Q2 2021 Ambac Financial Group Inc Earnings Call
Greetings and welcome to Ambac Financial group incorporated second quarter, 2021 and 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. If anyone should require operator assistance during the conference.
Please press Star zero on your telephone keypad as a reminder, this conference call is being recorded and is 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, 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 group second quarter 2021 financial result.
And we'd like to remind you that today's presentation may contain forward looking statements about our bad debt, including but not limited true new business credit outlook market conditions credit spreads financial ratings lockers or loss mitigation loss recovery investment returns or other items that may affect our future results.
These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances and.
Any forward looking statements are not guarantees of future performance over that.
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 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 statement, whether as a result of new information future events or otherwise.
Today's presentation contains non-GAAP financial measures the reconciliations of such measures and the most comparable GAAP figures are included in our earnings press release, which is available on our web site at Ambac Dot com.
Please note that presentations have been posted to the events and presentations section of our IR website, which support our comments to that.
I would now like to turn the call over to Mr. Claude Leblanc.
Thank you Lisa and welcome to everyone joining us from today's call.
This is her last earnings call, we made material progress on our key strategic priorities, leading to the further stabilization of our legacy insurance platforms and.
And the basket of our new specialty P&C insurance business.
Major developments for the quarter include first Ambac endorsement of Puerto Rico's planned support agreement.
Which paves the way towards the resolution of all of our Puerto Rico exposures.
Second the continued reduction and the net par of our insured portfolio and significant derisking watchlist and adversely classified credits.
Third the launch of a senior secured note offering which successfully closed post quarter and providing us with enhanced financial flexibility.
Lower carry.
Fourth the strong market receptivity to ever spans launch driving and robust pipeline of specialty program submissions and.
And finally as announced earlier this week. The addition of a new director to our holding company Board Ms. Lisa Iglesias.
I am very pleased to welcome Lisa who was appointed to the AFG and.
And AC boards as of August 4.
Lisa brings with her and it will of insurance industry experience, which will broaden the sports market and industry competencies as we continue to progress our strategic priorities.
We also announced the departure of Alec screen and member of our board since 2015.
Alex has been a valued board member and it has been my sincere pleasure to work with them.
His insight dedication and guidance throughout his tenure on the board have been invaluable.
I would like to thank Alex for his tremendous contributions to ambac and wish him the very best and his future endeavors.
Turning now to our second quarter review.
Ambac reported a net loss of $29 million or 63 cents per diluted share and adjusted loss of 13 million or 30 cents per diluted share for the second quarter.
At June 30, 2020.1.
Book value was approximately $1.1 billion or $23.01 per share.
And adjusted book value was 889 million or $19.25 per share.
David will discuss our financial results and more detail in a moment.
Looking at our insured portfolio.
Net par exposure was 30 billion at June 30, and down 4% from March 31.
More importantly, and box watch list and adversely classified credits were reduced to 11 billion at June 30 down 8% from last quarter.
Over 600 billion other decrease and net par exposure was tied to our proactive derisking efforts, including.
Including the partial commutation of and infrastructure credit and the reinsurance of a structured insurance credit.
Moving now to Puerto Rico.
On July 27th Ambac reached a settlement on our insured PREPA rum tax exposure.
We also became a party 2 agreements for our G. O P. B, a H T a and C. C. D E exposures that were previously entered into by Puerto Rico's oversight board and other major creditors.
This is a significant achievement for Ambac following years of effort to arrive at a holistic and central agreement with Puerto Rico's oversight Board.
Total net consideration for a perfect exposure is comprised of 3 components 1 cash.
True it contingent value instrument or C V I tied to the future financial performance of Puerto Rico sales and use tax.
This CVI instrument is the same 1 being offered for the other revenue bond and instrumentalities.
And 3 a second C b I tied to the future collections of Puerto Rico's from tax.
We refer to the 2 CB is a double barreled arrangements because together they constitute and enhanced and diversified cash flow recovery when the Commonwealth received excess from tax collections.
As opposed to a single sales and use tax CVI for the other revenue bonds.
Well the value of these instruments is subject to credit market and other risks as Puerto Rico emerges from bankruptcy and its government and economy stabilizes. We believe the double barrel CVI structure will provide enhanced recoveries for our peripheral bonds.
With Ambac and fidget, joining the other financial guarantors, Puerto Rico is now much closer to exiting bankruptcy with broad consensual creditor support for the Commonwealth proposed plan of adjustment.
A confirmation hearing has been scheduled to begin on November 8 and this year.
With a possible effective day sometime late in the fourth quarter or sometime during the first quarter of 2020.2.
We will have greater visibility regarding the ultimate impact of this settlement for ambac and the coming quarters as the bankruptcy process moves forward.
The net impact of our settlement had a negligible effect on our aggregate, Puerto Rico and net reserve estimates for the quarter.
On the litigation front, our team continues to prepare for trial on our contract claims against Bank of America Countrywide.
And as we've previously stated we were eager to get a trial day schedule as soon as possible.
Turning now to the management of our capital structure.
Immediately post quarter, and we closed on a senior secured debt offering effectively refinancing our current senior secured notes.
We seize the opportunity to take advantage of favorable market conditions and extend the term of the current node from 2020, 3.2020 6.
Well, we certainly do not expect our main army us litigation to last until 2026, we believed it was prudent to extend the tenor of the notes.
Provide ambac enhanced financial flexibility.
David will provide additional details about the debt refinancing and a moment.
Turning now to our new business initiatives at AFG.
The P&C industry continues to report healthy rate increases and most classes of business and we believe that pricing will continue to outpace estimated loss cost trends and the near to medium term leading to improved underwriting margins.
Ever span group, our specialty P&C insurance platform has made significant progress following its launch in February.
Ever spent insurance or Medicare now has full PNC authority and 40 jurisdictions.
Ever spent and indemnity are surplus lines carrier is authorized for excess and surplus lines and all 50 states and its white listed and the majority of the states that maintaining a registry.
And we're Spence first program with the Cardigan related to non emergency medical transport and began writing insurance coverage and Mei.
Since its launch ever span has seen a robust program pipeline with submissions across various classes of business and distribution sources.
Do you ever spent team anticipates launching additional programs in the third quarter.
And further build out ever span group, we have filed the form as for several additional shell carriers to add to our platform.
These for me are pending regulatory approval and we hope to close on the acquisitions as early as the fourth quarter.
Yeah.
The addition of these shells will support and diverse portfolio of programs and minimize the chance that our business partners and counter channel conflicts.
Turning to pillar 2 of our specialty program insurance strategy, which encompasses fee based M. G E and M G businesses, including exchange.
Exchange continues to perform well and the current environment and our outlook remains favorable.
The team at exchange is actively exploring opportunities to broaden its carrier network and distribution channels.
We remain active and sourcing additional opportunities to grow pillar 2.
Through further acquisitions and de Novo startups.
Turning to pillar 3.
During the quarter at the holding company made minority investments and certain insurance related businesses, including insure tech platforms that we believe will be synergistic to our specialty property and casualty program insurance and M. G. M G businesses.
I'm excited about the progress we've made to date on our specialty program insurance platform and we see significant opportunities ahead to advance our strategy and.
And I will turn the call over to David to discuss our financial results for the quarter day.
Yeah.
Thank you Claude and good morning, everyone.
For the second quarter of 2021, Ambac reported a net loss of $29 million or 63 cents per diluted share compared to net income of $17 million or 8 cents per diluted share and the first quarter of 2021.
Adjusted loss from the second quarter was 13 million or 30 cents per diluted share compared to adjusted earnings of $41 million or 59 cents per diluted share and the first quarter.
The difference between adjusted earnings and GAAP net income for the second quarter relates mostly to the exclusion of $13 million of insurance intangible amortization from the adjusted loss.
Compared to the first quarter, which included a $37 million gain from the crawler and junior surplus note exchanges second quarter results included favorable loss development, which produced and incurred benefit partially offset by interest rate derivative losses, and an increase and the provision.
And for deferred taxes.
Briefly turning to some highlights.
Premiums earned or $11 million and the second quarter compared to $14 million during the first quarter.
The decrease was driven by a smaller reduction and the allowance for premiums receivable and the continued run off of the insurance portfolio.
Investment income for the second quarter was $42 million down approximately 7 million from $49 million and the first quarter.
The decrease was due to lower but still strong results from pooled mostly alternative investments.
The total return and pooled funds was approximately 3.1% and the second quarter versus 4.6, and the first quarter the yield on the remainder of the portfolio was relatively unchanged and a slightly smaller base.
Second quarter pooled fund income totaled $20 million and income from available for sale securities totaled $22 million compared to $27 million and $22 million and the first quarter respectively.
Other income, which includes commission revenue earned from exchange and <unk>.
Span program fees was $7 million for the second quarter compared to $5 million and the first quarter.
Loss and loss expenses were a benefit of $26 million and the second quarter compared to an expense of $8 million and the first quarter.
Positive development and the insured structured finance portfolio generated a benefit of $16 million and the second quarter driven by improved credit factors and the positive impact of lower interest rates on excess spread partially offset by the negative impact of lower discount rates and incremental loss expense costs.
The public finance and short portfolio also experienced positive development.
<unk> and and $11 million benefit driven by an improved outlook uncertain COVID-19 exposed to credit and our military housing projects.
Partially offset by incremental loss expense costs and lower discount rates.
The signing of a planned support agreement related to our remaining exposure to Puerto Rico had a negligible impact on our Puerto Rico reserves, which continue to represent the vast majority of our public finance reserves.
Domestic public finance losses incurred $9 million and the first quarter was driven by increased Puerto Rico reserves, partially offset by the benefit of higher discount rates.
Net losses on derivative contracts, which are positioned as a partial economic hedge against interest rate exposure and the financial guarantee and investment portfolios.
Of 11 million for the second quarter compared to gains of $25 million for the first quarter was driven by lower forward interest rates.
Counterparty credit adjustments on uncollateralized derivative assets contributed about $3 million for the second quarter loss, while contributing 9 million of gains and the first quarter.
Operating expenses were $28 million down from $33 million and the first quarter.
The second quarter, a decrease was mostly due to cyclical and nonrecurring costs incurred and the first quarter Inc.
Clothing seasonal compensation costs and expenses related to the crawler and junior surplus note exchanges.
Notably consolidated expenses also include expenses of exchange of benefits, which we acquired at year end 2020 and ever span, which continues to ramp up its platform.
Collectively these items accounted for approximately 27% of consolidated expenses.
The provision for income taxes was $11 million and the second quarter compared to only $2 million and the first quarter the increase related to a higher provision for deferred taxes, resulting from the UK enactment of the tax increase from 19% to 25% effective April 1st 2020.
3.
Turning to the balance sheet.
And July Ambac assurance through a newly formed B R E issued $1 billion $175 million par amount of LIBOR, plus 4.5% senior secured notes due in 2020.6 these.
These notes are secured by the first 1.4 billion and RMB S litigation proceeds and the capital stock of Ambac UK.
Proceeds from the offering of $1.163 billion, along with other temporary sources of liquidity were used to fully redeem the outstanding balance of the LLS and I notes.
As Claude stated, we don't expect our arm B S litigation to extend to 2020.6 but given the lack of certainty as to the timing of our arm B S trial and favorable market conditions. We believe it was prudent to refinance our senior secured notes, which allowed us to reduce our cost of carry and increase our financial flexibility.
Shareholders' equity was effectively flat compared to the end of the first quarter at $23.01 per share of $1.1 billion at June 30th 2021.
Second quarter net loss of 29 million was materially offset by an increase and unrealized gains on securities of $26 million.
Adjusted book value decreased to $889 million or $19.25 per share at June 30 of 2021 from $908 million and $19.66 per share at March 31, 2021. This 41 cent decrease was driven by the adjusted loss net.
And of earned premiums.
Unlike book value a b V is not impacted by changes in unrealized gains and losses.
At June 30th F G and on a standalone basis, excluding investments in subsidiaries and cash investments and net receivables of approximately $281 million for $6.08 per share.
Coding approximately $149 million of liquid assets.
I will now turn the call back to Claude for some brief closing remarks.
Thank you David.
I am very pleased with our accomplishments during the second quarter.
And believe we have developed strong momentum going into the second half of the year that will help drive our growth strategy and position our platform for success and the future.
This completes our prepared remarks, I will turn the call back to the operator and open the call for questions.
Thank you.
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Our first question.
And as from.
Frank Laguardia and with a private investor. Please proceed.
Yeah.
Claude.
Claude as it relates to Puerto Rico.
Are we saying that after all is said and done.
Whenever it confirms.
The bulk of the well all of the reserves that are on the books will.
And will be needed.
So I you know at this point, what we're saying is that we believe we're adequately reserved for Puerto Rico as to the actual reserve numbers at the effective date of the plan that will depend on a number of factors relating to the.
Value of the consideration.
That is being put forward in the plan for each of the instrumentalities.
And obviously there is some significant plexus.
Relating to these some of these securities.
You know different different plans up all of them have cash I guess, some have bonds and then C. B is a S. E T C B eyes, and the case of H D. A C D E and the G O us and and the case of PREPA, a separate CVI related to rum tax collections and so.
As we get more information and progressing to plan and a clarification of some of the terms of the securities.
We will have a better view in terms of the ultimate realization, which could result in adjustments to the reserves, but at this point and we believe we're adequately reserved AR based on all the information that we have at the present time.
Also just 1 more.
Question, if I may.
As it relates to the major litigation I see that the new notes are secured by the first 1.4 billion or so all the.
Are there any settlement.
As we all know and as all experience litigation could be a very simple thing.
And it seems to be very and and and our case.
We can't get to litigation and it's been years and years.
But assuming that that happens.
We got an awfully big bet, all litigation and so anyone.
And a judge or anyone in the process suggests the arbitration.
2 short circuit, what could be a lengthy and expensive trial and maybe get a quick resolution.
Yeah, I think you're right I mean, this has been going on for some time and.
And we can't really comment on any nature of discussions that have happened in the past or currently but you know I think you're you're a assumption that judges would typically suggest.
Suggest arbitration.
And at various points in time to try to resolve things is on point.
And you know obviously our approach has been to look for settlement.
And if appropriate.
At the appropriate levels are and I think we are we view ourselves as being commercial.
Individuals' AR that we would look for settlement if it wasn't available.
History has shown that oftentimes these things do wait until getting close to trial before the shuttle, which is why we've been pressing aggressively to get to trial and are hopeful that a potential later this year or early next year and we will be there.
Our next question is from Giuliano Bologna with Compass point. Please proceed.
I guess moving on to a group.
Slightly different topic somewhere and our capital management side.
You've obviously taken a lot of initiatives.
I'm sorry.
And the gorilla trucks, and the junior surplus notes and and now on the unsecured notes out of the platform.
And I'd be curious looking forward. If there are any opportunities on the surplus notes are you know given that that will become the day.
Yeah.
BARDA security overtime, and Eric your and your debt cap.
And are there any opportunities there are there whether it be buying and some of them back or trying to figure out a way to settle those out over time.
Giuliano, Thanks, and I think we've commented on this path and we do think there are opportunities where you are.
Clearly opportunistic when it comes to managing the capital stack and and is 1 of our stated strategic goals to continue to simplify our capital structure. When we start getting into discussions around certainly around specific transactions, but it's not really an area. We want to go too deeply into.
To but it will say when it comes to the surplus notes. It does get more certainly more complex. There are obviously regulatory capital issues that come into play there their regulatory approvals that come into play and in context of and multiple initiatives ongoing with regards to litigation.
Asian, and and Puerto Rico, There's also capital management and liquidity considerations that we have to.
Focus on and so yeah, we are definitely focused on it but I cant really specifically say and.
No.
And that there is a particular transaction coming or what that may look like other than that it's something we're focused on but certainly more complex when it gets to surplus notes.
But and I talked with them.
And I wasn't there and Theres a good enough.
Much bigger capital consideration.
I'd be curious and this is more of a technicality question, but I'd be curious if there are any restrictions on your ability to buy those securities or separate from what's element or what you may or may not want upstream and theater I'm curious if you have any ability to buy those back or are there any major restrictions and obviously outside of capital consideration.
Yeah, we we do have some capacity I'll call. It limited capacity beyond which we would be required to get regulatory approval.
Oh, that's great.
That was all for me and I'll jump back in queue. Thank you very much.
Thank you. This does conclude our question and answer session and this also concludes today's teleconference. We thank you for participating you may disconnect. Your lines at this time and thank you for your participation.
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