Q1 2021 Ambac Financial Group Inc Earnings Call
Greetings and welcome to the Ambac Financial Group, Inc. First quarter 2021 earnings call. At this time all participants are placed in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference and please.
Press Star Zero on your telephone keypad as a reminder, this conference is being recorded and is now my pleasure to introduce your host Ms. Lisa comps.
Net of Investor Relations, Claude Leblanc, Chief Executive Officer, and David Trick Chief Financial Officer on now.
And I'll turn the call over to Lisa.
Thank you good morning, and thank you all for joining today's conference call to discuss the Ambac Financial group first quarter 2021 financial result.
We'd like to remind you. The today's presentation may contain forward looking statements about our business, including but not limited to new business credit outlook market conditions credit spreads financial ratings loss reserve loss mitigation lots of recovery investment return or other items that may affect our future.
These statements 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 of event.
Actual performance and events may differ possibly materially from.
Such forward looking statements.
Factors that could cause of this include the factors described in our most recent SEC filed quarterly or annual report under management's discussion and analysis of financial condition and results of operations and under risk factors.
Ambac is not under any obligation and expressly disclaims any obligation to update any forward looking statements, whether as the result of new information future events or otherwise.
Today's presentation contains non-GAAP financial measure at the rack.
Conciliation of such measures to the most.
Terrible GAAP figures are included in our earnings press release, which is available on our web site at Ambac Dot com.
Please note the presentation has 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.
And welcome to everyone joining us on today's call.
This morning, Ambac reported net income of $17 million or eight cents per diluted share and adjusted earnings of 41 million from 59 cents per diluted share for the first quarter.
At March 31 of book value was $1 1 billion or $23 and <unk> per share.
And adjusted book value was 908 million or $19 and 66 per share.
Our first quarter results were positively impacted by material progress on our strategic priorities, including gains of 37 million realized.
From our junior surplus note transaction and the inclusion of operating results from earned U M. G platform exchange.
We also regained significant derisking momentum during the quarter and materially progressed, our specialty property and casualty insurance strategy.
Starting with the review of our Derisking activities net.
The par exposure was $31 4 billion at March 31 down 7% from yearend.
And watch list and adversely classified credits were 12 billion at March 31 down 8% from December 31.
Active derisking transactions accounted for 56 per cent of the total decline and net par exposure for the quarter.
Notable transactions completed include one the execution of of material reinsurance transaction for certain public finance credits with net par outstanding of approximately 823 million per.
Ceded included general obligation.
And tax back revenue higher education, and transportation of exposures as well as the $158 million of watchlist and adversely classified credits.
The successful exit of our midst Queens Baseball stadium exposure at 540 million adversely classified credits by.
And at the refinancing and quota share reinsurance transaction.
And lastly, the negotiation of additional credit and liquidity improvements for a U K 's largest COVID-19 affected exposure.
The U S economy is experiencing a strong recovery year to date with the U S. GDP expected to have grown at an annualized rate of approximately 9% and the first quarter.
Higher retail sales increased manufacturing output and government stimulus, including the $1 nine trillion American rescue plan and act.
With 350 billion slated for state and local governments together with other fiscal and monetary stimulus and 2020 are driving the strong economic recovery.
Additional stimulus could come from the American jobs planned and 1.5 trillion projected and discretionary spending and the U S budget for 2020 two.
Given the strong economic conditions, we remain cautiously optimistic about the outlook for our insured portfolio, which we believe will continue to improve particularly as vaccination rates continue to increase.
Turning now to Puerto Rico.
As reported on May 5th the oversight Board has reached a planned support agreement with assured guaranty and the MBIA amongst other creditors.
This agreement impacts two of our revenue bond exposures HCA and CCD.
However, the agreement does not include Triple our largest remaining Puerto Rico exposure.
Ambac is not a signatory to the planned support agreement. However, we continue to believe that of consensual negotiated settlement, leading to a global resolution of Puerto Rico's bankruptcy is and the best interest of the Commonwealth.
Borrowings such of settlement Ambac will continue to pursue all of its legal rights and remedies to arrive at a resolution that respects the property rights and security interests of rubbing and bondholders.
We are firmly of the opinion of the Puerto Rico has ample debt and capacity to structure a reasonable outcome on the revenue bonds.
This is gonna be achieved and the way that would not impinge on the commonwealths ability to force economically and to serve its residents who've had to suffer through the lengthy and costly bankruptcy process.
Regarding our loss recovery efforts.
Our broad appeal and our main case against Bank of America. Countrywide was argued in April and we expect a decision from the first department within the next couple of months.
We are preparing to go to trial with or without of fraud case.
Assuming no change or developments that could impact the timing or nature of our case, we hope that justice Robert read recently appointed Doorcase, we'll schedule a trial date for the second half of this year or early 2022.
With regards to of capital management initiatives during the quarter, we executed a note exchange transaction, resulting in the acquisition of all outstanding Junior surplus notes and exchange for the issuance of surplus notes.
And this resulted and the extinguishment of 76 million and debt and accrued interest.
David will speak to these transactions and more detail in a moment.
Turning now to our new business initiatives at AFG.
The P&C industry continues to report healthy rate increases and we expect pricing will continue to outpace estimated loss cost trends leading to improved underwriting margins.
We believe that the improvements and combined ratios across the industry presents a tremendous opportunity to generate strong risk adjusted returns as we rapidly progressed, the ramp up of ever spend and our P&C specialty business.
Ever spend group has made significant progress following its launch in February of <unk>.
License expansion initiatives forever span insurance, our specialty admitted carrier has progressed materially and never spend now has full PNC authority and 26 jurisdictions.
Ever spent indemnity of surplus lines carrier is authorized for excess and surplus lines and all 50 states and as white listed and the majority of the states that maintain the registry.
I'm also pleased to report that ever spent the first program was recently launched with Cardigan and General insurance services, a subsidiary of Denver Group and of nationally recognized managing General agency. The focuses on specialty programs and services.
We are very excited about the ever spent cardigan partnership, which allow cardigan and to enhance their specialty transportation product offering and diversify their state footprint.
Our first program was also backed by strong and highly rated reinsurance panel.
Our management team's expertise and collaborative deal structuring approach has been positively received and the market.
And we're span has a significant number of submissions under active review and we expect a continued favorable market conditions will provide the robust program pipeline forever span and the coming quarters.
We are also exploring a number of strategic initiatives, including the potential acquisition of additional shelf carriers to support ever spans short and long term objectives.
Turning now to exchange.
The acquisition of exchange under pillar, two which encompasses the base M. G E and M. G of businesses was accretive to our first quarter results and we were pleased with our team's performance during the quarter.
With strong renewals on its employer stop loss business and growing revenue generation and its affinity business exchange is well positioned for growth and the coming quarters.
Consistent with the strategy the team is pursuing opportunities for product diversification and expansion of its strong channel of insurance carrier relationships as well as opportunities to develop additional revenue sources.
We're also actively exploring opportunities to grow the M. G M G program manager business.
By the additional acquisitions and partnerships as well as the establishment of the noble modeling M. G H and targeted specialty P&C lines of business.
With regards to pillar three we continue to actively explore various investment opportunities and businesses, which are complementary to our pillar one and pillar two strategies.
I will now turn the call over to David to discuss our financial results for the quarter David.
Thank you quote and good morning, everyone.
For the first quarter of 2021, Ambac reported net income of 17 million or eight cents per diluted share. This.
This compares to a net loss of $14 million of 31 cents per diluted share and the fourth quarter of 2020.
Adjusted earnings for the first quarter were 41 million of 59 cents per diluted share compared to adjusted earnings of $4 million or eight cents per diluted share and the fourth quarter.
The variance between the adjusted earnings and GAAP net income relates mostly to the exclusion of insurance intangible amortization.
Which amounted to 19 million from the first quarter.
Our first quarter results reflect the advancement of a number of our strategic initiatives, most notably our continued efforts to simplify and deleverage our capital structure.
Does that and we executed two transactions, which combined result, and all the junior surplus notes being extinguished and exchange for a surplus notes.
A GAAP gain from the extinguishment of debt of 33 million and the net realized investment gain of $4 million.
In addition, our first quarter results were favorably impacted by the inclusion of exchanges of results for the first time.
<unk> strong results from our investment diversification strategy and.
And gains on interest rate derivatives, partially offset by incremental reserves taken on Puerto Rico.
Briefly turning to some more specifics.
Premiums earned were $14 million and the first quarter compared to 18 million during the fourth quarter.
The decrease and the first quarter was driven by lower accelerated premiums as a result of the proactive derisking of the international credit.
Which produced 6 million of accelerated premiums and the fourth quarter of 2020.
Partially offset by an increase and normal earned premiums as a result of a reduction and the allowance for premiums receivable and the first quarter.
Although down slightly the investment income remains strong at $49 million compared to 53 million and the fourth quarter.
Performance was led by continued solid results and equities and hedge funds, partially offset by losses from the emerging markets debt and lower income from the coral The trust certificates.
AFG sold the crawl the trust certificates and exchange for AC issued surplus notes.
Part of the junior surplus notes exchange.
Included in first quarter of investment income book gains on full funds of $27 million.
And the income from available for sale Securities of 22 million.
Compared to $31 million and $23 million and the fourth quarter respectively.
Investments and pull funds had a total return of $4 six per cent for the first quarter compared to five 8% and the fourth quarter.
Other income of 5 million from the first quarter included commission revenue from exchange of $7 million.
Partially offset by foreign exchange losses, and certain expenses related to consolidated and V. I a.
Loss and loss expenses incurred were $8 million and the first quarter compared to 9 million and the fourth quarter.
Domestic public finance losses incurred were 9 million stemming from increased Puerto Rico reserves related to the recent developments, which Claude just discussed.
Partially offset by the benefits of higher discount rates.
The benefit of 7 million and in the fourth quarter.
Selected the favorable impact of higher discount rates and positive part of the development in general.
And from the active management of the insured book.
Especially offset by an increase in Puerto Rico reserves.
Operating expenses of 33 million up from 26 million and the fourth quarter the.
The increase was driven by the inclusion of exchanges commissions to sub producers and the operating costs.
Costs related to the junior surplus notes exchange and seasonal compensation costs.
While operating expenses increased this quarter increase including non recurring costs was primarily driven by the inclusion of exchange and the advancement of other strategic objectives, all of which will generate both near term and long term value.
The less we remain focused on prudently managing expenses across the entirety of the Ambac platform.
Turning to the balance sheet as a result of the exchange transactions, which eliminated all outstanding and junior surplus notes and related accrued interest AC issued 279 million par of surplus notes with associated accrued interest of $183 million lowering.
Its debt and outstanding interest by $76 million.
Out of this issuance AFG received surplus notes of 40 million of par with $26 million of accrued interest which are eliminated in consolidation and <unk>.
Range for its equity investment and the coral the trusts.
The exchange transactions were beneficial to both AAC and AFG and several ways.
Ray C. The exchange lowered the agency's outstanding debt and accrued interest by 76 million no cash outlay and reduced its annual interest expense by approximately $4 million.
For the simplified the capital structure and reduce the duration of outstanding debt.
And for a F G and the surplus notes received and the exchange improved liquidity relative to the investment and call of the equity.
On a fair value basis, the carrying value of the call the equity and have and expected duration shorter than the core of the equity.
Through with the investment and AC Afg's also of the residual beneficiary of the the leveraging of AC.
During the first quarter. We also early redeemed another $16 million of the AC secured notes.
Mostly through the sale of a portion of the securities collateral at market levels below the cost of the secured debt.
Shareholders' equity decreased 55 per share the $23.02 per share.
For approximately $1 1 billion at March 31, 2021.
The decrease was due to net unrealized losses on securities of 24 million and it.
$13 million increase to the redemption value of exchanges noncontrolling interests.
Partially offset by net income of $17 million and $6 million of foreign exchange translation games.
Adjusted book value decreased to $908 million or $19.66 per share at March 31, 2021 from.
And from $919 million of $20.05 per share at December 31, 2020 the.
The 39 cent decrease was driven by $13 billion increase to the redemption value of exchanges noncontrolling interests.
And the impact of unexpected future premiums from the reinsurance transaction and the Mets Queens of ballpark Derisking.
Partially offset by a 41 million of adjusted earnings.
Unlike book value.
The book value is not impacted by changes in the unrealized gains and losses.
F G on the Standalone basis, excluding investments and subsidiaries as of March 31, 2021 of cash investments and net receivable of approximately 274 million from $5 94 per share Inc.
<unk> approximately 155 million of liquid assets.
The decrease in assets of $92 million or $2 and five per share from December 31 was mostly related to the capitalization of ever span.
I will now turn the call back to Claude for some brief closing remarks.
Thank you David.
I am very pleased with the accomplishments during the first quarter of 2021 we.
We remain focused on all of our strategic priorities and expect our momentum to continue as we progress of our efforts and the coming quarters on.
Operator, please open the call for questions.
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Thank you. Our first question comes from the line of Giuliano Bologna with Compass point.
Please proceed with your question.
Kumar of I think.
To touch on some of the developments on.
And obviously getting deals on the Puerto Rico side is a positive.
And we look at the boss reserves and the losses already methodology kind of and the first quarter.
Is there anything related to those.
The new announced transactions included in the <unk> and the scenario analysis that you're using for the first quarter or is that role and during the second quarter.
Yeah, Hi, Julien and I would say David trick and thanks for the question no we fully incorporated.
Everything we learned through I think it was the announcement on on May 5th.
And to our reserving process and.
As you May recall, we were scheduled the release earnings on Thursday, but given the announcement that came out that we wanted to fully analyze and consider Oh that's.
And that's why we delayed earnings to today, so we incorporate and everything into our scenario analysis that we know of as as of and through the fifth.
That sounds good and then thinking about.
The rep and warranty litigation and the kind of the.
The primary and largest cases out there against Hunter and are there any big milestones in terms of hearings or anything coming out from the near term.
And there was a potential to be focused on there.
So at this point were just waiting to hear back.
From the first apartment on our appeal of the.
Broad case, and we expect that will come through hopefully in the next it could be as soon as the next week or two of them take a few months and then the following that we're hoping that we will have the opportunity to meet with the justice read too to establish a trial date.
Which we hope.
It could be as early as later this year or early 2022.
Okay.
So it sounds very good.
And then one final one just thinking about.
Some of the holding company liquidity and liquid assets is there any plan in terms of the kind of how you want to manage that obviously.
And Youre looking for more and.
More expansion in terms of more transactions on that side to keep out of your business lines or is it or are there. Other uses of capital and currently where you may need to capitalize some of the and the.
The business lines, and you're building out or how do you think about the excess of above and beyond that.
Sure Julien a.
Couple of things I think you touched really on most of it there are other transactions of call it external transactions that we're.
And we're looking at as we've talked about regularly and and addition to that we're looking at potential other sort.
And so the de Novo transactions.
And particularly and the sort of pillar two sector.
But you know in terms of ever span and I think ever spend is pretty well capitalized at this point there is some sort of capitalization and I should say.
Operating investments, we may may make there, but I think from the ever spend standpoint, we're set.
It's really.
The other types of transactions de novo startup opportunities and.
And to all of the third party acquisitions that we would be looking to allocate capital towards in the in the future.
That sounds good.
I appreciate it and I'll jump back in the queue.
And Australia.
Thank you and there are no further questions at this time. This concludes today's conference. We thank you for participating you may now disconnect your lines.
Yeah.