone.

During the fourth quarter of 2019 and back reported a net loss of 110 million $2.40 diluted share compared to net income.

6 billion dollar 41 diluted share the third quarter.

The main driver of the fourth quarter and that was relative to third quarter. Net income was the 142 million onetime gain recognized in September.

I see Citigroup settlement.

And $60 million increase incurred loss and loss expenses primarily related to RMBS.

Justin loss for the fourth quarter with 80.

<unk> dollar 91 diluted share compared to adjusted earnings of 77 million or $1.63 per diluted share in the third quarter.

The main differences between adjusted loss and the GAAP net loss for the quarter, Dan charts intangible amortization foreign exchange.

Briefly touching on some highlights.

Premiums earned to a 20 million in the fourth quarter versus 10 million during the third quarter.

The increase was due to a reduction in the allowance for uncollectible premiums, partially offset by the continued run off of the in short portfolio.

That's been income for the fourth quarter was 42 million down from 45 million a third quarter of 2019.

A decline resulted from a reduction in income associated with our sales of casino bonds.

We continue to reposition our portfolio and lower income from Asias investment in its own secured notes.

Due to lower rates and a partial redemption.

Notable is that agencies alternative investments contributed 7% consolidated investment income in the fourth quarter compared to 5% last quarter around zero percent all of last year.

Continue to diversify the portfolio to generate more attractive risk adjusted long term returns.

These are insurance and other obligations, we would expect alternative investments to contribute a greater proportion of investment income potentially some short term volatility.

That realized investment gains were 9 million or the fourth quarter, which included 16 million of gains from sales of uninsured COFINA bonds, partially offset by unrealized foreign exchange losses.

Ambac UK related to their holdings of U.S. dollar denominated investments.

Foreign exchange losses of no impact on book value adjusted book value is there more than offset by the appreciation of the British pound a functional currency of Ambac UK.

Loss and loss expenses incurred when 97 million in the fourth quarter had to 37 million in the third quarter.

RMBS losses, a 40 million in the fourth quarter compared to a benefit of 25 million in the third quarter.

Driven by a reduction to estimated representation and warranty obligation recoveries.

Associated with the reduction in the underlying losses, and a change in assumptions and higher related loss expenses incurred.

Fourth quarter public finance losses.

The 4 million compared to 77 million in the third quarter and.

And included an increase in Puerto Rico reserves and related loss expenses, which were partially offset by the impact of higher interest rates.

Operating expenses for the fourth quarter decreased two point fourmillion from the third quarter to 23 million.

The decline was driven by $2 million reduction in compensation related expenses due to severance expenses incurred during the third quarter in connection with staff reductions and lower fourth quarter coral compensation expense.

We continue to focus on reducing core operating expenses and although our cost cutting actions may be back with some volatility as a result of short term events related to executing our strategic priorities. We are seeking implementing sustainable reductions to long term operating expense.

That's not what this objective as one example, a promise this expense declined by half a million in the fourth quarter.

Compared to the third quarter and is expected to decline by an additional half a million or more in the first quarter 2020, all at the result of our corporate relocation.

Interest expense for the fourth quarter was 66 million relatively flat compared to the third quarter.

At year end 2019, we redeemed 149 million of he sees outstanding secured notes using mostly the proceeds from the city FCC settlement.

We anticipate this redemption will have a favorable impact on interest expense in 2020 subject to changes in live or approximately 12 million.

Turning to the balance sheet shareholders' equity of 1.5 billion decreased two dolls and three cents per share from September Thirtyth 2019 to $32.41 per share at December 31st 2019, primarily due to the net loss for the quarter.

Okay, and unrealized losses on Securities 38 million, partially offset by foreign currency translation gains 54 million.

Just a book value decreased to 1.31 billion at December 31st 2019 from 1.3 billion at September Thirtyth 2019.

On a per share basis, adjusted book value decreased a $1.48 to 28 <unk> three per share at December 31st 2019.

This decrease was primarily driven by the adjusted loss for the quarter.

And 10 million a premium ceded under a new reinsurance transaction, partially offset by the impact of changes in foreign exchange rates.

As far AFG on a standalone basis as of December 31st 2019.

After you had cash investments and that receivables of approximately 483 million or $10, a 61 cents per share.

I'll now turn the call back to quote for some brief closing remarks.

Thank you David.

I would like to thank my colleagues at our board of directors for their hard work throughout the year and helping us to meet and in many cases exceed our goals I would also like to thank our shareholders for your ongoing support we appreciate your feedback during a year and we look forward to updating you on our progress as we continue to advance our strategic priorities.

Long term value for shareholders.

Operator, please open the call for questions. Thank you.

Thank you we will now be conducting a question and answers person if you'd like to ask a question. Please press star one I knew telephone keypad, a confirmation turn will indicate your lines and the question Q.

You mean for start to if he'd like to remove your question from the Kim for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.

My first question comes from the line Julianna Balicka with BTG. Please proceed with your question.

Hi, good morning, and thanks for taking my questions I guess starting off on the secured notes side you repaid about 142 million of that note with the proceeds from the city city. Okay, [laughter] and then kind of going forward. He overseas you should receive somewhere in the low $40 million random cash proceeds and that will be rolled into the notes.

Again.

Any sense of kind of yep <unk>, the central savings and how long that continues to go on for.

[laughter].

Oh, Yes July so that's right the the cash flow circulated if you will and we'll pay down additional amounts and the first quarter from.

Reis circulating of that pay down as well as additional cash flows from other sources the collateral potential other cash flows.

So on annualized basis.

Just based on what we paid down in the fourth quarter reduced interest expense by about $12 million, depending on where LIBOR goes which factors in that re circulation of that those cash flows from the pay down.

That makes sense.

I'm thinking about kind of the the rest of the debt structure. Obviously, there are few different a trusted outstanding are there any other opportunities out there to kind of pay down or reduce debt across structure or is it makes sense extended going out for secured notes in the near term because their cash pay and expenses.

Yeah subject to I would say liquidity another capital allocation considerations, we will continue to look at opportunities to reduce that outstanding secured balance.

And that's for the rest of the capital structure and we've said before that our objective is to simplify and optimize the capital stack and as we've done with some transactions the pass will continue.

Keep our eyes opened and.

And explore opportunities to do that.

Specific I can tell you a today that would be appropriate to give you more specifics on things that were considering.

That makes sense I appreciate that then Oh, it's nice to see the kind of your operating expenses coming down.

<unk> three additional benefit going forward I'm on the premise expense.

So which is good to see how to go forward basis, because it'll definitely bring down your tough operating cash flow for operating draw on cash flow.

But then thinking about how does your prep for litigation that or prepped for.

Going to trial are there any kind of enhanced litigation related expenses, there might be transient and the first half.

That was kind of go forward basis I, it's hard to say, but we did as we noted in our loss adjustment expense a true ups in the fourth quarter, but did take additional eylea expense on both the RMBS front as well as a Puerto Rico, which are the two two areas where.

We are most litigious. So we did reevaluate our reserves there the ended the year and treat those balances up to what we believe appropriate at this time.

That makes sense well, that's a charisma at merian questions I appreciate the time. Thank you.

Thank you, ladies and gentlemen, as reminder, if he'd like to during the question can you. Please press star one telephone keypad at this time, a pause a moment to allow for any other questions.

Thank you. Our next question comes to mind, I, frankly, <unk> private Investor. Please proceed with your question.

Good morning, Claude and thanks for taking my question.

Well I caught up.

'cause it was.

<unk>.

With respect to Puerto Rico, It sounds like the oversight Board Oh.

Oh somewhat off track, what they're on it and they are there.

Ongoing negotiations with either the board or the Commonwealth and who would you have to negotiate.

Commonwealth will support.

And as it relates to the bank of America appeal.

Shed some light on.

What they are appealing it seems like the appeal process has been ongoing now for about six months.

Happens happens appeals been hurt before.

Hey, good morning, Frank.

On your first question.

There are ongoing discussions.

Between our advisors.

And management with the advisers to the oversight board as well as other creditors. So I think that's an ongoing process there our formal mediation process. He said that go on periodically.

Yeah, but that's more on the on the formal side of things, but I think even.

Sure sure that there was always ongoing discussions us between creditors certainly.

And you know at departure times between the creditors and the DLP, So I think up.

My comments to that but I think it is a.

I see a fluid situation and we are.

Active, but our discussions and deliberations around.

Finding a resolution to to Puerto Rico.

But I would agree also that you know what's been put forward by the oversight board is not something that provides for a good entry to negotiation at this time.

As it relates to bank of America I think.

There are appeals are really.

Going back to the initial does should decisions or that were confirmed by.

Just a sherwood a an appeal to the first department, where we prevailed again and.

This is a final set of appeals that bank of America.

It is making to those to the final at the highest court and the sit in New York that the court of Appeals.

Which they're entitled to ask War, and we're just waiting to see whether that appeal will be granted.

If it's not granted.

We will be in front of Justice Sherwood a in may.

To discuss.

On a conference to discuss the timing of the trial, which has remained said before the July timeframe.

At the appeal is granted what does that was the process.

It is unclear, but I think there is a reasonable chance that if it is granted that the there would be delayed the trial I think thats.

Not something that we would be deciding but I think there's more risk certainly that the trial could be delayed.

And who has to decide on the field caught the jokes.

It's the first apartment.

I see so that would be.

Court of Appeals.

It's it's a it's a first apartments, that's the first let the level above the the.

Supreme Court that reviews are these cases, and then they decide whether or not it goes to the court of appeals, which is the highest score.

Okay, Oh, one final point sounds like you're narrowing down just search for.

For the an operating company or some kind of strategic.

Position or can you shed any more light on that.

Yes, we've talked in indicating the pass that we're looking at companies that are.

You know reflect certain key metrics that we've agreed to with the board.

And we review annually.

The focus is on.

Businesses.

Reflect our core competencies, so I would say in the credit and insurance.

And we've looked at you know a variety of opportunities that range from a capital light.

Insurance or credit originators.

To various servicing platforms and fee base.

Businesses, both in insurance and credit space. So we continue our focus in those markets and we have overtime identified opportunity. So we believe I couldn't be very attractive to add back and we believe would deliver long term value to our shareholders. So we junior efforts to focus on the sector and where are you.

It's going to getting to pass we would be very disciplined in our approach and anything we do as measured against the return of capital to our shareholders. So weve, a very disciplined approach and.

We'll see if we can identify the red opportunity in the coming here.

Well. Thank you very much finally, a hobby showing up in New York stock exchange.

Oh, well being on New York stock exchange or recently, where we're pleased with that it offers us a lot of benefits.

To being back in a big Board where were you once we're at the beginning so I think we're very pleased to be back.

And it's also going to translate to some meaningful cost savings for us as well. So I think the the benefits of both of being back end Archer home and also the to the benefits from cost savings I think translates to a win win for us.

Thank you very much clock.

Thank you.

Thank you. This concludes our question and answer session and that concludes our call today. Thank you, ladies and gentlemen for your time and interest today you may disconnect your lines and has a wonderful though.