Q3 2021 Ambac Financial Group Inc Earnings Call

Greetings and welcome to the Ambac Financial Group incorporated third quarter 2021 earnings call.

At this time all participants 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 is being recorded it.

It 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.

Yeah.

Lisa is your line on mute.

Thank you good morning, and thank you all for joining today's conference call to discuss Ambac financial groups third quarter 2021 financial result.

We'd like to remind you that 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 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.

Any forward looking statements are not guarantees of future performance other than <unk>.

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 reports under management's discussion and analysis of financial condition and results of operation and under risk factors Ambac is not under any obligation and expressly disclaims any obligation to update any forward looking.

Statements, whether as a result of new information future events or otherwise.

Today's presentation contains non-GAAP financial 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 com.

Please note the presentations have been posted to the events and presentations section of our IR website, which support our comments today.

Now I'd like to turn the call over to Mr. Claude Leblanc.

Thank you Lisa and welcome to everyone joining us on today's call.

I am very pleased with our third quarter results, which were primarily driven by positive credit development, and our structured finance and public finance insured portfolios net.

Net income for the quarter was 17 billion or 35 cents per diluted share and adjusted income was 25 million or 53 cents per diluted share.

David will discuss our financial results in more detail in a bullish.

As we approached the end of 2021, we have demonstrated significant progress in the active derisking of our legacy financial Guaranty portfolios.

Further rationalization of our capital structure via the refinancing of our senior notes.

And the continued growth and expansion of our new specialty property and casualty program insurance business.

Taking a closer look at our new specialty P&C business, starting with ever spend our specialty P&C insurance platform, which anchors pillar one of our strategy.

Since its launch in February ever spend has continued to make material progress on all key growth and value metrics.

Ever spin indemnity, our surplus lines carrier is currently authorized for excess and surplus lines in all 50 states and its white listed in 45 states that either maintained or have either factor registry.

Ever spent insurance company, our Medicare now has full P&C authority, and 45 jurisdictions, including California.

Working to secure authority and the few remaining states in the near term.

Since its launch ever span group has built a robust program pipeline across the various classes of business through multiple distribution sources and have signed up and is currently writing for three program partners. The most recent being covered well.

Ensure tech focused on the commercial auto space.

Ever spent is poised to launch a number of additional programs in the fourth quarter.

Ever spent group has also expanded its carrier base this quarter with the purchase of an admitted shell Providence, Washington Insurance company or Pete Wick, The second oldest insurance company in the United States.

The work will provide ever spend with additional capabilities to launch new admitted programs develop innovative products and provide enhanced flexibility to foster strategic relationships with prospective program partners.

Ever spent group has also filed for as to acquire additional admitted carriers, which will further expand its admitted carrier offerings.

We hope to close on these acquisitions in the fourth quarter.

The acquisition of additional carriers furthers our goal to build a leading specialty P&C program insurance business, where we can provide multiple options for our distribution partners minimizing the risk of channel conflicts.

Turning to the second pillar of our new business strategy M. G E M G businesses.

The acquisition of exchange benefits, our Anh M. G. You at the end of 2020 was the first of what we expect will be several distribution businesses or our pillar two strategy.

Exchange continues to perform well in the current environment and our outlook remains favorable.

Since our acquisition exchange has broadened its carrier base expanded its product offerings and has made $6 million and distributions to AFG.

Exchange team continues to actively explore opportunities to grow the business by further expanding their carrier network and distribution channels.

We continue to seek opportunities to grow pillar to do further acquisitions and de Novo startups, and we're seeing a growing pipeline of quality opportunities.

As a public company with permanent capital, we are a differentiated strategic partner for prospective M Gs and M to use <unk>.

Part of our value add and back also offers our partners a full suite of business services, including advanced P&C technology solutions, which we believe will enhance the competitive position of our pillar two businesses.

We've also progressed our pillar three segment, where we have identified and executed on three opportunities.

To date. These investments have included data analytics and insurance related technology companies. The most recent being our investment and cover well.

We expect these strategic investments will generate attractive returns on capital.

L for broad synergies across our pillar, one and pillar two businesses.

In summary, we continue to see attractive growth opportunities across all three pillars of our specialty P&C insurance business offering attractive risk adjusted returns and strong fundamentals.

We are well positioned to take advantage of such opportunities as we advance our efforts to grow and further scale our platform.

Moving now to our legacy financial Guaranty business.

Net par exposure was 29 billion at September 30th down 6% from June 30th.

16% year to date.

Amdocs watch lists and adversely classified credits reduced to 11 billion at September 30 down, 5% from last quarter and down 20%.

From year end.

Proactive derisking efforts accounted for decreases of approximately $630 million and net par exposure.

At $340 million.

Watch lists and adversely classified credits during the third quarter.

Year to date Derisking efforts accounted for $2 7 billion of the decrease of net par exposure at $1 7 billion and watch lists and adversely classified credits.

Moving now to Puerto Rico.

This past July Ambac reached a settlement on our insured PREPA rum tax exposure. It became a party two agreements for our G. O P. B, a H D. A N C C D E exposures.

During October and earlier last week, Puerto Rico bondholders submitted their settlement elections on all but our HCA bonds.

Yesterday marked the start of the confirmation hearing to approve the Commonwealth amended plan of adjustment in the bankruptcy court.

The proposed plan has the broad support of creditors and the Commonwealth of Puerto Rico.

While there are objectors to the plan that we expect the plan to be approved by the court with an effective date sometime during the first quarter of 2022.

Confirmation of the plan of adjustment will eliminate considerable uncertainty as to the ultimate loss experienced for our Puerto Rico exposures with the exception of our H D exposure, which will be addressed by a separate title III process.

We expect the H J title III process to move to conclusion as quickly as possible. Following the recently announced settlement between the oversight board and the DRA parties pursuant to which among other things the DRA parties will support the Commonwealth plan and the forthcoming HCA plan of adjustment.

Our loss reserves on Puerto Rico includes settlement options offered to add back guarantee bondholders, including the potential for commutation payments from Ambac and contingent value instruments issued by the Commonwealth, which remains subject to residual market and credit risks.

With the bankruptcy conclusion of Puerto Rico insight, our exposure to adversely classified credits at AC will be significantly reduced.

Rico risks currently totaled $1 1 billion of net par and represent 16% of total adversely classified credits as at September 30th.

We view this as a major step forward towards accomplishing our strategic Derisking objectives in our legacy financial Guaranty business.

Turning now to our Rep and warranty litigation.

The conference has been scheduled for late November and or Bank of America Countrywide litigation.

We plan to ask the judge has set a trial date as soon as reasonably possible.

I will now turn the call over to David to discuss our financial results for the quarter David.

Thank you Claude and good morning, everyone.

For the third quarter of 2021, Ambac reported net income of $17 million 35 per diluted share compared to a net loss of 29 million or <unk> 63 per diluted share in the second quarter of 2021.

Adjusted income for the third quarter was $25 million or 53 cents per diluted share compared to an adjusted loss of $13 million with 30 cents per diluted share in the second quarter the.

The difference between adjusted earnings and GAAP net income relates mostly to the exclusion of $10 million of insurance intangible amortization from adjusted income.

Net income for the third quarter as compared to the second quarter was primarily driven by a greater loss and loss expense benefit gain.

Gains on interest rate derivatives, and a lower provision for income taxes. These improvements were partially offset by lower net investment income from pooled funds.

Briefly turning to some highlights.

Premiums earned were $11 million in both the third and second quarters.

Lower normal premiums earned were driven by the continued organic and proactive reduction of the financial guarantee insurance portfolio offset by an increase in accelerated premium related to proactive derisking.

However span contributed modestly to earned premiums, but at exponential growth rate.

Investment income for the third quarter was $21 million down from $42 million in the second quarter.

Income from the available for sale portfolio declined to $15 million in the third quarter from $22 million in the second quarter. As a result of the July redemption of the Ambac Allison I secured notes held in the investment portfolio.

Excluding the impact of the Allison I redemption, which was more than offset by a reduction to interest expense income from the available sell portfolio was relatively unchanged during the quarter.

Income from pooled funds totaled $6 million in the third quarter, a reduction of $14 million from the second quarter, reflecting lower but still positive returns in most funds alongside losses on global equity and emerging market debt funds held in Ambac UK portfolio.

Total return on pooled funds was approximately 1% in the third quarter versus three 1% in the second quarter.

Pulled fund returns exceeded 2% at a C level close to nil at a U K the yield on the remainder of the portfolio was relatively unchanged.

Splitting the impact of the Allison I nodes on a slightly smaller asset base.

Other income, which includes gross commission revenue earned from exchange and fronting fees earned at ever span was $8 million for the third quarter compared to $7 million in the second quarter.

Loss and loss expenses were a benefit of $55 million in the third quarter compared to a benefit of $26 million in the second quarter.

M B S insured portfolio generated a $23 million benefit in the third quarter as a result of improved credit factors and higher forecasted recoveries, partially offset by a resulting lower estimated representation and warranty subrogation receivable incremental litigation costs.

Public finance also experienced positive development in the third quarter that translate into a $30 million benefit which was mostly driven by improvements to AAC is Puerto Rico reserves and a few other exposures.

The impact of which was moderated by approximately $11 million of incremental loss expenses.

The reduction to Puerto Rico reserves resulted from greater clarity unexpected outcomes for the plant support agreements as we move closer to final resolution.

While future adverse development in our Puerto Rico reserves may occur due to outcomes that are less favorable than currently expected. We may also incur a favorable development in our Puerto Rico reserves in future quarters.

Future development of our Puerto Rico loss reserves will be influenced by many factors, including final confirmation of the plans our ability to execute risk mitigation opportunities timing the value and liquidity of new bonds and CVI subrogation as well as a number of other factors.

Net gains on derivative contracts, which are positioned as a partial economic hedge against interest rate exposure and the financial guarantee investment portfolios were $5 million for the third quarter as a result of higher interest rates compared to losses of $11 million for the second quarter.

Counterparty credit adjustments, our uncollateralized derivative assets contributed $2 million of gains in the second quarter compared to $3 million of losses in the second quarter.

Operating expenses were 32 million up from 28 million in the second quarter. The increase in operating expenses for the third quarter was primarily due to higher compensation costs and strategic advisor fees.

Higher compensation costs were driven by higher performance based compensation growing head count at ever span.

<unk> cost at the legacy financial Guaranty business.

Exchange benefits and ever span group collectively accounted for approximately 22% of consolidated third quarter operating expenses.

The provision for income taxes was $2 million in the third quarter compared to $11 million in the second quarter.

The decrease was a result of the deferred tax expense in the second quarter, resulting from the UK enactment of the tax increase.

Turning to the balance sheet.

As discussed on our call in July a see through a newly formed V. I E issued $1 billion $175 million par amount of LIBOR plus four 5% senior secured notes due 'twenty 'twenty six proceeds of which along with other sources of liquidity were used to fully redeem.

Yes, standing Ambac Allison I notes.

The impact of this refinancing during the third quarter compared to the second quarter was a reduction to both assets and outstanding debt of over $460 million and net interest savings of $1 million.

Shareholders' equity was effectively flat compared to the end of the second quarter at.

$22 91 per share of $1 1 billion at September 30th 2021.

With net income of $17 million more than offset by foreign exchange translation losses of $19 million in unrealized losses on investments of $4 million.

Adjusted book value decreased to $882 million and $19.05 per share at September 30th from 889 million and $19.25 per share at June 30th.

There's 20 cent per share decrease was primarily due to foreign exchange translation losses and premiums ceded under a reinsurance transaction, partially offset by adjusted earnings.

Unlike book value a b V is not impacted by changes in unrealized gains and losses.

At September 30th 2021 F G and a stand alone basis, excluding investments in subsidiaries ever span exchange in D. C had cash investments and net receivables of approximately 282 million with $6 nine per share.

Including an approximately $161 million of liquid assets.

I will now turn the call back to Claude for some brief closing remarks.

Thank you David.

In closing, we believe ambac is well positioned to scale a sustainable diversified specialty P&C program insurance platform, while we continue to progress the active run off of our legacy financial Guaranty businesses.

Our key value drivers include one material capital at the holding company, which remains unlevered.

Two our differentiated P&C platform encompassing capital light fee based growth oriented businesses that can leverage ambac business services infrastructure and our substantial Nols.

And lastly, the resolution of near to mid term catalysts with a goal of further stabilizing our legacy financial guaranty business, and providing us with greater optionality and clarity surrounding capital movement through a holding company.

I am excited about the progress we have made and the future ahead as we look to further expand and grow our platform.

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