Q4 2020 Ambac Financial Group Inc Earnings Call
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Ladies and gentlemen, thank you for your patience, we will begin in a few moments again. Thank you for your patience, we will begin in a few months. Thank you.
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Greetings and welcome to the Ambac Financial Group, Inc. Fourth quarter 2020 earnings call. At this time all participant lines are in a listen only mode. A brief question and answer session will follow the formal presentation for.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
Now my pleasure to introduce your host Ms. Lisa Kampf head of Investor Relations, Claude Leblanc, Chief Executive Officer, and David Trick Chief Financial Officer.
Now I'll 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 fourth quarter 2020 financial results and its platform diversification strategy.
I'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 other than.
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 SEC filed annual report under management's discussion and analysis of financial condition and results of operations and under risk factors.
Index 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 the reconciliation of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our web site at Ambac Dotcom.
He has no debt presentations have been posted to the events and presentations section of our IR website, which support our comments today.
I would now like to turn the call over to Mr. Claude Leblanc.
Thank you Lisa and welcome to everyone joining today's call.
2020, it wasn't unprecedented year marked by a global pandemic.
Little financial markets, and political and social unrest, which created significant uncertainty and stress on amdocs operations as well as our insured and investment portfolios.
Notwithstanding these challenges the dedication and commitment of our employees allowed us to navigate through this period and made material progress across all of our strategic priorities, which I will cover in a moment.
For the year ended December 31, 2020, Ambac reported a net loss of 437 million for $9.47 per diluted share and an adjusted loss of $378 million or $8 19 per diluted share.
For the fourth quarter Ambac reported a net loss of $14 million for.
31 cents per diluted share and adjusted earnings of $4 million or 87 per diluted share.
At December 31, 2020, our book value was $1 1 billion for $23 57 per share and adjusted book value was approximately 900 million for $20.05 per share Dave.
David will discuss our results in more detail shortly.
During the year, we remain focused on executing our strategic priorities, namely one stabilizing the platform by improving our risk profile.
<unk> loss recovery through the exercise of our contractual and legal rights three.
Exploring ways to rationalize our capital and liability structure.
For improving the effectiveness and efficiency of Amdocs operating platform and.
And five advancing our new business and diversification strategies.
With regards to our Derisking activities.
2020 was very challenging, particularly during the first two quarters as a result of credit market dislocations.
During the first half of the year, our risk and surveillance teams performed comprehensive in depth reviews on credits most susceptible to COVID-19 disruption and related economic recession.
We closely monitor these exposures moving some to the adversely classified category.
And where appropriate established or increase reserves based on our risk assessments.
Yeah.
Notwithstanding the challenging market conditions, we were able to execute a few key transactions during this period, including the refinancing of our last remaining Chicago Geo exposure would net par of $171 million.
That's credit markets stabilize and derisking opportunities to begin to open up in the second half of the year, we accelerated various initiatives to reduce exposures and mitigate risks, including developing credits we had identified as being most impacted as a result of the pandemic.
He achievements included.
The improvement of credit and liquidity protection for key cobot stressed exposures, including two of our largest insured exposures.
The commutation of an international utility transaction with net par outstanding of $298 million.
Three the refinancing of an international stadium transaction with net par of $217 million and for the commutation refinancing and cancellation of several municipal and structured credit exposures.
For the year these and other transactions combined with portfolio runoff decreased our insured portfolio by 11% from 38 billion to 34 billion as of December 31 2020.
Adversely classified and watch list credits decreased by a net eight per cent from 14 billion to $13 billion year over year, notwithstanding material offsets relating to the impact of credits added during the year due to our Covid assessment.
And two an increase of over $150 million to the impact of the pound and euro appreciating versus the dollar.
Post year end, we also closed immaterial quota share reinsurance transaction not reflected on our 2020 results involving a portfolio of public finance credits with net par outstanding of $823 million.
At December 31, 2020.
This transaction.
Closed in January included general obligation lease and tax back revenue higher education, and transportation credits, including $160 million of watch list and adversely classified credits.
And I'm also pleased to report that to date Ambac has not paid any direct COVID-19 related claims.
Turning now to Puerto Rico.
We remain optimistic about the island's economic recovery over the short and long term as the flow of buddle federal recovery stimulus and infrastructure funding improves under new local and federal government leadership.
While Puerto Rico's economic picture continues to improve and tax collections repeatedly exceed the oversight board's projections. We continue to believe the collective focus of key stakeholders should be on a near term global resolution to the bankruptcy process.
The oversight Board recently announced a planned support agreement for PSA.
Two Commonwealth obligations supported by 70% of general obligation and public buildings authority bondholders, including conditionally support from assured Guaranty and MBIA, Inc.
Ambac disagrees with the PSA as it still contains many of the flaws of the prior PSA, including being based audit fiscal plan with erroneous and misleading financial projections and providing for the use of money belonging to the secured revenue bondholders.
In order to reach a consensual holistic and permanent solution, we believe material progress needs to be made with key revenue bond creditors, particularly the model lines, who are not likely to support PSA that fails to respect their legal rights and financing structures.
We also believe there are accretive and constructive solutions available that could resolve the revenue bonds and avoid further costly litigation and delays, while creating new sources of funding and restoring access to the capital markets for Puerto Rico.
We remain willing to engage with the oversight board and the Commonwealth on our restructuring plan that respects the property rights and security interest of rubbing your bondholders.
Turning now to a loss recovery efforts.
And our main case against Bank of America Countrywide, we await a neutral day. After the trial scheduled for February was postponed due to COVID-19.
In the meantime, we are appealing the dismissal other fraud claim.
Timing for the trial will depend on a number of factors, including one the appointment of a new judge for our case following the retirement of Justice Sherwood.
The calendar of the new judge and three the impact of the pandemic on court proceedings as well as the status of our broad appeal.
At this point, we believe the trial could take place in the next 12 months, but it could be later based on these and other variables.
On a related note we were pleased to see the trial court's decision and MBIA versus credit Suisse late last year.
We believe the decision strongly validates the strength of our MBS contract claims and the value of prejudgment interest.
Turning to our efforts to rationalize our capital and liability structure.
During the year, we further de lever the balance sheet with additional early redemptions of the secured notes by $121 million, which brings our total senior note redemptions to over $500 million.
With regards to the investment portfolio. During 2020, we progressed our goal to broaden diversification and improve risk adjusted returns.
Despite the first quarter market turmoil created by the pandemic and other headwinds we delivered a total return of approximately $4 one per cent for 2020 entirely driven by strong performance in the last nine months of the year.
Such performance was aided by our ability to reallocate assets to take advantage of opportunities created by the first quarter turmoil.
With regards to our operating platform.
Operating expenses for 2020 decreased $10 million from the prior year, reflecting our focus on reducing core operating expenses and the implementation of sustainable reductions to long term operating expenses related to our legacy business we.
We do however, expect some volatility in expenses and increasing expenses related to our new business operations.
In conclusion, I am very pleased with our accomplishments in 2020, we believe that our actions taken in prior years to stabilize our insurance platform simplify our capital structure and manage our operating costs favorably positioned us to successfully navigate these challenges in 2021, we remain committed to all of our strip.
You take parties as we continue to build on our efforts to enhance long term shareholder value.
I will now turn the call over to David trick to discuss our financial results for the fourth quarter.
After his remarks I will return to discuss for a new business strategy day.
Yeah.
Thank you Claude and good morning, everyone.
During the fourth quarter of 2020, Ambac reported a net losses of $14 million for 31 cents per diluted share.
This compares to a net loss of $108 million or $2.33 per diluted share in the third quarter.
The improvement in the fourth quarter compared to the third quarter was driven by lower loss and loss expenses incurred the higher net investment income.
Adjusted earnings for the fourth quarter were $4 million or eight cents per diluted share compared to an adjusted loss of $93 million or $2.01 per diluted share in the third quarter.
The variance between adjusted earnings and GAAP net income for the fourth quarter related mostly to the exclusion of $16 million of insurance intangible amortization.
Contributing to our results for the quarter were premiums earned of $18 million in the fourth quarter compared to $15 million during the third quarter. The increase was driven by higher accelerated premiums related to the active de risking of an insured international utility transaction.
Investment income of $53 million, which was up $16 million compared to $37 million in the third quarter was driven by solid investment portfolio performance stemming from a strong equity and credit markets and capital reallocated after the first quarter market impact of Covid.
Investments in pooled funds performed the strongest with the fourth quarter, a total return of five 8% compared to 3% in the third quarter.
Totally turned across the consolidated portfolio was one 8% in the fourth quarter versus two 4% in the third quarter.
Included in fourth quarter investment income for gains on pooled funds and the other equity investments of 31 million net income from available for sale securities of $23 million.
Compared to $14 million and 24 million in the third quarter respectively.
Loss and loss expenses incurred were $9 million in the fourth quarter compared to 83 million in the third quarter.
Volume, our MBS losses of $15 million were down from $27 million in the third quarter.
Fourth quarter RMB S insured losses were due to incremental loss expenses related to representation and warranty litigation costs.
Actually offset by the favorable impact of higher discount rates and slightly better credit performance.
Third quarter R. M. B S insured losses of $27 million due to higher expected losses, resulting from the COVID-19, driven global recession, and incremental loss expenses related to representation and warranty litigation costs.
Although finance produced an incurred benefit of $7 million in the fourth quarter compared to a $43 million loss in the third quarter.
For fourth quarter benefit reflected the favorable impact of higher discount rates and positive credit development in general, resulting from the active management of the insured book, partially offset by an increase in Puerto Rico reserves, resulting from assumption changes.
Third quarter incurred losses of 43 million for predominantly driven by increased Puerto Rico reserves related to higher loss expenses and assumption changes.
Operating expenses were $26 million up modestly from 23 million in the third quarter. The increase resulted from costs incurred in connection with the acquisition of exchange.
Higher variable incentive compensation and head count additions had adverse bad.
Shareholders' equity increased 98 cents per share to $23 57 per share for $1 1 billion at December 31, 2020.
The increase was due to 43 million of foreign exchange translation gains and net unrealized gains on securities of $15 million, partially offset by the net loss for the quarter.
Adjusted book value increased to $919 million or $20 five per share at December 31, 2020.
From 891 million for $19.44 per share at September 30th 2020.
The 61 cent increase in adjusted book value was mostly driven by the impact of foreign exchange translation gains. Unlike book value a b V is not impacted by changes in unrealized gains and losses.
AFG on a stand alone basis, excluding investments in subsidiaries as of December 31st 2020, and cash investments and net receivables of approximately $366 million for $7.99 per share, including approximately 200 and for.
The $4 million of liquid assets.
The decrease in assets from September 30th resulted from the December 31st acquisition of exchange along with the initial capitalization of ever span indemnity.
Liquidity was aided in the quarter by the long awaited receipt of 28 million of tolling payments from Ambac assurance.
Connection with such payment. We also agreed to reallocate $210 million of additional NOL to AFG from AAC and forego future tolling payments.
The exchange was included in Ambac for consolidated balance sheet as of December 31, 2020 day.
Main impact was a reduction to cash and the establishment of goodwill and intangible assets the impact of exchange on our operations will begin to be recognized from the first quarter totaled 21.
In the first quarter 'twenty 'twenty, one AFG also completed the capitalization of ever span in conjunction with its receipt of an a minus a M. Best rating AFG funding this $82 million of capital infusion with cash on hand.
Now I'll turn the call back to Claude to discuss ever span in our platform diversification strategy in more detail.
Thank you David.
Turning now to our new business strategy.
Our platform diversification strategy is focused on creating a portfolio of synergistic recurring fee based businesses under a common ownership structure that will generate strong earnings and allow for the utilization of Ambac Nols.
This strategy is group into three pillars.
The other one is built around ever span group, our specialty property and casualty program platform.
Ever spent group currently includes admitted carrier ever spent insurance company.
Surplus lines carrier ever span indemnity insurance company.
These entities received an a M best financial strength rating of a minus excellent and.
In February of 2021.
And with capital in excess of $100 million will operate as a class eight P&C insurance platform.
We expect to begin writing new specialty programs and our second quarter of this year.
Ever spend may retain up to 30% of the risk it underwrites aligning itself with its reinsurance partners further distinguishing itself as a specialty program participatory fronting insurance platform.
We are sourcing program business from multiple channels, including managing general agents reinsurance brokers Act.
<unk> and other producers.
Ever spend will generate revenue for fronting fees net premiums on retained risks and investment income.
We believe ever spanned success will be driven by its competitive advantages, including one it's a M best a minus excellent rating too.
A class eight financial size designation, three broadly license E&S and admitted carriers.
For a leading management team with deep leadership experience spanning the insurance reinsurance and MGA markets.
Five at risk appetite to retain up to 30% of underwritten risk create strong alignment of interest with reinsurers and lastly access to a strong public holding company infrastructure with broad institutional relationships.
The team is led by wide blackburne.
President White has 37 years of experience running successful specialty programs 35 of which were with the longest running specialty writer of this type of state national.
And Steve Dresner serves as ever spans Chief underwriting officer, Chief Reinsurance officer and has a similar number of years of experience running specialty program business. Most recently at Crum <unk> Forster.
We also believe our watch is well timed as market and pricing conditions continue to improve and capacity providers continue to maintain and exercise discipline.
Recent market data from market Scout noted an increase in rates in Q4, 2020 for both P&C and personal lines of seven 1%.
Why is the coverage with the largest rate increases where umbrella liability professional lines and D&O liability.
Going into 2021 rate increases are expected to continue across all lines with an average forecast for rate increase of 11, 6%. According to a study reported on by Marsh <unk> Mclennan and started in business insurance.
Given these favorable market conditions, we expect ever spans disciplined approach to risk management and underwriting as well as the lack of channel conflicts will attract significant interest from both insurance distributors and reinsurers.
Further benefiting ever span in the fronting carrier market is the evolving commoditization of capital and MGA demand for new capacity sources as traditional carriers face increasing challenges.
Turning now to pillar, two which encompasses fee based MGA and <unk> businesses.
The MGA MCU program manager sector is attractive because it offers access to high growth, earning businesses with attractive rates of return.
And the ability to diversify revenue via recurring commission revenues.
According to a 2020 strategic study series by cutting U S. Based MGA has produced 65 billion and annualized premium representing 10% of the P&C market.
Additionally, the MGA universe has grown an average of 6% over the last five years.
Ambac expects to grow its MGA MCU program manager business, using several strategies, including organic growth additional acquisitions and partnerships and investments in de Novo platforms.
The pace of that growth will depend on market conditions and for M&A transactions, our ability to find attractive target companies at a fair price.
Our acquisition of exchange Mark the first step in delivering on our pillar two strategy.
December 31, 2020, Ambac acquired 80% of the membership interest of exchange is specialty accident health M. G U.
Since its inception in 2010 exchange and its industry, leading management team have delivered outstanding growth and profitability supported by major insurers Reinsurers third party administrators brokers and producers.
The exchange team is led by Peter Mcguire.
A seasoned executive with over 30 years of experience in brokerage underwriting and reinsurance who previously worked at QB E Star insurance companies and Willis towers Watson before co founding exchange with James Denison net.
Brown and CAD designed Webber.
All of whom have extensive insurance and reinsurance experience.
In 2020 exchange generated gross premiums of over 100 million for their carrier partners with strong EBITDA margins, we expect the acquisition of exchange to be immediately accretive to ambac.
Going forward exchange will continue operating under its own brand with its existing leadership team future plans include expanding its geographic distribution and product diversification, adding new carriers and generating additional revenue sources as a reinsurance intermediary.
Turning now to our third pillar pillar.
Pillar three includes complimentary service businesses that will support pillars, one or two including potential investments and insure tech platforms and third party administrators.
Our timing for pillar three strategy is longer term and will be based on market opportunities.
We are excited about our accomplishments, which we believe will provide ambac. The following key benefits one revenue diversification through P&C base fee and premiums.
Two capital light fee and premium businesses valued by market participants and analysts on a multiple of EBITDA.
Three the opportunity for Ambac financial group to utilize its Nols unlocking additional shareholder value.
For ownership of a platform operating in a high growth sector of the P&C market that generates attractive risk adjusted returns.
In conclusion 2021 marks a transition year for Ambac is we for rest of our new business strategy. We are encouraged by our progress thus far and we're excited about the possibilities that lie ahead of us as we look to further enhance long term shareholder value by generating meaningful return on capital.
Look forward to providing you with additional updates in the quarters ahead.
Operator, please open the call for questions. Thank you.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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One moment, please while we poll for questions.
Our first question is from Mark Palmer with <unk>.
Please proceed with your question.
Yes. Thank you good morning.
I have a couple of questions that pertain to how a couple of macro factors impact Ambac platform.
A lot of attention of late about a rising interest rates.
Wanted to see based on all the changes that have occurred in the platform.
What is the impact of rising interest rates to what extent does it benefit the platform or not.
Hi, Mark Hi, David Thanks, very much for your question.
There's a number of impacts from rising rates are the most obvious and prevalent one really relates to the discount rates that we utilize for reserving purposes, and so as discount rates increase.
Increase certainly the.
Value of our loss reserves.
Come down and there's there's a few pluses and minuses along the way there in terms of the dynamic between subrogation and loss reserves, but nonetheless from a.
Financial reporting standpoint, the higher discount rates is certainly a benefit.
And from our investment portfolio overall, I would say, it's a it's a slight benefit we are relatively short duration.
Investment portfolio, so to the extent we can redeploy.
Cash as rates are rising that's that's a good thing for for us from an investment standpoint, the only drawback to rising rates for us really relates to the subrogation on our RMB S portfolio more specifically they are MBS, our insured portfolio and as rates rise.
It's mostly on the short end of the curve.
Debt that hurts excess spread so we've deployed a.
A number of hedges over the years to try and mitigate some of that risk, which has been a cost too, but nonetheless, we think we will hedge a part of that risk as we head into a period of uncertainty here with regards to our movements along the curve.
Thank you.
One quick follow up.
There was a $1 nine trillion dollar stimulus package being considered by Congress right now of course.
A sizable portion of that would be allocated to.
States and municipalities.
What what's your take on what the impact of that stimulus could be in.
In terms of the credit environment as it pertains to the municipalities.
Thanks, Mark This is Claude I, you know obviously, assuming the bill goes through in its current form.
We think that that stimulus package will be.
Beneficial for very beneficial for states and municipalities.
I think there's still some question in terms of how it will be allocated as between them.
Within the state.
Various resources, whether it be to fill budgets.
Or allocated to certain municipalities for for certain express purposes. So I think theres still some questions around how and when it will be distributed and for what purpose, but as a general matter. We think the size of the of the package and the expressed intent.
Abuse, all looks generally quite favorable for for municipalities.
Thank you.
And our next question is from Derek Pilecki with Gator Capital. Please proceed with your question.
Good morning line of question about holding company cash and investments I assume the $82 million invested into ever spend what came out of holding company cash.
Is that correct and what is the current balance of holding company cash and investments.
Sure Yes.
Correct.
Funding of.
Ever spanned came out of it all day.
Company.
Cash so at the end of the year we ended.
<unk> ended at 366 in terms of total total assets at the holding company and that was the major cash outflow after.
After the year end. So it's just a reduction of $82 million of liquid assets at the holding company.
And then my second question is about exchange could you provide with the revenues and operating margin were for exchange during 2020.
We haven't disclosed.
Disclose that obviously that has no impact on our P&L.
P&L for 2020 and heading into 'twenty, one will be reflected in our first quarter results.
I can tell you that in 2020 the company produced.
With decent amount over $100 million of gross premiums written for the year and has high.
Double digit EBITDA type margins.
And did that acquisition closed in 2020.
December 31.
Thank you.
Sure.
And our next question is from.
Moving on to below <unk> with Compass point. Please proceed with your question.
Good morning.
Kind of looking forward I was curious thinking about the holding company. There's obviously some capital that's been flowing to ever sat in capitalizing ever spend and then you also have some capital for acquisitions for the south.
Curious, how you think about kind of deploying all of that capital because you have for you.
Under $500 million of capital, but obviously being 450 and 500 million of capital at the holding company level and you just received.
Okay.
Tolling payment app in the fourth quarter kind of curious how you think about using all of that capital because there will still be some capital left over after capitalizing ever span and then beyond that.
Making the acquisition exchange kind of thing I'm curious about the allocation for strategy for the remainder going forward.
Yeah, Thanks, Julien so the.
Number number of things one you know we as we've talked about in the past and Claude described with regards to the.
<unk> three pillar strategy, we are very disciplined in terms of how we look at opportunities to deploy capital and I think that's evidenced in some of the.
Transactions, we we recently announced.
Do you need to maintain capital at the holding company for liquidity and operations of the business and that.
That which is viewed as excess of that can be deployed for strategic purposes, and Claude described the the three.
Pillar strategy, and we don't really anticipate additional capital needing to go to ever span, but certainly with regards to the other two pillars. That's something we're actively looking at and pursuing and evaluating opportunities and so that capital at this point in time is being preserved for.
Our strategic our strategic purposes.
That sounds good.
Then kind of on the heels of a settling out two crore.
Trust are there any other other opportunities in the capital structure to go after that where you might be on the older tonnage.
Salaried or send a lot of stomach some debt exposures or surplus notes holders.
Earlier.
Yeah, we've cleaned up a fair amount of the capital structures as you note and certainly we'll remain opportunistic but there's nothing.
And the pipeline at this point.
That sounds good I appreciate your time and I'll jump back in the queue.
Thanks.
And our next question is from Matthew Weber with sales of entry partners. Please proceed with your question.
Hi, good morning I.
I wanted to ask you about the bank of America Countrywide case.
Could you please discuss the use of the potential proceeds from the case if ambac.
Successful specifically is the company committed to anything within the capital structure that would consume these proceeds and what is the waterfall for these funds.
Good morning, Thanks for your question.
The there is capital.
Certainly credit debt that's been pledge.
Or is being used to fund our.
Litigation. So I think there is a waterfall and I'll, let David walked through that and the excess funds beyond that would be general purpose funds for the.
For the company debt, we will evaluate the use of.
After.
Settling the litigation, but David if you want to walk through the.
The debt structure.
Where we have goodness, yeah, there's really two obligations that we have related to rep and warranty.
First is what we referred to as the Elephant Allison I note for the often referred to as the tier one debt. So with the proceeds from the Rep and warranty up two the first 1.4 billion. We are required to pay down that Allison I note and then after that.
We are required to use proceeds.
Above $1 6 billion to pay down what is referred to as our tier two notes.
So we are obligated to pay down both those obligations upon proceeds as I described the outstanding balance on the tier two notes is about $306 million at the end of the year, which includes.
Principal and accrued interest and on a gross basis, the Allison I no balances one 6 billion.
But a C owns about 400 and.
$60 million of those nodes. So the net balance if you will is about a billion two well those tier one notes.
Thank you.
Sure.
And there are no further questions at this time, Andrew Thompson concludes today's teleconference. We thank you for participating you may disconnect. Your lines at this time. Thank you for your participation.
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Yes.
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