Q2 2020 Ambac Financial Group Inc Earnings Call
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Ms., Lisa can head of Investor Relations close a blank Chief Executive Officer, and David trick Chief Financial Officer.
Now I'll turn the call over to Lisa.
Thank you. Good morning. Thank you all for joining today's conference call to discuss.
Back financial group's second quarter 2020 financial results.
To remind you that today's presentation may contain forward looking statement, 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.
Actual form it's been 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 on your management's discussion and analysis financial condition and results of operations under risk factors.
In fact, if not under any obligation and expressly disclaims any obligation to update any forward looking statements, whether as a result of new information future events or otherwise.
Today's presentation contains non-GAAP financial measure.
Reconciliations of such measures. The most comparable GAAP figures are included in our earnings press release, which is available on our website at <unk> Dot com.
Please note that presentations have been posted to the that's a presentation section of our IR website, which support our comments today.
Management is participating in this call from remote location.
Technical difficulties occur and we have to terminate the call you'll be able to read the transcript of her prepared remarks, which we posted to the Investor Relations section of our website. In addition management will be available to address any questions that remain unanswered. Please feel free to contact me via the contact information in our press release schedule.
I will now like to turn the call overarching for close to walk.
Thank you so.
For those of you joining us on todays call. We hope that you and your families are keeping safe and healthy as a cobot Nike endemic countries, Mr. Rob somebody states across the country, we all grapple with its ongoing success.
Health and safety, where employees and stuff we're meeting a top 30 and that continues to work primarily remote wouldn't know interruptions tour business operations.
Bottomed in New York Tristate area entering reopening phases, three and four in July.
In a group of employees have returned to their offices on a voluntary basis, we continue to monitor the evolving pandemic conditions, and we'll make adjustments as needed.
Okay, and Bourbon based on current facts and circumstances.
Turning to our second quarter results.
Lastly, Ambac reported a net loss of 35 million or 77 cents per diluted share for the second quarter.
And an increase in book value per share what dollar 46 for sure you're $23.34 from March 31st 2020.
The adjusted loss was 24 million or 52 cents per diluted share for the second quarter, resulting in a decrease in adjusted book value for sure.
Slide $21 and success at June 30, 2020.
Our results for the second quarter, what they can shoot strain on credit markets, primarily driven by did cobot endemic partially offset by the rebounded the capital markets since the end of the first quarter.
In short portfolio short relatively well during the quarter in part due to the significant loss mitigation and de risking actions accomplished in recent years.
Today, we have not yet paid any cobot 19 related claims.
However, significant uncertainty remains regarding the ultimate impact of coping lunching in particular on municipal exposures, which could see increased strain in coming quarters, if the effects of the pandemic or prolonged and depending on the response from state and federal government.
We will continue to actively monitor in a self exposures in our portfolio most susceptible to pandemic related risk and changes in economic outlook and seek to implement and execute strategies to address evolving here is a risk.
David will provide additional details on a quarterly results in a few minutes.
Turning now to weren't short portfolio.
Net per exposure was 35.3 billion at June 30, 2020 down 3% from March 31, 20, 27% year to date.
Watch list in adversely classified credits were 14 billion at June 30, 20, 21% from the first quarter it don't 2% year to date.
Or risk and surveillance teams have continued to perform in depth reviews and meeting active dialogue with issuers on credits most exposed to the Coca disruption.
As a result of our continued analysis during the past few quarters, we migrated several credits to the adversely classified category, where appropriate established or increased economic reserves.
The majority of the reserve increases were attributed to the public finance sector, you're primarily related to our Puerto Rico exposures.
During the quarter. We also continued to focus on mitigating areas a risk utilizing various tools at our disposal.
This included shoring up one of our largest remaining single risk exposures.
I need to a whole company securitization in the UK, where we work with the issuer to secure additional liquidity well the same time, increasing future optionality for him back with regards to this transaction.
We also facilitated to reinsurance transaction, which we're we're meeting exposure to the New Jersey Turnpike Authority.
Communities significant portion of our remaining exposure to PG any.
As a core strategic priority, we remain focused on de risking or watch list and adversely classified credits.
Work to leverage all options at our disposal continued to scope and de risk onshore portfolio ever do as potential tailwinds.
Turning now to Puerto Rico.
Local and federal governments continue to provide relief and assistance in response to cobot 19.
The rate of eight expenditure and efficacy of spending as well as developments on the help fund will influence the timeline for Puerto Rico's economic recovery.
Puerto Rico has been a bankruptcy since 2017 and the timing of its exit remains uncertain.
Ratably legal and other advisors working for the oversight board and Commonwealth government of costs, the Puerto Rico taxpayers nearly three quarters of a billion dollars fees and expenses as of July 22nd 2020 with no end in sight.
This is money that could have been spent on disaster relief or another public policy goals.
Puerto Rico deserves better oversight and strategic direction to help navigate the opportunities and challenges in the months ahead.
To that end Ambac welcome to news of potential changes in the membership of the oversight board.
The oversight board has pursued in mice gotta path of legally challenging market expectations and statutory regimes that were established for the purpose of encouraging investment in Puerto Rico.
Like with the revenue bonds.
Unfortunately in early July judges swayed issued orders denying in large part motions to lift state that would have allowed ambac and others to enforce their rights related to H.T.J.C.C.D.A. and PREPA.
Alternative Forum.
And Bakken tends to appeal the orders denying the motions to lift the state and we'll continue to vigorously litigator rights and protect the interest of the revenue and other bonds that we ensure.
As we stated previously Ambac remains committed to working with government representatives to achieve holistic consensual and durable resolutions for Puerto Rico.
Negotiating in good faith with a broad sort of Caldwell. The creditors is the only way to help Puerto Rico successfully navigate economic uncertainty and restore access to capital markets.
Turning now to a loss recovery efforts.
We're pleased with encouraging developments this quarter in a rep and warranty case against Countrywide and bank of America.
On June 11, the intermediate appellate court denied country watched motion relieved to appeal certain pre child decisions to the highest court in New York State.
And in late June Justice Sherwood Affirmatively schedule five week trial to begin on February 22nd 2021.
While there remains some risk of further delay in this case based on additional motion practice. We're hopeful that are trial schedule will remain in place.
We believe the biggest potential obstacle is a cobot pandemic. However courts in New York are carefully reopening and we hope conditions will improve to allow us to proceed to trial next February schedule.
We strongly believe in the merits of strength of our case I look forward to its resolution at the earliest possible opportunity.
Now turning to new business.
As it relates to the implementation of our specialty insurance New business strategy. We're pleased to report that Wisconsin office of the Commissioner of insurance recently approved the sale of ever spent insurance company from AC to our holding company FG.
We intend to use everspan as a platform for specialty program insurance business pillar, a key component of our broader new business strategy.
In connection with this development, we're pleased to welcome to highly respected executives to the Everspan team why Blackburn and Steve Dresdner.
Why thats been hired as president and Steve as Chief underwriting Officer, and Chief Reinsurance Officer other Smith.
Why is it well recognize respected industry veteran with over 37 years experience most recently with state national.
Steve Dresser joined us from crawling Forrester and has over 36 years of experience and both the insurance and reinsurance industry and brings with him proven underwriting expertise in the specialty program business.
We look forward to updating you as we progress or strategy in upcoming quarters.
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.
During the second quarter of 2020, Ambac reported a net loss of 35 million or 77 cents per diluted share count.
Compared to a net loss of 280 million or $6.07 per diluted share in the first quarter of 2020.
Second quarter results reflected lower loss and loss expenses and the impact of the partial reversal of the financial markets disruption, which occurred during the first quarter.
Interest in operating expenses also decline.
During the first quarter, the economic and financial markets disruption, particularly lower interest rates and higher market risk premiums caused by the pandemic contributed significantly to our financial results.
Nothing material non economic losses.
During the second quarter. This contributed subsided with the immaterial net impact.
Adjusted loss for the second quarter was 24 million or 52 cents per diluted share.
Compared to an adjusted loss of 265 million or $5.75 per diluted share in the first quarter.
The variance between adjusted net loss for the second quarter, largely due to 14 billion of insurance intangible amortization.
Briefly touching on some highlights.
Premiums earned were 11 million in the second quarter versus just over 10 million during the first quarter.
The slight increase was driven by the net impact of negative accelerations. During the first quarter continued run off of the in short portfolio and an increase in the premier allowance during the second quarter.
Investment income excluding realized gain was 52 million for the second quarter compared to a net loss of 21 million in the first quarter.
Second quarter investment income was comprised of mark to market gain.
All the investments of 26 million.
Income from available for sale Securities of 26 million.
The solid performance of our pulled investments was led by hedge and public equity fund returns, which produce returns north of 10% for the quarter.
Partially reversing the fair value losses recognized in the first quarter of 53 million.
Income from available to sell Securities is 26 million in the second quarter compared to 31 million for the first quarter.
The decline was the result of lower interest rates on short term and floating rate investments.
Redemptions of owned Lcnine notes and the sale of certain securities.
Securities was sold early in the quarter to reduce risk and build liquidity in the face of uncertainty regarding covert 19.
Some of this liquidity was redeployed during the quarter and therefore it is expected to be further reflected in third quarter results.
Security sales generated 9 billion of net realized gains during the second quarter.
Loss and loss expenses incurred were 16 million in the second quarter compared to 117 million in the first quarter.
Second quarter incurred losses were driven by public finance sector losses, which were partially offset by a benefit from RMBS.
Public finance losses incurred were 42 million in the second quarter, driven by increased Puerto Rico reserves related to assumption changes and higher loss expenses.
Public finance losses incurred in the first quarter of 170 million were driven by the sharp decline in discount rates as well as additions to Puerto Rico reserves and credits impacted by Cobot 19.
The RMBS benefit of 35 million in the second quarter compared to a benefit of 83 million in the first quarter was due to a further increase in expected excess spread recoveries, resulting from lower interest rates and improvements in credit partially offset by higher loss expenses.
Operating expenses for the second quarter of 20.5 million decreased 13% from 23.5 million in the first quarter.
The decrease was the result of lower compensation costs related to both the timing and level of incentive compensation accrual as well as lower headcount.
Interest expense decreased 5 million in the second quarter 258 million.
Following the redemption of 77 million of secured notes.
Lower interest rates and lower discount accretion on surplus notes.
The second quarter net loss was more than offset by an increase in unrealized gains on securities of 104 million, resulting in an increase to shareholders equity of $1.46 per share to $23.34 per share or 1.1 billion at June Thirtyth Twentytwo.
Okay.
Adjusted book value decreased to 965 million a $21.06 per share at June Thirtyth 2020.
From 1.1 billion or $22, an 11 cents per share at March 30, Onest 2020.
This adjusted book value decrease was mostly driven by the adjusted loss for the second quarter.
Unlike book value adjusted book value is not impacted by changes in unrealized gains and losses.
As for F. G M. A standalone basis as of June Thirtyth 2020.
After you had cash investments and net receivables of approximately 481 million.
Including nearly 340 million of liquid assets or $10 at 51 cents per share.
I will now turn the call back to Claude for some brief closing remarks.
Thank you David.
While the full extent of future economic disruption stemming from the pandemic remains uncertain, we believe ambacs runoff financial guarantee business continues to be well positioned to manage through the potential challenges due in large part to our discipline and prioritize risk exposure management strategy.
At the same time the current environment has also surfaced a number of attractive market opportunities, which we believe could lead to future material value creation for shareholders.
We remain active and exploring new opportunities and look forward to updating you on our progress in future quarters.
Operator, please open the call for questions. Thank you.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one our new telephone keypad, a confirmation Tom will indicate your line is in the question Q.
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Our first question comes from the line of Mark Palmer with BTG. Please proceed with your question.
Yes. Thank you good morning, and thanks for taking my question.
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First of all thanks very much for the commentary on some of the proactive steps that the company is taking to address.
The stress and the municipal market.
Looking broadly.
We're looking at a an environment where interest rates are at historic lows.
Yeah, we know that what that means to.
Some other insurance companies, its but but.
The case of Ambac I think there are.
Quite a few puts and takes if you could talk a bit about what those puts and takes our the positives and negatives arising from lower interest rates.
Turning to the company.
Thanks, and good morning, Mark.
Maybe I'll start off with just at a high level from a risk management perspective, and I'll pass it over to David who can touch on some of the.
Capital management aspects of it but generally speaking with lower rate environment, We Oh, we do see opportunities to do incremental a refinancing transactions at a better pricing.
For municipalities and we have engaged with a number muni is particularly the ones that we have seen in more stress situations related to coated.
And we're working with that with a few of them to find ways to help them refinance and access capital that at a better pricing. So I think from that perspective.
You know, there's there are better opportunities.
To put some of these muni credits to refinance.
The other area that's benefited us is.
On our structured finance portfolio in particular RMBS.
Where rates go down we were able to collect additional excess spread so as we mentioned last quarter, where we took reserves said.
Increased economic reserves relating to expected stresses in the RMBS portfolio the reserves.
The net basis decreased because of the increased.
Expected recovery from excess spread.
Which is also an economic.
If it to the company. So so those are I think you're probably two of the key well see benefits that we see a coming out of this obviously lower investment returns.
On our fixed income portfolio, but there we have made some changes and reallocations too.
Look for error is a better relative value returns.
Due to offset some of that decline, but with that alternative to David truck cool give little more color into.
Mark I think a clear touched on a lot of it but thinking about the right side of the balance sheet first.
The benefit really relates to excess spread in the RMBS book as well as other structured finance transactions that.
Either have excess spread or carry costs associated with them, including for example student loans, where there is.
Lower negative carry within the student loan portfolio. So from a structured finance standpoint from an excess spread deal recovery and cash flow standpoint for our structured exposures, where we have real real embedded losses low interest rates is a very very.
Strong positive for us.
It also keeps are of course, our cost of our floating rate debt low.
So thats been helpful as well from a interest cost standpoint.
And from the asset side of the balance sheet.
Yes, it becomes a little more challenging to invest.
In.
Fixed income securities, but we've been finding our pockets in.
Including our own insured securities.
As well some other.
Alternative investments I guess I'll call it.
To try to optimize the risk adjusted returns on.
The investment portfolio and I would say I'll, just close and saying really that maybe the other consideration really is the risk that comes with low interest rates from.
That environment not continuing to exist so the risk that rates go up.
Which no one really anticipates in the short term.
It is certainly still a real risk and something that we think about regularly and.
We've had hedges on the books for a long time related to that and we've modified those hedges over time, the probably the lowest point they've they've ever been.
It is something we continue to monitor and want to make sure we protect the assets, particularly the asset excess spread that exists on our.
On our book today from a unexpected to war.
Our long term.
Drift up in interest rates.
Very good thank you very much.
Sure.
Sure.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question can you. Please press star one on your telephone keypad.
Our next question comes from mine.
Lucky with greater capital. Please proceed with your question.
Good morning, I think on the last earnings call you would imply that you bought back some ambac liabilities in early April.
In the credit market dislocation was that the did you repurchase actual ambac issues liabilities are where they ambac insured.
Ends.
Yes.
Eric how are you it's David trick. Thanks for the question. We we we did buy some ambac wrapped securities. We spent about 170 million.
Under $50 million sorry in the quarter.
Of Ambac wrapped wrapped bonds.
Okay and my other question was when you give the.
Cash and investments at KFC of $481 million are there any liabilities ASG that would have to net against that amount.
The only liability that FG are some payables and that's netted against the receivables. So the 41 is that number, but there's no debt or financial obligations.
At the at the holding company is just simply working capital payables.
Great. Thanks.
Sure.
Thank you ladies and gentlemen, there are no further questions. At this time. This concludes today's conference. We thank you for participating you may now disconnect. Your lines. Thank you again.