Q4 2021 Ambac Financial Group Inc Earnings Call
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.
Good morning, and thank you all for joining today's conference call to discuss Ambac financial group's fourth quarter 2021 financial results, 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 finding.
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.
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 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 a result of new information future events or otherwise.
Today's presentation contains non-GAAP financial measures.
Conciliations 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 Dot Com. Please note that 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.
For the year ending December 31, 2021, Ambac reported a net loss of $17 million or <unk> 61 per diluted share.
And adjusted earnings of $43 million or <unk> 66 per diluted share.
For the fourth quarter Ambac reported a net loss of $22 million or <unk> 42 per diluted share and adjusted loss of $10 million or <unk> <unk> per diluted share.
David will discuss our results in more detail shortly.
2021 was a transitional year for Ambac.
Against the backdrop of the rapidly growing programs market in the U S and healthy rate increases across the P&C industry in most classes of business, we launched and materially advanced our specialty P&C insurance platform at AFG.
When we introduced this new business strategy to you last year, we classify each component and just separate pillars.
Each pillar has since evolved into three distinct operating units under the following names.
Pillar, one our participatory fronting insurance platform is branded under ever spend rate.
Pillar two.
Our product development and distribution partner Division will operate under Cerrado group.
Pillar three or.
Our strategic investment units will fall under Red growth capital group.
Ever spend group has launched in the first quarter of 2021 with an a minus rating and class eight designation from a M best.
At launch the platform consisted of ever spend indemnity insurance, our surplus lines insurer and ever spent insurance company or <unk>.
Sure.
They were spent group expanded its platform during the latter half of 2021 with the purchase of Providence, Washington Insurance Company.
And in early 2022 acquired three additional admitted carrier shelves.
With these acquisitions ever spend group has multiple active certificates of authority in all 50 states and is well positioned as a differentiated platform with greater Optionality for its program partners.
Since its launch ever spent has seen a robust program pipeline across various classes of business from multiple distribution sources.
Date ever spend assigned nine program partners and has a strong pipeline going into 2022.
Our response differentiated business plan provides for up to 30% retention of underwriting risk distinguishing ever spend from its competitors and creating significant alignment of interest with ever spans reinsurance partners.
The company's leadership team consists of industry veterans and underwriting.
Programs and claims administration, as well as regulatory and compliance.
We believe the platform is positioned well for strong growth in 2022.
Turning to our product development and distribution partner Division Cerrado group.
Change our first MCU partner was on boarded at the beginning of 2021.
Exchange successfully expanded its distribution network.
Diversified its business model and had a strong finish to the year.
Exchange distributed $7 4 million in 2021, 80% of which was paid to ambac.
We are actively pursuing new M&A and de novo opportunities to grow Surat as partner platform supported by centralized business service offering <unk>.
Including core P&C technology solutions that we believe will enhance our distribution partners competitive positions.
The last pillar of our strategy Redrow capital group was established as our strategic investment Division.
To make investments that we believe will further enhance the value of ever span and sirona.
We made three investments in 2021, including investments in companies involved in data analytics and insurance technology.
All with attractive target returns on capital.
Overall, we are very pleased with the progress we made in 2021, and we believe we are well positioned to expand and grow our specialty P&C insurance platform in 2022.
Turning now to an update on our legacy financial Guaranty business and our accomplishments for the year.
We continue to reduce risk and insurance portfolio through active derisking and natural portfolio run off net.
<unk> net par exposure was 28 billion at December 31 down approximately $6 billion or 17%.
From December 31 2020.
Amdocs watch lists and adversely classified credits were reduced to 10 billion at December 31 down approximately $3 billion or 23% from the prior year end.
Proactive derisking efforts accounted for decreases of approximately $3 billion in net par exposure and $2 billion and watch list and adversely classified credits during 2021.
As it relates to our largest at risk exposure, Puerto Rico Ambac continues to make substantial progress.
Significant milestones were recently reached in January with a bankruptcy court approval of a plan of reorganization related to our Geo and PBA exposures and qualifying modifications for our PREPA and <unk> exposures.
Ambac and other relevant parties have been working on finalizing necessary documentation that we anticipate will lead to effective dates for those reorganizations in mid March.
Ambac insured bondholder elections have been received and tabulated, which once effective will significantly reduce our insured geo PBA crisper and CBA liabilities through Commutations and acceleration of options consistent with a court approved plan and qualifying modifications.
Once these plans are effective ambac will reduce its insured principal and interest exposure to Puerto Rico by approximately $450 million.
And when combined with the 2019 casino restructuring will reflect the elimination of approximately 85% of our total Puerto Rico exposure.
Later this year Ambac expects that HCA will complete its title III bankruptcy process.
Terms consistent with the planned support agreement that.
That we joined in the summer of 2021.
We anticipate that a plan of adjustment for HCA should be available for consideration in the coming weeks.
The range of uncertainty around our Puerto Rico exposure continues to reduce and loss reserve levels have been reduced commensurately in line with current proceedings.
Ultimate loss experience on Puerto Rico remains dependent on the conclusion of the bankruptcy process.
And the realized market value of plant consideration.
Additionally, the economic performance of Puerto Rico over the long term will impact final ambac losses for those exposures not otherwise settled through commutation and acceleration.
Turning now to our loss recovery efforts in regards to your bank of America Countrywide litigation presided over by Justice read all parties have agreed to an in person trial date of September seven 2022.
We're pleased to have established a trial date and look forward to resolving our claims as favorably as expeditiously as possible.
We're also making material progress on our fraud only case against countrywide, where we expect to conclude the summary judgment phase of the case in the coming months and proceed to trial next year.
Similarly, we are working to get through the summary judgment phases for our cases against first Franklin and Nomura and hope to get to trial on one or both of those cases next year.
Turning to our efforts to rationalize our capital and liability structure.
During 2021, we executed two key transactions, leading to material benefits across our capital and liability structures.
This included the junior surplus note exchange transaction, resulting in the extinguishment of $76 million of debt and accrued interest.
Second the issuance of new senior secured notes by AAC through a newly formed E proceeds of which along with other sources of liquidity were used to fully redeem the outstanding Ambac <unk> notes.
The benefit of this refinancing our lower net interest carry costs.
And an extended debt maturity date to 2026.
We believe the extended maturity period will provide increased financial flexibility during dependency of our RBS litigations.
We are pleased with the market receptivity that allowed us to execute on these transactions and continue to evaluate additional means to further simplify and streamline our capital and liability structure.
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 fourth quarter of 2021, Ambac reported a net loss of $22 million.
42 per diluted share.
The net income of $17 million or <unk> 35 per diluted share in the third quarter of 2021.
The adjusted loss for the fourth quarter was $10 million or <unk> 16 per diluted share compared to adjusted earnings of $25 million or <unk> 53 per diluted share in the third quarter the.
The difference between the adjusted loss and GAAP net loss relates mostly to the exclusion of $11 million of insurance intangible amortization from adjusted income.
The net loss for the fourth quarter compared to the third quarter was primarily driven by a lower loss and loss expense benefit.
Brief highlights include premiums earned of $11 million in both the fourth and third quarters.
Financial Guaranty earned premiums continue to trend downward as a result of our active de risking efforts and continued organic run off of the insured portfolio.
Ever spans contribution to net earned premium although modest was nearly three times what it was in <unk> 'twenty one off of gross written premiums that were up one six times from the third quarter.
<unk> continues to add programs and as each program grows as earned premium will contribute more materially.
This is in addition to program fee growth, which is which has a similar earnings pattern to premiums.
As Claude referenced ever spend added four programs in the fourth quarter and 7% for the full year 2021. In addition ever spent has already added two programs in 2022.
Investment income for the fourth quarter was $27 million up from $21 million in the third quarter the.
The increase in investment income during the fourth quarter was from pooled funds, which generated $13 million of gains compared to $6 million of gains in the third quarter.
Ore gains were recognized in equity real estate and private credit, partially offset by lower but still attractive returns on hedge funds.
The total return on pooled funds was approximately 2% in the fourth quarter versus 1% in the third quarter.
Yield on the available for sale portfolio was relatively unchanged.
Other income for the fourth quarter was relatively unchanged compared to the third quarter at $8 million.
Other income included growth commissions from exchange of $6 million program fronting fees earned at ever spend as well as other fees.
<unk> gained momentum in the fourth quarter was $26 million in gross written premiums, 17% higher than in the fourth quarter of 2020.
Loss and loss expenses were a benefit of $15 million in the fourth quarter compared to a benefit of $55 million in the third quarter.
Public finance experienced $41 million of positive development in the fourth quarter, driven by lower reserves related to Puerto Rico, and enhanced recovery profile related to the further restructuring of our longstanding adversely classified credit.
The reduction to Puerto Rico reserves reserve resulted from further clarity unexpected outcomes related to the Commonwealth plan of adjustment and the PREPA and Ccta qualifying modifications.
While further adverse development in our Puerto Rico reserves may occur due to outcomes that are less favorable than currently expected. We may also incur additional favorable development in our Puerto Rico reserves in future quarters.
Future development of our Puerto Rico loss reserve will be influenced by many factors, including the consummation of the Commonwealth Poa.
And qualifying modifications the confirmation and consummation of in HCA plan, our ability to execute risk mitigation opportunities.
<unk> the value and liquidity of new bond in CVI subrogation as well as a number of other factors.
The structured finance portfolio generated a loss and loss expense of $24 million compared to a benefit of $21 million in the third quarter as a result of incremental litigation costs and a lower estimated subrogation recoverable related to a single RMB as transaction.
Net gains on derivative contracts, which are positioned as a partial economic hedge against interest rate exposure and the financial guarantee and investment portfolios was $3 million for the fourth quarter compared to gains of $5 million for the third quarter.
Counterparty credit adjustment losses on uncollateralized derivative assets offset gains from higher rates by $2 million in the quarter, while supplementing gains by $2 million in the third quarter.
Operating expenses were $33 million up from $32 million in third quarter.
The increase in operating expenses for the fourth quarter was primarily due to higher performance based compensation, including as a result of higher head count related to our new businesses, partially offset by lower strategic advisor fees.
Exchange benefit risk Bank group collectively accounted for approximately 26% and 22% of fourth and third quarter consolidated operating expenses respectively.
On to the balance sheet shareholders.
Equity decreased 49 per share to $22 42 per share or $1 billion.
December 31 2021.
The decrease was due to a net loss of $22 million and a reduction to net unrealized gains on investments of $10 million.
Partially offset by $9 million of impact related to stock compensation foreign exchange and changes in the redemption value exchange as Noncontrolling interest.
Adjusted book value decreased to $874 million or <unk> 88 per share at December 31, 2021 from $882 million or $19 five per share at September 32021.
The <unk> 17 per share decrease was primarily due to the adjusted loss net of premiums earned partially offset by the impact of inflation adjustments on certain future installment premiums and adjustment to the carrying value of the redeemable noncontrolling interest in exchange.
At December 31, 2021, AFG on a stand alone basis, excluding investments in subsidiaries of a spin exchange and AAC had cash investments and net receivables of approximately $269 million or $5 81 per share.
<unk> approximately $142 million of liquid assets.
I will now turn the call back to Claude for some brief closing remarks.
In conclusion.
Our accomplishments position ambac, well for the coming year and the board and management team are steadfastly focused on maximizing shareholder value through the execution of key strategies for both the specialty P&C insurance platform.
And the legacy financial Guaranty business.
As we look to execute on our strategic priorities. We have further expanded the board's diverse skill set with the addition last August of Lisa Iglesias to our board of directors.
Lisa brings with her a wealth of insurance and other business expertise that will be beneficial to us as we expand our specialty P&C insurance business.
As we look ahead for 2022.
Our strategic priorities for the specialty P&C insurance business include one.
Growing and diversifying ever spend groups participatory fronting platform with existing and new program partners.
Two building Cerrado group into a leading federation of specialty MGA and MCU insurance partners through additional acquisitions and de Novo builds supported by a centralized business services unit with core technology solutions.
Three.
Making opportunistic investments through retro capital group that are strategic to the overall specialty P&C insurance platform.
Our priorities for the legacy financial Guaranty insurance companies include one actively managing derisking and mitigating insured portfolio risks.
To pursuing loss recovery through active litigation and other means.
Currently our MBS Rep and warranty litigation.
Three improving operating efficiency and optimizing our asset and liability profile.
And for exploring at the appropriate time strategic options to further maximize value for AFG.
We remain excited about the opportunities that lie ahead for Ambac and I look forward to updating you on our progress.
Operator, please open the call for questions.
Thank you at this time I will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in your question Ken.
You May press star two if you'd like to remove your question from Mccain.
For participants using speaker equipment, it may be necessary to pick up your handset before question Mr. Keith One moment please.
Questions.
Thank you.
Our first question comes from the line of Greg <unk> with Laguardia Capital. Please proceed with your question.
Good morning, Clos, David Lisa. Thank you so much for those informative remarks, and congratulations on all the progress you've made on the specialty platform and on Puerto Rico.
Just had a couple of questions for you. This morning. The first one was with regard to countrywide.
And in the event that we were to reach a settlement is that something that would typically happen only on the EBIT trial or could could we see something like that happened months ahead of a trial date and the second question is with regard to our warrants I know that there is fairly steadily traded but does the company ever consider repurchasing and retiring the warrants. Thank you.
Okay.
Thanks, Gregg Thanks for your questions and good morning, I'll take the first question and pass the second to Mr. Correct.
As it relates to settlements, we typically don't comment on.
On settlement discussions.
As a matter of our policies, but I think in the past we've seen litigation settlement at various times.
But certainly there has been our track record of them settling.
At or near trial dates.
That's probably as much as I can say about that.
We are certainly looking forward to our trial date September end.
That's as much as we can comment this morning.
Okay. Thanks.
Sure. Thank you.
Yes, we have looked at repurchasing the warrants a few years ago actually we did.
We purchased a number of the warrants and then reissued them in connection with a.
A recapitalization transaction that we did back in 2018, if I recall correctly.
So we continue to monitor opportunities there.
The opportunity to repurchase those against some of the other.
Opportunities, we have to redeploying capital and to date since the initial repurchase we made in re issuance in 2018, we have not.
<unk> made a additional repurchases of the warrants, but its something we continue to monitor again versus other opportunities we have to deploy capital.
Thank you so much.
Yeah.
Thank you as a reminder, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Charles Post with Stephens. Please proceed with your question.
Hey, good morning.
I'm trying to get a better sense for.
Tours were achieving.
Ever spend in exchange.
We've got roughly $200 million tied up with the two entities.
They are growing but I'm trying to get a better idea of the returns we're getting on that money.
Yes.
Sure Charles It's David I think it's not only about the returns that we're getting today, but what our expectations are for the future so ever spend as you.
Probably no only got off the ground with its ratings and fair.
<unk> of last year, so it's still.
Very much in startup mode, but we are starting to experience as clubs comments and my comments.
<unk> indicated starting to experience.
Real growth and market acceptance of the platform.
And so for a platform like that our expectations of the mid teen type returns that would be available to capital deployed there.
And I would say for exchange.
We bought exchange at the end of 2020.
I think during 2021, it's fair to say that.
Covid continue to have a little bit of a overhang onto the growth.
The platform, but as my remarks indicated in the fourth quarter. They had really substantial growth in business volume in the fourth quarter and four for that business. Similarly, we expect to see over the medium term mid teen type returns.
And it is today profitable and generating cash back to the holding company.
Which in 2021 was about $6 million.
Justin.
Distributions.
<unk> 2021 , which we expect to grow in.
<unk> 2021, as well the first quarter.
22 distribution to AFG from exchange is about $1 6 million. So it's nice cash generating business.
And its growth as demonstrated in the fourth quarter is expected to continue to improve as the overhang of Covid continues to lift.
Okay. So, but then we've had a massive jump up in your guys' overhead the operating expenses went from $92 million in 2020 $226 million and 37% year over year.
Zach.
They can increase I know, we have a lot of it can take quite a bit of money, but it's a lot of that increase also from these two entities.
Yes.
Then comment a bigger percentage of our total expenses are related to <unk>.
Span in exchange and in particular, when you look at something like exchange, which is a <unk>.
Included in those expenses are the commissions that they pay to their agents that are on the front end of their business from a distribution standpoint. So if you have three different businesses included in operating expenses.
Which have very.
Different types.
Types of expenses distribution expenses commissions.
Ceding commissions, so it gets a bit.
It's a bit complex, but the growth in expenses is due to picking up a volume and the addition of these new businesses while at the same time the expenses related to our legacy business financial guarantee business continued to decline.
Okay.
Some topics.
On the <unk> search for them.
Excluding the recoveries you got to you guys are showing about $850 million of expected payments to be made how much mi.
Payments did you make in dollar amount in 2021.
On the structured finance business.
Correct.
The main source of claim payments on the structured finance business.
Our MBS book, which have been relatively light, we actually have been in.
Net recovery position.
On the structured finance book.
Paying now.
Nominally on the structured finance.
Five six.
$6 million.
Quarter on <unk>.
Lanes that were recovering.
<unk> to $25 million, a quarter is where our net.
The recovery position is $15 million to $20 million a quarter on the structured finance book, Okay. So if I look at page 53 of the 10-K, we have about $2 billion in recoveries.
$850 million of expected.
Yes.
One seven of the recoveries are in W. So, we've got 300 million of excess.
Excess spread against $850 million so.
If we only have about gaining the payments then.
Am I wrong to think that $850 million could prove to be very high.
800.
$50 million of gross payments on the RMB.
So in your structured finance.
Yes.
That's probably a little high you also have.
Student loan claims in there as well so specific to the RMB at book.
It is high but we have significant future stood alone claimants claim payments to come in the future, which.
Oh very sort of back ended and we wouldn't expect to see claims on the student loan book until.
At least five years from now.
Okay.
Alright, guys.
Clearly you've been over five years now and we've seen it looks like you dropped 41% and our stock is down 46%.
S&P is up 90, <unk> up 48% excluding dividends.
It's up 27%.
I could see us doing some stuff that's a little more shareholder friendly because the G&A is getting up there.
We're getting paid users getting paid year on year, but three is getting paid so I'd like to see a little more.
And with the shareholders. Please.
Thank you.
Thank you. Our next question comes from the line of Arthur <unk> with Macquarie. Please proceed with your question.
Hi, Thank you for taking my question.
Three questions first is.
First Franklin in EMEA litigation.
Is that broad only.
That also include.
<unk>.
Her contract.
My second question is Harborview lumen transactions that are part of the country like you mentioned that the trials.
That might be.
And Mike might be starting in a year from now.
Hi.
<unk> brought on me.
Hum.
Why is there no reps and warranty breaches as part of that.
Pocket.
And lastly, with the Countrywide litigation the trial date is set for September seven.
What's the expected.
The next step assuming there is a.
The favorable outcome in the.
In trial.
When we get the favorable ruling what would be the next steps in the process from a timing and.
Practice standpoint.
You get the final resolution two.
Actually received the payment.
Is there some issue with the primary liability versus that contingent liability.
There needs to be another trial for the contingent liability can you just walk me through the the next steps.
Assuming that you'll have a good outcome in the September .
<unk> two trial.
Yes.
Sure.
Thanks for your questions.
So I just had a little bit of a hard time hearing you.
On the first question was specific to first Franklin is that correct.
That's correct yes.
Yes, yes.
That is a broad and contract case.
That's proceeding.
So it contains.
James.
At this time.
And as it relates to the hardware Bucase that is a fraud on the case.
And that is also pursuing.
We believe that we will get to trial next year.
Barring any appeals are things that could potentially delay it.
Hope and expect that that will be.
In front of our judge next.
Next year in a fragile.
And.
In the case of the deck.
Main countrywide case.
That is setup.
Super.
Our trial to start in September .
The way again I don't think there is a.
One right way and I think.
Judges take varying lengths of time too.
Review.
Cases right decision so.
In the case of the MBIA case it was.
Six to 12 months, maybe closer to 12 months before a decision was reached on that.
That may be a little bit on the long side of things.
I think but I think.
It will take a number of months, we would expect for decisions to be reached.
But hopefully likely.
Certainly with inside a year would be our expectation, but we really can't.
How long it would take.
And for the question that was raised earlier.
It could settle earlier, obviously to the extent that there was a settlement before trial or even after the trial.
That would be a possibility that we would settle in and get cash sooner.
Once a decision is reached by the judge then thats when the.
The damages awards would be determined.
But there could be further delays potentially in that event.
From further appeals by either side.
But that's.
To be determined and I think it will be evaluated in the context of.
The trial, how it progressed.
What the ultimate outcome.
Yes.
Yes.
You will have follow up questions.
The bifurcation of the primary liability claims against countrywide.
From the contingent secondary liability claims against Bank of America is the September trial.
I mean, the primary liability claims against countrywide and not the <unk>.
The contingent secondary library, and the bank of America or is it both together.
Topics have been discussed as I understand that there is yes. You are correct you are correct, yes, they were bifurcated.
This is directly against countrywide and.
The successor liability would only proceed if needed.
Thank.
Bank of Americas supported countrywide evolve settlements for well over a decade now so.
To the extent that they are.
I would try to avoid.
Okay.
Liability that we would proceed to the successor liability case as a separate case, which would be a much.
<unk> case that was all.
So you are.
Satisfy the judgment, but again.
Countrywide has paid out billions over the last decade.
<unk>.
Without regard to any successful.
Case.
Mhm.
So you would need to pursue a separate case to get paid.
Bofa decide no.
Only a countrywide did not pay so its countrywide did not satisfy the judgment.
Then we would.
Pursue the successor liability against Bank of America directly.
Understood.
And one follow up one follow up question on the gross Franklin on immunology.
Rod only.
What gives you the confidence.
<unk>.
<unk> only.
Keith has legs.
Then the.
December 2020 decision.
Going against.
The AC <unk> claim in the.
Countrywide.
How is this different.
Frankly horrifying planned Nomura.
Slide standpoint than the countrywide one.
So the first Franklin case is fraud and contract.
And.
It's possible, we don't agree but it's possible.
That decision could be reached.
To limit our case to contract only.
Or fraud, only that that's a possibility in the case of the.
And contract has always been our primary path.
Primary cases, so that debt.
Remains true today also with their main countrywide case.
In the case of Harbor view that is not a contract case, but that is only fraud and therefore theres no.
There is no basis for that case not to go through.
As a as a fraud only case.
And that one is yes.
No.
Preparing for for.
Oral arguments and summary judgment.
Assuming we get through that in <unk>, we expect that that will go to trial as a fraud only case next year.
Yes.
Okay. Thank.
Thank you.
Yeah.
Thank you, ladies and gentlemen that concludes our question and answer session and thus concludes our call today. We thank you for your participation you may now disconnect your lines.
Okay.