Q1 2022 Ambac Financial Group Inc Earnings Call
Please go ahead Sir.
Thank you.
Good morning, and thank you all for joining today's conference call to discuss Ambac financial group's first quarter 2022 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 outlooks market conditions credit spreads financial ratings loss reserves loss mitigation loss recoveries investment returns or other item.
<unk> that may affect our future results. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstance.
Any forward looking statements are not guarantees of future performance or events.
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 conditions and results of operation and under risk factors and.
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 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 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 Club the block.
Thank you Chuck and welcome to everyone joining today's call.
For the quarter ending March 31, 2020 to Ambac reported net profit of $2 million or <unk> <unk> per diluted share.
And adjusted earnings of $14 million or <unk> 30 per diluted share.
In addition, this quarter, we announced a share buyback program, which began in April and to date, we have repurchased over one 5 million shares for just over $13 million or an average price of $8 78 per share.
Yesterday, we announced the addition of $15 million to our share repurchase program, bringing the total unused authorized amount to $21 8 million.
David will discuss our results in more detail shortly.
As previously shared with investors 2021 was a transition year for Ambac as we launched our specialty P&C insurance business and progressed, our strategy to become a growth oriented company.
Our results for the first quarter of 2022 for specialty P&C insurance platform are a clear reflection of our early successes, which are very encouraging.
We experienced growth across both our specialty P&C participatory fronting and insurance distribution businesses.
Total specialty P&C insurance production of nearly $70 million, representing a 71% increase from the first quarter of last year.
This growth is being driven by the scaling and expansion of our new businesses further supported by the favorable market conditions and they are progressing secular shifts in the insurance market.
As it relates to market conditions, we have continued to see rate increases at moderating pace in.
In most lines of business.
A dynamic which supports the continued growth of the rapidly evolving program and fronting markets in the U S.
The MGA market is estimated to be generating between 60, and 65 billion of premium annually, having doubled over the last decade.
Fueling the growth of the fronting market, which grew by nearly 53% year over year and 2021.
This is a trend we anticipate will continue in the coming years subject to market conditions.
For the first time this quarter. In addition to our traditional consolidated reporting we are now providing segment reporting on our two growing operating businesses.
Ever spend group.
Which we will report in our specialty P&C insurance segment.
<unk> group, which we will report in our insurance distribution segment.
Our specialty P&C insurance business ever span group was launched in the second quarter of 2021.
And our strategy from the beginning was to differentiate our business model from other fronting businesses.
A key component of this differentiation is our ability and willingness to retain up to 30% of underwriting risk.
Create significant alignment of interest with ever spans reinsurance partners.
This distinction further expands our ability to differentiate ever spin as a leading solutions and service market for our valued program administrators.
In the first quarter of 2022. This strategy has been successful in generating $24 million in gross premium written across the 10 programs launched over the last year, including three this quarter.
Representing a run rate of approximately $100 million, which we expect to grow in consecutive quarters with a strong pipeline of prospective programs going into the second quarter.
Our leadership team at ever span is represented by industry executives with proven track records in all key aspects of our business model underwriting actuarial and claims.
Turning to our distribution business.
Our insurance distribution segment led by exchange, our first <unk> partner is profitable and growing having placed over $45 million of premium for the first quarter of 2022 and.
An increase of nearly 13% over the prior year.
Which represents a record quarter for the company.
Going forward, we expect the company will continue to successfully expand its business and distribution network, both organically as well as through select strategic transactions.
Recently, we announced that exchange entered into a renewal rights transaction for a $13 million portfolio of employer stop loss or ESL business. The.
The transaction was self funded is expected to be immediately accretive to earnings and is anticipated to expand exchanges ESL premiums by over 15%.
As importantly, we believe this transaction will open up new distribution relationships nationally and exchange's core ESL business.
Overall, we are very pleased with the progress each of our P&C insurance businesses has shown this quarter and we believe we are well positioned for continued growth both organically and through strategic transactions in 2022.
Turning now to our legacy financial Guaranty business.
During the quarter, we had two significant developments at AAC.
As previously announced the plan of adjustment in Puerto Rico, which related to our <unk> and PBA exposures was finalized on March 15th.
This facilitated a reduction to our Puerto Rico insured principal and interest exposure by $450 million and since the end of the quarter. We have further reduced our Puerto Rico exposure by $716 million.
Eliminating all of our remaining PREPA and CCD exposures.
As a result as of today, our only remaining insured Puerto Rico exposure is to HCA and our residual exposure to casinos.
These transactions collectively represent a 49% reduction in our remaining Puerto Rico exposure, which led to amdocs recognized gain of $198 million in the quarter.
As it relates to our remaining <unk> exposure in Puerto Rico.
The HG plan of adjustment was filed on May 2nd and we expect that it will be confirmed and become effective before the end of the year.
However, until the title III process is concluded for HCA, some uncertainty still exists around the final outcome.
Looking at the balance of our portfolios, we continue to reduce risk in the insured portfolio through active you're risking and natural portfolio runoff.
Net par exposure was 27 billion at March 31 down nearly $1 billion or 4% from December 31 2021.
Ambac watch list than ever see classified credits were reduced to $9 6 billion at March 31 down approximately <unk> 6 billion or 6% from the prior year and <unk>.
Overall Ambac has moved a material amount of uncertainty from its legacy insured portfolios over the last couple of quarters absent new material developments and the insured portfolios. We would anticipate this to result in lower future loss volatility.
The other significant development at AAC during the quarter related to a New York Court of Appeals ruling in an unrelated RMB is litigation known as heat.
While this decision did not involve any of our RMB S cases, the decision in the court of appeals limits damage recoveries for one of our various paths to recovery in certain of our RMB S cases.
As a result of this change in law AAC reduced its rep and warranty subrogation recoverable by $186 million.
Changes in discount rates and underlying insured RBS transaction performance contributed an additional $38 million to the overall reduction of the recoverable.
As it relates to our RBS loss recovery efforts, we are actively pursuing all claims in our rep and warranty litigations.
And in our main case against Bank of America Countrywide, we are preparing for trial and look forward to resolving our claims as favorably and as expeditiously as possible.
As more fully described in letters filed with the court on March 24th and March 28 by our outside counsel.
Ambac has multiple paths in that case to recover our claim payments. In addition to significant pre judgment interest, which began accruing more than 10 years ago.
Furthermore, we believe that he does not impact our two primary path to recovery.
<unk> discovery.
And two reimbursement neither of which was addressed by heat.
At trial Ambac intends to prove the following first.
In light of the recent heat decision through multiple paths, we intend to prove that countrywide discovered the breaches without the need for notice we have been preparing the discovery case against countrywide for years and have always planned to prove discovery along with our noticed breach approach at trial.
Amex discover case is also unique in the <unk> space given that countrywide originated approximately 85% of the loans and the transactions at issue in the case means.
Meaning that countrywide employees reviewed every application for every loan that countrywide originated.
<unk> role as originator with most of the loans at issue in the litigation makes our case markedly different from other outstanding RBS litigations.
Countrywide also discovered breaches through its role as sponsor of each securitization transaction and a servicer of the loans.
As such countrywide discovered breaches of reps and warranties without the need for any notice.
Second Ambac has a separate reimbursement claim under its insurance and indemnity agreements with countrywide.
As an insurer Ambac has an extra form of protection through contractual rights and remedies provided in these agreements.
An appellate court has already held that the sole remedy repurchase protocol.
What was that issue in heat does not apply in our reimbursement claim.
There are MBS plaintiffs like trustees do not have this kind of alternative path to recovery.
Third we intend to prove the countrywide prevented ambac from providing additional notices by failing to timely provide ambac with loan files and other materials in its possession.
We also intend to approve the futility of providing further notices.
Countrywide refused to repurchase all but a small number of effective loans that ambac noticed even those that its own internal fraud and quality control divisions acknowledged to be effective.
With respect to other cases, we're making progress on our fraud only case against countrywide and our cases against first Franklin and Nomura, which we hope to progress the trial as early as next year.
To Dimensionalize organically.
As we look across all cases against RMB as sponsors and countrywide, we're seeking damages of well over $2 billion and then there are other cases first Franklin our fraud, only case against countrywide and Nomura, we're seeking aggregate damages of more than $1 billion.
We have confidence in our claims and intend to vigorously pursue them to fair and final resolution.
As a reminder, the recoverable on our balance sheet for our breach of contract cases does not include prejudgment interest or any recovery from our fraud only claims both of which could be material.
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.
Before I discuss our first quarter results I'd like to emphasize two changes we made to the presentation of our financial results this quarter.
First our results are being presented on a year over year basis, rather than on a sequential basis, our former presentation method.
Secondly, we have begun disclosing our results through three segments legacy financial Guaranty insurance specialty property and casualty insurance and insurance distribution.
Both of these changes are a result of the continued growth and expansion of our new businesses relative to the continued runoff of the legacy financial Guaranty business.
For the first quarter of 2020 to Ambac and reported net income of 2 million or <unk> <unk> per diluted share compared to net income of $17 million or <unk> <unk> per diluted share in the first quarter of 2021.
Adjusted earnings for the first quarter were $14 million or <unk> 30 per diluted share compared to adjusted earnings of 41 million or <unk> 59 per diluted share in the first quarter of 2021.
Difference between adjusted earnings and GAAP net income for the first quarter of 2022 related mostly to the exclusion of $14 million of insurance intangible amortization from adjusted income.
The reduction in net income for the first quarter of 2022 as compared to the first quarter 2021.
It's primarily caused by the $33 million gain on the extinguishment of debt in the first quarter of 2021 related to the junior surplus note exchange transactions.
Other notable variances relative to the prior period include higher loss and loss expenses.
And lower investment income.
Offsetting by higher gains from interest rate derivatives and higher VII gains.
As part of our new segment disclosure and as Claude referenced we are now reporting several new metrics, including P&C insurance production.
P&C insurance production is a combination of both gross premiums written at ever span and premiums placed through our insurance distribution segment.
P&C production as a proxy for the basis upon which program fees earned premium and gross commission income will be generated.
Gross premium written at ever spend was $24 million in the first quarter compared to a de minimis amount in the first quarter of 2021.
And up over three times from the $7 million written in the fourth quarter of 2021.
Premiums placed in addition in the distribution business totaled $45 million and the <unk>.
First quarter compared to $40 million in the first quarter of 2021, and an increase of 12%.
Taken together P&C insurance production was $69 million in the first quarter up 71% over the first quarter of 2021 and over.
Two times the production of last quarter.
First quarter is seasonally the largest quarter of the year for the insurance distribution business.
Premiums earned were $15 million in the first quarter compared to $14 million and the <unk>.
First quarter of 2021.
Financial guarantee earned premiums continued to trend downward as a result of our active de risking efforts and our organic run off of the insured portfolio.
<unk> contribution to net earned premium although modest was just over $1 million for the quarter as compared to nil for the prior period and over double the prior quarter.
In addition, we would highlight that of the $24 million of gross written premiums in the quarter, a wristband retained $5 million of net written premium which will earn in over the next year.
Ever spend also collected $1 million of program fees, approximately a quarter of which were earned in the first quarter and the remainder of which will also earn in over the over the remainder of the year.
<unk> continues to add programs and as each program grows gross written premium we would expect to see both earned premium and programming fees grow exponentially.
Our distribution segment also continues to grow as previously noted $45 million of premiums are placed in the quarter, a 12% increase from the $40 million placed last year.
Insurance distribution business revenue comes from commissions earned based off the amount of premium at places and for the first quarter gross commissions were $9 million up 19% from $7 million in the prior year period.
The insurance distribution segment produced $2 7 million of EBITDA for the first quarter up almost 13% over the first quarter 2021.
Investment income for the first quarter was $5 million down from $49 million from the first quarter of 2021.
The decrease in investment income during the first quarter was it related to three items.
Hold the fund investments generated a net gain of about $1 million in the quarter compared to $28 million in the first quarter of 2021 given.
Given market conditions, we believe our pooled funds performed well in the quarter.
This compares to extra ordinary pooled fund performance in the first quarter of 2021 at approximately four 6% or 20, 20% annualized rate.
Secondly, we incurred a $9 million loss on Puerto Rico plant consideration classified as trading.
Which represented a small component of our large overall gain from the Puerto Rico restructuring in the quarter.
Thirdly, we lost $7 million of income as a result of the refinancing of Ambac Allison I noticed.
A large portion of which we owned in the investment portfolio.
However, interest expense was also down by a similar an offsetting amount year over year.
During the first quarter. We also recorded realized gains of $9 million from a class action litigation recovery related to oil and gas bonds, we formerly owned and the legacy financial Guaranty segment investment portfolios.
Loss and loss expenses were $24 million in the first quarter.
Compared to $8 million in the first quarter of 2021.
Public finance experience of $190 million of positive development in the first quarter compared to a $9 million loss in the prior year, all of which was driven by Puerto Rico.
Future development of our Puerto Rico loss reserves, which now solely related to our HTS exposure will be influenced by many factors, including the confirmation and confirmation of the HVA plan our.
Our ability to execute risk mitigation opportunities timing the value and liquidity of new bonds CVI obligation related to HCA.
As well as a number of other factors.
While future development in our Puerto Rico reserves may occur, we do not currently anticipate such development to be significantly material.
The structured finance portfolio generated a loss and loss expense of $213 million this quarter compared to a benefit of $8 million in the first quarter of last year.
This change resulted primarily from a $224 million reduction for a rapid warranty credit.
$86 million of which was a direct result of the previously mentioned New York, New York Court of Appeals decision.
In addition, there was a $27 million reduction related to an increase in discount rates.
And $11 million related to a reduction in underlying transaction losses.
Net gains on derivative contracts, which are positioned as a partial economic hedge against interest rate exposure and the financial guarantee investment portfolio.
With $57 million for the first quarter compared to gains of $25 million for the first quarter 2021.
The interest rate derivative portfolio is designed to benefit from rising rates as a partial economic hedge.
Against rate exposure, and Ambac financial Guaranty insured and investment portfolios.
Operating expenses were $34 million up from $33 million in the first quarter.
The slight increase in operating expenses for the first quarter was due to higher defense of legal expenses in the legacy financial Guaranty segment.
Higher head count and other expenses associated with building and growing our new businesses.
And growth related sub producer commissions and the insurance distribution segment.
Partially offset by lower corporate consulting and advisory fees and advisory fees.
Turning to the balance sheet shareholders equity decreased $2 77.
Our share to $19 65 per share.
<unk> 9 billion at March 31, 2022 from.
From year end 2021.
The decrease was due to net unrealized losses on investments of $105 million and $23 million of foreign currency translation losses.
Adjusted book value decreased to $841 million or $18 seven per share at March 31, 2022.
$874 million or $18 88 per share at December 31, 2021.
Is <unk> 81 per share decrease is primarily due to foreign currency translation losses, and the impact of higher risk free rates used to discount economic future installment premiums.
At March 31 2022.
AFG on a stand alone basis, excluding investments in subsidiaries at cash investments and net receivables of approximately $243 million or $5 22 per share, including approximately $118 million liquid assets.
I will now turn the call back to Claude for some brief closing remarks.
In conclusion, we are excited by the material progress and growth we've seen in our specialty P&C insurance platform as a fronting and MG markets continued to show strong growth and profitability.
We continue to see attractive opportunities to deploy capital in our insurance distribution business in order to grow organically and through strategic transactions. We also see meaningful opportunities to capture growth and expense synergies across our growing businesses through our dedicated business services unit supporting the existing and future technology.
Distribution and infrastructure needs of our distribution partners.
We will also continue our focus derisking and loss recovery efforts in key areas of our legacy financial guarantee companies and at the appropriate time, we will explore strategic options for this business with the goal of maximizing value for our shareholders.
As we continue the transition and expansion of our P&C platform. We believe the company's value will be increasingly driven by the individual segments and therefore aligned with our strategic focus on the specialty P&C insurance and distribution businesses.
These new businesses are characterized by capital light models.
EBITDA managed and growth focused occur.
Accordingly, we believe the framework for evaluating our new businesses.
And for Ambac as a whole will need to include such new metrics separate and distinct from our legacy financial Guaranty business, which today is capital intensive and event driven.
We further believe the assessment of value for each underlying segment. In addition to our holding company capital better reflects the value of our enterprise. We look forward to continuing to update you on our progress in the coming quarters.
<unk>. Please open the call for questions.
Thank you.
And gentlemen, we are now conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad.
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Participants using speaker equipment.
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One moment please projects one for questions.
As a reminder.
The question limit to one question and one follow up.
We have our first question from the line of David Belt Park with Wells Fargo Advisors. Please go ahead.
Yes, good morning.
I have a question regarding the warrants that expire April 32023, and has there been any talk or discussion as far as extending.
The warrant time.
<unk>.
With regard to the.
The potential for a delay in the <unk>.
In the trial, obviously these 10 10 year warrants and just wondering whether there is any possibility of extending those warrants and I believe there should be.
Thank you.
Okay.
Hi, Thanks for the question.
Honestly, we have not had that discussion.
But the feedback we will certainly take it under consideration.
And provide you with any appropriate feedback once we had an opportunity to review your your suggestion.
Okay. Thank you.
Thank you.
Anyone who wishes to ask a question at this time My press Star and one on your thoughts John for now.
Okay.
Your next question is from the line of Sean.
Certain SCO with Rosen equities. Please go ahead.
Yes, hi, good morning, Thanks for letting me ask the question I was encouraged by some of the language in the press release about trying to see some of these litigation claims pursue too.
Ultimate adjudication, given the long timeline here I actually.
Followed and back back in 2007 2008, when some of this stuff once you know kind of insects and I saw some of the conduct that went on with some of the originators and securitizing.
I'm very interested to see you guys being able to put some of the <unk>.
Some of that.
The trial, so I appreciate that.
I'm interested to know do you think that there is the potential for.
The potential for the trial to be delayed.
We need some time to kind of work out how those figures.
We have to.
CRE new mechanism.
Kind of judge how to gauge how many of these loans.
We basically re underwrite these loans like based on the ruling in the Doj case.
Thanks for your question Sean.
As we described in our letter to Justice Rito March 'twenty that we reference.
That is available on the court side, and we're going to have it available on our investor section of our website as well.
We believe that in the U S Bank decision.
That should not have any impact on the timing of our trial or the scope of our trial.
We believe that we should be able to proceed to trial.
Schedule in September .
It's impossible to tell if other issues or other cases develop.
In other directions, but.
As we've explained extensively in my prior remarks and in the letter our cases very uniquely positioned.
And differentiated in the market.
Which is also why we believe there is a clear path to trial in September .
It makes it makes a lot of sense.
Read that letter and it was good to kind of see articulated some of the ways that you are kind of in a different situation relative to the trustee.
Okay.
Differentiating factors in terms of your rights.
Contractual aspects of the case.
I would also encourage that you guys are doing.
It came back into the market.
Thanks.
Okay.
Good morning.
Some of the parts valuation of the company here barely scratched any value too.
You mentioned some potential proceeds.
Our value that could be smart.
From AAC and the medium to long term.
And I also like that you kind of re up the buyback.
And the last few days I'm wondering would you guys kind of paradigm.
I'm not trying to put you on that.
Big granular kind of.
Yes.
<unk>.
Let's say.
Course of the year, if you continue to get distributions from the banks.
P&C businesses do you think that there is scope to.
Even add more to that buyback if the prices remain compelling later on the year.
Hey, Sean it's something we will taken consideration.
Stock buyback is something that we evaluate on a.
A regular basis and try to way liquidity versus opportunities in the market to buy the stock where we can be opportunistic versus capital deployment.
New business opportunities. So it's the recurring evolving evaluation of capital deployment and certainly it's one we will continue to.
Evaluate as the.
The weeks and months go by here and see where we come out on the current authorization.
Where are opportunities to deploy capital.
Our throughout the course of the year. So that's something we continue to and we will likely continue to evaluate.
Well I'll just endorsed.
At this point strongly.
The color and thanks for your time guys.
I appreciate it thank you.
Thank you.
There are no further questions at this time. This concludes today's conference. Thank.
Thank you for your participation you may disconnect your lines at this time.
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