Q1 2020 Earnings Call
[music].
Good morning, and welcome to the Ambac Financial Group first quarter 2020 earnings call.
At this time, all participants are in listen only mode.
Next question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host Ms., Lisa Camp head of Investor Relations <unk>, Chief Executive Officer, 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 first quarter 2020 financial result, we hope everyone is doing well, we'd like to remind you that today's presentation may contain forward looking statement, which are based on management's current expectations and are subject to uncertainties and change.
The circumstances.
Any forward looking statements are not guarantees of future performance other than.
Actual performance in events may differ possibly materially from such forward looking statement.
Factors that could cost. This include the factors described in our most recent FCC filed quarterly or annual report under managements discussion and analysis a financial condition.
Hope of operation under.
Factors.
I'm back if not under any obligation and expressly disclaims any obligation to update any forward looking statement, whether as a result of new information future events or otherwise.
Today's presentation contains non-GAAP financial measures reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website, yet ambac dotcom.
Please note that presentations have been posted to the events and presentations section of our IR website, which support our comments today.
Due to shelter in place restriction management is participating in this call from remote location.
Technical difficulties occur and we have to terminate the call you will be able to read the transcript of her prepared remarks, which we've closed at the Investor Relations section of our website.
In addition management will be available to address any questions I remain unanswered. Please feel free to contact me via the contact information in our press release schedule.
I'll now like to turn the call over time to close block.
Thank you Lisa.
For those of you joining us on today's call. We hope that you in your families are managing through this unprecedented crisis and keeping safe.
We would first like to express gratitude to all the first responders would've been risking their lives on the frontline fighting a cold at 19 pandemic.
With those directly impacted by this crisis.
With regards to him back we're currently working remotely to protect the health and wellbeing employees and colleagues.
Thanks to the efforts.
Please or business continues to operate without interruption.
The fast moving and evolving nature of Cobot 19 has created significant economic uncertainty with global and U.S. GDP forecast showing sharp declines.
In the U.S. monetary and fiscal policies, particularly the carriers that have helped to moderate somewhat the negative economic impact.
However, credit remains a big concern given the uncertainty as to the severity and duration of cobot 19 related disruptions.
Financial markets and economic volatility, resulting from the cobot pandemic have impacted or insured and investment portfolios as reflected in our financial results released yesterday.
We reported net loss of 280 million or $6.07 per diluted share, but the first quarter of 2020, and an adjusted loss of 265 million.
$5 in 75 cents per diluted share.
At March 31, 2020, or book value and adjusted book value were $21 in 88 cents and $22, an 11 cents per share respectively.
This quarter's results were primarily driven by the steep decline and afford rate curve impacting the discount rate on our GAAP reserves mark to market losses, Arner investment and deliberate portfolios as well as losses on our macro hedge.
Well, we increased economic losses in our short portfolio during the quarter.
No we tried to or municipal finance exposures. This was more than offset by higher expected excess spread recoveries in our MBS portfolios, David will provide a more detailed review quarterly results and a few minutes.
Well the ultimate economic outcome of the Cobot 19 pandemic remains uncertain, we believe that the results to date of our de risking strategy provides us with a stronger platform to navigate through this challenging period.
Turning now to weren't short portfolio.
Our risk in surveillance teams have been performing in that reviews on credits most exposed to the Cobra disruption and the ensuing economic recession.
Today, we have not had any coping 19 related claims and many issuers have funds on hand or alternative means to meet their near term obligations.
We assess our portfolio and the effects of the pandemic, we're closely monitoring our exposures and we have moved certain credits to the adversely classified category and increased economic reserves for others based on our risk assessment.
These changes primarily relate to certain U.S. public finance and certain securitizations, including mortgage backed securities and see the wells.
In our public finance portfolio, we consider exposures most immediately impact by the decrease and economic activity.
Includes certain hotel occupancy tax back deals and sitting financings, which are dependent upon narrow revenue for tax streams that have declined precipitously since stay in place orders have enacted.
Other sectors. We're closely monitoring include transportation hospitals, and private higher education.
Well it is still too early to set the full impact of the global pandemic and associated recession dirt exist significant protection and the majority of our impact of transactions, which we believe will mitigate ultimate losses, even if claims are paid to cover liquidity shortfalls in the near term.
We've also been assessing the impact of the significant monetary and fiscal stimulus by the federal government, which has initiated numerous measures, including those beneficial to state and municipalities.
Well, we believe these programs will help soften the impact of liquidity and credit risk to the municipal market. We also believe significant additional actions will be required.
In support of municipalities and states, we have been sharing our views with decision makers in the federal government about ways to alleviate fiscal pressures for me to spell entities as Congress Treasury and others in Washington developed and implement programs to either public sector and dealing with the consequences other pandemic.
Turning now to structured finance.
Weaker U.S. consumer highlighted by the third or 33, and a half million new jobless claims over the past seven weeks will likely result in higher delinquencies and potentially incremental losses tour MBS and private student loan exposures.
However, lower interest rates have sharply increased the expected excess spread recoverable in our first lien MBS portfolio offsetting much of the expected impact of the deterioration associated with the cobot 19 pandemic for consumer asset portfolio.
I would like to remind everyone that our MBS and private student loan portfolios are very seasoned and have been reduced by more than 90% that's a great recession.
Moreover, permitting borrowers earned a better position to face this crisis with overall improved equity in their homes and better household balance sheets. Nonetheless near term challenges in these sectors are expected and we are an active dialogue with servicers are these consumer assets in particular evaluating the potential impact.
I've recently enacted for parents and payment more Troy measures.
With regards to or de risking efforts activity slowed during the first quarter as a result of the significant market disruption. However, we were still able to execute a number of transactions, including the commutation of the last of our remaining Chicago Geo exposures.
170 million.
During the quarter, our total net par outstanding declined from 38 billion to 36 billion.
As market conditions improve will aim to take advantage of additional opportunities to further de risk our watch list and adversely classified credits.
Turning now to Puerto Rico.
Our thoughts are also with Puerto Rico as it deals with the crisis caused by Cobot 19.
Having shown great resilience in the face of harsh conditions in the past, we believe the Puerto Rico, we'll do so again.
We expect koby 19 will be sufficiently address in due course and over the medium to longer term, Puerto Rico may be better position versus other U.S. economies to take advantage of certain post pandemic opportunities.
This includes the potential for expansion of its domestic pharmaceutical and medical device manufacturing base and the revitalization revitalization of its recently redevelop and expanded tourism industry.
We believe the longer term fundamentals of the I'll remains strong and will improve overtime.
In the meantime, we hope the oversight board, which used to stop spending hundreds of millions in taxpayer money on unnecessary legal battles, including challenging the lawful party and liens of revenue bonds.
The effects of certain court decisions during the Puerto Rico bankruptcy.
That is municipal markets and created meaningful challenges and uncertainty for municipalities and states issuers.
The oversight board is currently advancing legal arguments that if successful could have a severe and permanent impact on municipalities and states throughout the country, leading to widespread destruction of value and increased taxes for you what taxpayers.
Given the significant challenges facing the U.S. municipal markets stemming from Koby 19.
The oversight board and their advisors should immediately refocused our efforts on consensual resolution of the crisis in Puerto Rico as was expected when the federal government enacted for Mesa.
Ambac remains committed to working with the oversight board and the Commonwealth to achieve holistic consensual and durable resolutions for Puerto Rico.
Negotiating conceptually in good faith with a broad set of Commonwealth creditors is the only way to help Puerto Rico successfully navigate the challenges and opportunities in a month in years ahead and restore access to capital markets.
Regarding our loss recovery efforts.
Given the challenges impacting courts throughout our nation the timeline of our RMBS litigation has also been extended.
As a new York State courts look to manage through this pandemic not unlike many other currently scheduled trials. The previously scheduled July 13, 2020 trial date in our case against Countrywide and it and bank of America has been vacated.
We will seek to reschedule the trial once greater clarity develops about when it can be conducted.
In the meantime, we're still waiting for the first apartment to determine whether it gets decision on countrywide pre trial motion should be reviewed by the New York Court of appeal.
Countrywide requested.
Countrywide has also address that our judge wait for the court of appeals to decide a pending appeal into non ambac, our RMBS related cases before proceeding with our trial.
We have also oppose this request.
We continue to believe in America, and strength of our case and look forward to its resolution at the earliest possible opportunity.
While the new business front, we remain very active in assessing opportunities to deploy capital on new business initiatives in the assurance and credit space and we believe the market dislocation and global recession may present, more opportunities to acquire businesses and make investments at attractive valuations.
However, we also recognize that we may face additional challenges and executing new business transactions, given the uncertainty and volatility in the market.
I'll now turn the call over to David trick to discuss our financial results in more detail David.
Thank you Claude and good morning, everyone.
As club commented the main contributor to our results for the first quarter of 2020, but the impact of the cobot 19 pandemic on the economy in financial markets.
Lower interest rates higher market risk premiums and the expected financial impact on certain insured transactions were the primary drivers to the first quarter net loss on derivatives investments in our in short portfolio.
During the first quarter of 2020, Ambac reported a net loss of $280 million or $6.07 per diluted share.
Compared to a net loss of $110 million or $2.40 per diluted share in the fourth quarter of 2019.
Adjusted loss for the first quarter with 265 million or $5 in 75 cents per diluted share compared to adjusted loss of 88 million or $1.91 per diluted share in the fourth quarter.
The principal variance between adjusted net loss for the first quarter was 13 million of insurance intangible amortization.
Touching on some specifics premiums earned toward 10 million in the first quarter versus 20 million during the fourth quarter. In addition to continued run off of the before the portfolio. The decrease was mainly due to an improvement in the allowance for premium receivable credit losses.
The fourth quarter.
This is an increase in the allowance in the first quarter.
Investments.
Excluding realized gains produced a net loss for the first quarter of 21 million.
Down from net income of 42 million in the fourth quarter of 2019.
Mark to market losses on limited partnership and other pulled investments a 52 million accounted for the first quarter net investment loss.
Despite some de risking of exposure to these asset classes towards the end of February significant declines in asset values due to the drastically higher risk premiums associated with the market dislocation that occurred in March related to the covert 19 pandemic accounted for the adverse performance in our global portfolio of equity.
Hi yield credit and asset back investments.
Subject to future trading decisions, we may make our current view is that the significant majority of these mark to market losses are temporary in nature and to that point, we have already begun to observer a reversal of these losses during April with a couple of funds experiencing experiencing high single digit return.
Earnings for the month.
The market dislocation that led to these negative results also provided us the opportunity to deploy some capital and Ambac insured securities and select other assets at a relatively favorable levels late in the first quarter and early second quarter.
Income from available for sale Securities was 31 million in the first quarter versus 34 million in the fourth quarter the decline being mostly attributable to redemptions of owned Allison I nodes and claims and other payments.
Loss and loss expenses incurred 117 million in the first quarter compared to 97 million in the fourth quarter of 2019.
Lower discount rates in the first quarter cause non economic incurred losses of approximately 190 million as we present valued our expected loss cash flows using a discount rate on average of 115 basis points lower than the prior quarter.
Lower discount rates had the most profound impact on the public finance in short portfolio due to the long term nature of claims in that sector and relative size of reserves.
As a result incurred public finance losses were 178 million in the first quarter compared to 54 million in the fourth quarter.
Incurred public finance losses, excluding the impact of interest rates related to assumption changes on previously reserved transactions and the establishment of new reserves for insured exposures exposed to covert 19 amounted to 67 million in the first quarter.
The RMBS benefit of 83 million in the first quarter compared to a loss of 40 million in the fourth quarter was due to an increase in expected excess spread recoveries of 130 million, resulting from lower interest rates.
And higher estimated representation and warranty separate location recoveries of 36 million, resulting from lower discount rates, partially offset by an $83 million negative impact from lower discount rates and higher expected losses due to the decline in economic conditions and the cobot 19 pandemic.
Net loss and loss expenses for student loans was $14 million.
Up from 5 million in the fourth quarter of 2019 due to incurred losses, driven by changes in assumptions and lower discount rates that were partially offset by additional et cetera expected excess spread resulting from lower interest rates.
In the aggregate estimated incurred losses, excluding the impact of any interest and discount rate shifts the first quarter for approximately 97 million, which primarily reflect the proactive establishment of new an increase reserves related to the impact of covert 19 on our short transaction.
In other assumption changes.
These losses will more than offset by additional expected excess spread from RMBS and student loans of $170 million.
Net losses on derivative contracts or $70 million for the first quarter compared to a gain of 12 million for the fourth quarter.
The loss in the first quarter was driven by significant declines in forward interest rates, which are more than offset by gains in RMBS excess spread and elsewhere.
And 30 million of adverse counterparty credit adjustments on interest rate derivative assets.
The interest rate derivatives portfolio is positioned as a partial economic hedge against the interest rate exposure in the financial guaranty and investment portfolios.
As Ford rates declined the hedge position was reduced materially during the first quarter.
The first quarter counterparty credit adjustment relates to the impact of widening counterparty credit spreads and the downgrade of one counterparty against the backdrop of an increase in the associated swap receivable assets.
We perform active credits available on all of our derivative Counterparties and do not anticipate any counterparty credit losses, and therefore, we consider any CV adjustments to be temporary in nature.
Operating expenses for the first quarter of 23.5 million were relatively flat to 23.1 million in the fourth quarter.
The modest difference was due to higher compensation and consulting fees, mostly offset by a reversal of UK VAT charges, lower legal expenses and lower premises cost.
The increase in compensation costs was mostly due to cyclical costs related to incentive compensation, including payroll taxes, whereas the higher consulting fees were due to an accrual reversal that occurred in the fourth quarter of 2019.
Interest expense decreased 3 million in the first quarter to 63 million, resulting from the partial redemption of 149 million of agencies outstanding secured notes made at year end and lower interest rates.
During the first quarter, we redeemed an additional 77 million of the secured notes, which will contribute to further interest expense reductions and future periods.
Turning to the balance sheet shareholders' equity of $1 billion decreased $10.53 per share from December 30, Onest 2019.
To $21 in 88 cents per share at March 30, Onest 2020.
Due to the net loss for the quarter combined with the decline in unrealized gains on securities of 146 million in foreign currency translation losses of 46 million.
The reduction in unrealized gains are further reflective of an increase in risk premiums with the majority of the decrease related to investments in Ambac insured RMBS and ABS securities.
Adjusted book value decreased to 1.01 billion at March 31st 2020 from 1.31 billion at December 30, Onest 2019 <unk>.
On a per share basis, adjusted book value decreased $6.72 to $22, an 11 cents per share at March 30, Onest 2020.
This HBV decrease was primarily driven by the adjusted loss for the first quarter and the impact of lower foreign exchange rates on assets held Ambac UK.
As for F. G on a standalone basis as of March 30, Onest 2000, 20-F, G had cash and investments in net receivables of approximately 482 million or $10 on 53 cents per share.
I will now turn the call back to Claude some brief closing remarks.
Thank you David.
While we are in a period of great volatility and the severity and duration of the pandemic will ultimately determine our success in mitigating any potential losses, we are in a better position today to face. These challenges based on actions taken to date.
Our value drivers and fundamentals remain strong, including one we have no debt and 482 million of net assets at FG, our holding company.
To.
Our claims paying resources of 5.2 billion and the timely payment of all our claims and full.
Three our consolidated investment portfolio of 3.4 billion in assets with historically strong market performance.
For our gross Rep and warranty receivable of approximately 1.8 billion.
Five a total of 3.7 billion about a wells available to shelter future taxable income at both F G and AC.
Lastly, our significant expertise and resources that we will bring to bear to navigate through this period of uncertainty in order to maximize shareholder value.
I would like to conclude by thanking our shareholders for your ongoing support and our employees for their incredible effort and unwavering commitment to ensure the continued uninterrupted operation of our business.
I would now like to turn the call back to the operator for questions.
Thank you.
We'll now be conducting a question and answer session. If you wanted to ask the question. Please press star one on your telephone keypad and a confirmation total indicate your lines in the question Q.
You mean press star to feel like you're moving a question from the Q.
Just since you're using speaker equipment, maybe necessary to pick up your handset before pressing the star Keith.
One moment, please how we pull for questions.
Thank you. Our first question comes from the line of Gulino Valonia with BTG. Please proceed with your question.
Good morning, and thanks for taking my questions.
Starting off if she has mentioned that there are some opportunities to buy ambac wrapped securities.
In the at the end of the first quarter I'd be curious if you still see opportunities out there and that there are also potentially opportunities to buy back some of ambacs debt at a discount to par.
Yes, Hi, Jay Leno. Thanks for thanks for the call into question. So yes, we did have the opportunity to to buy some ambac securities.
Later in the in the third quarter and in particular and beginning.
Third quarter, excuse me first quarter and.
Particularly in early part of the first the second quarter. This using so yes, there are opportunities out there.
To buyback Ambac, a secured and other debt as well.
There are certain restrictions that we have to operate under a based on some of the governing guidelines of those instruments, particularly when it comes to liquidity management.
But we did buy some actually.
And back out.
Listen I notes during the quarter.
At our holding company at a reasonable discount to two part and to take advantage of some of the trading opportunities there.
But there are other capital and liquidity considerations that we need to manage when looking at.
Opportunities to buy different parts of our capital structure.
Makes sense and then thinking about the discussion around potentially buying business are building business with the holding company capital.
I know that you've said that you've looked at many opportunities over the years I'd be curious if you're seeing some opportunities come up and if there's any shift in the industry is in sectors their confidence subsectors that you might be looking at given the volatility.
Yes, I think the answer is yes, there there's certainly more opportunities that we are seeing any broader.
Set of industries.
There is also a lot of uncertainty in the markets.
In some of the industry that we are focused on an insurance in credit as well.
So I think while there are more opportunity there is also more challenges.
In evaluating the risk associated with certain opportunities, but we have identified in our seeing some that are interesting and.
We'll be continuing our active exploration of these opportunities.
That sounds good. Thank you for taking my questions I appreciate it and I will jump back into queue.
Actually.
As you might do you mean press star one to ask a question.
Thank you there no further questions at this time this will conclude today's conference. We thank you for your participation you may disconnect your lines at this time.