Q3 2020 Ambac Financial Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by our converts will begin shortly once.
Once again, thank you for standing by our conference will begin shortly.
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Greetings and welcome to the Ambac Financial group Inc. third quarter 2020 earnings call.
At this time all participants are only about.
A brief question and answer session will follow the formal presentation.
Watch require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
My pleasure to introduce your host Mr., Kim head of Investor Relations.
<unk> Chief Executive Officer, David Trick, Chief Financial Officer, I will 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 groups third quarter 2000, Twentys financial result.
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.
Actual performance and events may differ possibly materially from such forward looking statements.
Factors that could cause. This include the factors described in our most recent FCC filed quarterly or annual reports.
Under management's discussion and analysis of financial condition and with.
Good operations under risk factors.
Ambac is 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 at Ambac Dot com.
No. The presentation have been posted to the events and presentations section of our IR website, which support our comments today.
Management is participating in this call from remote location, if technical difficulties occur and we have to terminate the call you will be able to read the transcript of our 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 we.
Please feel free to contact me via the contact information in our press release to schedule a call.
I would now like to turn the call over to Mr. close.
Thank you Lisa.
For those of you joining us on today's call. We hope that you and your families are keeping safe and healthy.
Last night Ambac reported a net loss of 108 million $2 or 33 cents per diluted share.
And an adjusted loss of 93 million or $2, a one cents.
Sure for the quarter.
Results for the third quarter were driven by higher loss and loss expenses.
Related to Puerto Rico, and RMBS exposures.
This increase reflects evolving credit conditions stemming from the COVID-19 pandemic.
As well as costs.
Incurred from our ongoing actions to defend our rights.
<unk> through litigation.
David will speak to our results in greater detail in a moment.
Turning to our short portfolio.
During the quarter or short portfolio continued to fare well wouldn't know COVID-19 related claims paid net.
Net par exposure was 34.8 billion at September Thirtyth, 2020 down 1.5% from June Thirtyth and.
9% year to date.
Excluding the impact of the weakening U.S. dollar told apart would have been down 3% for the quarter.
Watch list and adversely classified credits were 14 billion at September Thirtyth, 2023% for the second quarter and 5% year to date.
Additionally, during the third quarter no new credits were downgraded to the adversely classified category.
The relative strength and resilience of Werent short portfolio, what's in large part the material benefits of active de risking strategy and the ongoing seasoning of our portfolio.
We continue to actively monitor the credits in our insured portfolio stress as a result of the endemic.
This time, we believe that there are sufficient revenue streams or alternative funds available for the majority of these issuers to mitigate longer term losses, however, significant uncertainties remain including the Bakken Twod and timing of relief if any for state and local governments through additional fiscal stimulus.
During the quarter, we were also able to restart a number of key be risking and credit strengthening efforts.
Which were helped by the improving economy stronger municipal new issue, new issuance market and the stabilization of credit markets.
She de risking transactions during the quarter included.
One the refinancing of an international sitting transaction within that power of 217 million.
To the commutation refinancing or cancellation of several municipal and structured credit exposures and three the enhancement of credit and liquidity protections oki cobot distressed exposures, including two of our largest expose credits.
We're optimistic that the regained de risking momentum achieved during the third quarter will continue although looking forward. It is expected to be more choppy than what we experienced in the prepared demick environment.
Turning now to Puerto Rico.
Over the past few months the political landscape in Puerto Rico has changed materially starting with the resignation of four oversight board members in recent months and the appointment of Justin Peterson to the oversight board.
In addition, the gubernatorial legislative elections were held last week, leading to the election of a new Governor Pedro parallel C, which is expected to lead to changes to a fall off.
We're hopeful for that new political leadership and composition of the oversight board well focus on transparency accountability and good faith negotiations with creditors to board and even more prolonged restructuring process.
We look forward to constructive engagement with the new oversight board and Commonwealth leadership over the coming months.
Turning now to a loss recovery efforts.
We've been advancing our rep and warranty case against Bank of America, Countrywide and ramping up our preparation for the trial, which is scheduled to begin in February 2021.
As expected during the third quarter Countrywide filed the motion to dismiss ambacs fraud claims.
Yes, she was fully briefed in September and the judge scheduled oral arguments for November 13th.
While there remains a risk of further delays due to coated and other factors, we look forward to proceeding to trial and resolving our longstanding claims against countrywide and bank of America as expeditiously as possible.
Turning now to new business.
As previously announced our Everspan subsidiary was repositioned under or holding company F. G with the goal of pursuing opportunities in the specialty program insurance business.
During the third quarter, we continue to progress our initiatives by amongst other steps applied to re domesticated everspan to Arizona and to expand the company's licenses to broader property and casualty lines.
We also continue to explore opportunities to invest in or acquire managing general agents and other fee based businesses as part of our broader strategic priorities, which we believe could achieve attractive risk adjusted returns for our shareholders and materially accelerate the use of ore at a wells overtime.
We are pleased with the progress we've made so far and look forward to updating you as we progress.
I will 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 third quarter of 2020, Ambac reported a net loss of 108 million or $2.33 per diluted share.
This compares to a net loss of 35 million or 70 cents per diluted share in the second quarter.
Third quarter results were mostly driven by incurred RMBS and public finance loss and loss expenses.
Compared to the second quarter the increase in incurred loss most expenses was mostly due to RMBS.
Adjusted loss for the third quarter was 93 million or $2.01 per diluted share. This compares to an adjusted loss of 24 million or 52 cents per diluted share in the second quarter.
The variance between adjusted loss net loss and GAAP results for the third quarter was primarily the exclusion of the insurance intangible asset amortization of 14 million.
Briefly touching on some notable highlights.
Premiums earned were $15 million in the third quarter compared to 11 million during the second quarter. The increase was driven by higher accelerated premiums stemming from our active de risking efforts with regards to an international transaction.
The investment portfolio performed well during the third quarter on the heels of the strong rebound in the second quarter third.
Third quarter investment income was 37 million compared to 52 million in the second quarter.
Third quarter investment income was comprised of mark to market gains on pooled investments of 13 million income from a variable available for sale securities of 24 million.
Gains on pooled investments for the third quarter, a 13 million compared to 26 million in the second quarter reflect the continued recovery of investments in hedge funds high yield leveraged loans in equities, all which were significantly impacted by the economic and financial market turmoil sales.
I think from the COVID-19 pandemic during the first quarter.
Permits for the third quarter also benefitted benefitted from the redeployment of some additional capital.
Income from available for sale Securities was 24 million in the third quarter compared to 26 million for the second quarter the.
The decline was primarily due to lower rates redemption of Allison I nodes, and a slightly lower asset base.
Since the market dislocation experienced in the first quarter, we generated consolidated investment portfolio total returns of 4.7% and 2.4% during the second and third quarters, respectively.
Loss and loss expenses incurred were 83 million in the third quarter compared to 16 million in the second quarter third.
Third quarter incurred losses were driven by the public finance in RMBS sectors.
More than half of which related to expenses from our ongoing aggressive efforts to mitigate risk and defend our rights and certain insured transactions through litigation and other means.
RMBS incurred losses of 27 million in the third quarter compared to a benefit of 35 million in the second quarter.
The $62 million quarter over quarter swing resulted from higher expected losses, driven by the prolonged stress and the economy from the COVID-19 pandemic.
<unk> increased loss expenses related to litigation costs from a representation and warranty cases.
The $35 million benefit in the second quarter was due to the impact of lower interest rates on excess spread recoveries partially.
Partially offset by higher loss expenses.
Public finance losses incurred were 43 million in the third quarter and $42 million in the second quarter incur.
Incurred losses in both periods were predominantly driven by increased Puerto Rico reserves related to the higher loss expenses and assumption changes.
Operating expenses for the third quarter of 23 million increased 2 million from $21 million in the second quarter.
The increase was primarily due to variable compensation costs and lower capitalized software development costs.
Interest expense decreased 9 million in the third quarter to 50 million.
6 million of this reduction related mostly to senior surplus notes the discount on which as of June 2020 had been fully accreted through.
The remaining 2 million of savings related to the redemption of 26 million of secured notes at the end of the second quarter and lower interest rates.
Shareholders equity decreased 75 cents per share to $22.59 per share or 1 billion at September Thirtyth 2020.
The decrease was due to the net loss for the quarter.
Partially offset by unrealized gains on securities of 42 million and foreign exchange translation gains of 29 million Unreal.
Unrealized gains include in part the recovery of unrealized losses experienced in the first quarter related to the COVID-19 endemic.
Adjusted book value decreased to 891 million or $19.44 per share that's sad.
At September Thirtyth 2020.
From 965 million or $21.06 per share at June Thirtyth 2020.
Adjusted book value decrease was mostly driven by the adjusted loss for the third quarter, partially offset by the impact of foreign exchange rate.
Unlike book value HBV is not impacted by changes in unrealized gains and losses.
That's why if GE on a standalone basis.
As of September Thirtyth 2020, after you had cash investments and receivables of approximately 465 million or $10.16 per share, including approximately 318 million of liquid assets. These amounts exclude 11 million if GE has invested in ever Spanish.
Parents, which was purchased from AC in July.
I will now turn the call back to quote for some brief closing remarks.
Thank you David.
While the pace of economic recovery remains uncertain, we continue to pursue our strategic priorities, which include improving our risk profile through active de risking.
Proactively and persistently defending our rights and pursuing recoveries.
And progressing our new business initiatives.
We are excited about our new business initiatives, which we believe will create long term value for our shareholders. Our bar for new business opportunities remains very high and consistent with our past practices will be assessed against the return of capital to our shareholders.
Look forward to updating you on the progress in the coming quarters.
Operator, please open the call for questions. Thank you.
Thank you we will now be conducting a question and answer session.
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Our first question is coming from the line of bark Palmer with the T.I.G. Please proceed with your question.
Yes. Thank you. Good morning, you mentioned in the prepared remarks that the vast majority of the losses incurred during the quarter related to incremental reserves on Puerto Rico exposures did.
Did the company during the quarter or receive any claims that could be attributed to stress arising from cope at 19.
Good morning, Mark No. We did not receive any direct claims for COVID-19, as I mentioned.
But we are evaluating scenarios around the potential effects of COVID-19 across our portfolio as it relates to Puerto Rico, you know as we consider all elements of credits certainly hope it has had an impact on Puerto Rico and that is something that we've considered and will continue to consider.
Going forward as it relates to Puerto Rico, but the reserve increase this quarter in Puerto Rico specifically.
I had to do with a variety of assessments that we made you know relating to our assumptions really relating to a court.
Court rulings.
You know the effects of coated amongst other things and you know every quarter as we have in the past, we will look at the various inputs or evaluate or our assumptions and our scenarios and adjust them. Accordingly, So I know, it's hard to pinpoint anything specific from cobot on Puerto Rico, but certainly there is a factor that we can.
Better, but it is certainly something that we've considered across our entire portfolio as we.
Evaluate credits that had been or could be a impacted directly in the future.
Thank you and.
And one more you mentioned or a couple of risk mitigation actions.
Taken during the quarter, including refinancing commutation.
What is the the the outlook or the pipeline for.
For additional refinancings, and Commutations that that you're seeing right now given the distress in the environment.
Yeah. That's a good question Mark I, you know I think we've got a fairly deep pipeline still on these but some of these transactions as you point out that are directly impacted by co, but if there are narrow revenue streams or they're.
They're just heavily impacted by a reduction of inflows are multiple inflows are clearly they are more challenged to take every finance. However, we do believe that somebody's credits could you know re scope their debt or look for short term financing that could address their near term liquidity concerns.
As the platform for perhaps a medium to longer term refinancings.
As I mentioned also in the third world one of the things that we've seen.
Stepped up materially and had some very meaningful success. This quarter is on working.
Working with some of the issuers to reduce restructure their deals. So in some cases, you know we were using our control rights.
And our position as a creditor to you know, it's just a the issuer in many respects to <unk> to address your liquidity or funding concerns, but as part of that we are seeking additional collateral.
Additional security or better terms for add backs that we have had to a significant successes this quarter and I expect we'll also continue to see those in the coming quarters, but they won't necessarily show up as a as a reduction of that adversely classified credits or.
You know immediately but we are you know.
Some of these restructurings I've been very promising.
Thank you very much.
Thank you. Our next question does come from the line of Galliano Baloney of Compass point. Please proceed with your question.
Good morning, just trying to turn it over to the Everspan topic for for a minute when I think about capitalizing ever spend.
And be available liquidity and assets at the holding company. Yeah. Obviously, we don't know the exact amount that well have additional capitalization that would go into the idea at this point, but it doesn't seem like you'll be in choosing yeah, 400 or $450 million capital into Everspan.
I'm just kind of curious how you're thinking about the remaining liquidity at the holding company that hasn't been allocated everspan or that you know.
Yeah. When you think about you know after allocating capital to Everspan, what you may end up doing some of that capital.
Sure. That's a good question. So you know at this point, we're you know we view the capital at the holding company as being a strategic capital and you know part of our strategy is clearly in line with what you described in terms of a.
Property casualty specialty programs ensure.
That we've been working on it that is a you know perhaps more than just an editor you could have all the platform and that will be one area that we will be looking to capitalize depending on the path forward that we select for that that platform, which.
Which has which has variations.
Depending on market conditions and opportunities that we see but beyond that we have also indicated that we are pursuing other transactions.
Some.
By form of M&A, others in the form of did although that would also require capital a focus on the M.G. markets.
Or other fee based businesses and these could be controlled transactions or investment transactions a.
We believe that there are attractive opportunities in that sector that would be accretive and strategic some strategic in Oh, working alongside of our insurance platform and those are entities that we've been exporting out for a number of months and we are you know Intel.
To continue to pursue some of those options I think those are probably the two categories I would say that we're focused on deploying capital from the holding company. Besides you know potential other strategic investments.
And again as I mentioned in my closing remarks, we're always weighing those opportunities and return profiles of those investments against the return of capital to our shareholders, which is also a a something that we may do at some point.
That makes sense and then thinking about.
On the agency side.
When I think about some of the investments in kind of the capital structure I'm curious if there are any benefits to yeah.
Find different securities in the in the and the debt and the debt stack just because you have some pretty elevated yields in some discounts in some of those securities today. So I'm kind of curious if there's any if there are any merits to looking at some of those securities that.
They have a higher take rate or a bigger discount to create value at this point in the portfolio to kind of reduce the interest expense on one side, but also potentially realize some gains.
Yes, usually I know you know that's something we have looked at and done in the past as you may recall.
And in particular, we've we've done some purchases and sales for that matter in the higher tiered securities like the health and I know.
And you know we have to wait a couple of things when we consider purchases of our own issued securities. One is you know opportunities in our own rap securities, which we've been very active in as you know and whether it be RMBS or Puerto Rico over the years and the risk adjusted returns we can.
And obtained from doing that as well as liquidity considerations and perhaps most importantly is capital considerations. So never their securities you referenced we get regulatory capital treatment for and we'd have to you know we have to be very thoughtful about when purchased repurchasing.
Securities what the impact on regulatory capital is and in many cases, we do need regulatory approval to.
To repurchase those securities. So while there there may be attractive opportunities here and there we're not always.
Able to necessarily execute on on all those opportunities based on the constraints that I I referenced.
That makes a lot of sense well. Thank you for answering my questions and I will jump back in the queue.
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Thank you. Our next question is coming from the line of Shaul buckets Whats the waterfall asset management. Please proceed with your question.
Hello, Thanks for hosting the call on create your disclosures today I'm, just a little bit on the upcoming or arguments are all hearings.
Is there any other current filings that you'd have to go through in terms of being dismissed in order to keep maintain the February 2021 trial date at this point.
So.
Thanks for your question. So currently EPS the oral arguments will be later this week.
On the motion to dismiss or fraud claim that's a november 13th there could be an appeal of any additional decisions by the court.
You know.
Including the.
Yeah any decision to reach by the judge in relation to the fraud claim.
Although he may not make any decisions on a Friday claim. It may just decide that he will hear that case as as part of the trial. So I think at this point, we're not expecting or any other decisions, but it's you know we can't really predict you know the decision that the judge will make how that might influence a b of a or.
Our decisions on appeal.
But we believe that we have a clear path to trial in February at this point and expect.
I expect that that will that they will stick with unless things change I think are probably the biggest risks that we see out there is a is a cobot risk.
Everybody before the.
The court system.
Thank you and if I can one more question on the municipal bond market, you mentioned that some new issue activity took place during the quarter in a I'd want to understand a little bit more given some the rate moves that we've seen over the past few days, you know whether or not that you'd expect that to continue and how that impacts yorio overall profitability.
Thanks.
Yes, So you know for us given we're not writing business it doesn't directly impact or our earnings but I. You know I think we view the new issue market is as a velocity and volume being encouraging.
For a number reasons it means that one of the you know a issuers are accessing the markets effectively I think is the first point and doing it at what we believe to be a very tight spreads generally yeah.
And when we look at some of our exposures are willing to co that yeah. I think the more challenged ones. You know story credited wells around a code that are going to find it more you know more difficult to access a new issue markets. Currently if you were looking to refinance. However, we think that you know with the improving economy and working with issuers.
Look to restructure or re scope the debt.
Some of these issuers are very strong. They just have a you know this near term liquidity challenge relating to.
To Covance. So we believe that there is a number of ways that that can be addressed but certainly having the new issue market.
Not as strong as it is certainly helpful for the issuers and and for US as we work with the issuers and helping them address their near term liquidity issues.
Thanks, so much.
Thank you.
There are no further questions at this time. This does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time have a good day.