Q3 2022 Ambac Financial Group Inc Earnings Call
Yes.
[music].
Greetings and welcome to the Ambac Financial Group, Inc. Third quarter 2022 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 <unk>.
Star and then zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to turn the call over to Charles the Best Ski head of Investor Relations. Thank you.
Thank you.
Morning, and welcome to Amdocs third quarter 2022 call to discuss financial results.
Speaking today will be close to the block President and CEO and David trick Chief Financial Officer.
They will discuss the financial results of our business and the current market environment and after our prepared remarks, we'll take your questions.
Our call today includes forward looking statements the company cautions investors that any forward looking statements involve risks and uncertainties and is not a guarantee of future performance actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors.
These factors are described under the forward looking statements in our earnings press release in our most recent 10-Q and 10-K filed with the SEC.
We do not undertake any obligation to update forward looking statements.
Also in our prepared remarks or responses to questions. We may mention some non-GAAP financial measures reconciliation to those non-GAAP measures are included in our recent earnings press release operating supplement or other materials are available on the Investor Relations section of our website add back dot com.
Tom.
I would now like to turn the call over to Mr. Claude Leblanc.
Thank you Chuck and welcome to everyone joining today's call.
This quarter represents a pivotal moment for ambac marked by the $1 $84 billion settlement of a long running our MBS litigation against Bank of America, and the near term resolution of our remaining Puerto Rico exposure.
Two of the largest self standing obstacles impacting the pursuit of near and long term options to maximize value from our legacy financial Guaranty business.
I'm also very excited with the progress we continue to make in our core specialty P&C business, which delivered material growth again this quarter.
For the quarter ending September 32020 to Ambac reported a net income of $340 million.
Or $7 41 per diluted share.
Book value at quarter end was 1 billion and adjusted book value was 1.04 billion.
David will discuss our financial results in more detail shortly.
Yeah.
On October six we settled several army us litigations with bank of America.
For which we had been seeking recoveries for more than a decade.
Ambac received proceeds from the settlement on October 19th.
Settlement of these army us litigations remove the single largest uncertainty from our balance sheet marked by substantially all of last quarter's $1 5 billion rep and warranty subrogation receivable.
At its peak the litigation recoverable was nearly twice the size of our adjusted book value.
But today, our remaining rep and warranty subrogation receivable is down to less than 10% of adjusted book value.
In addition, our significant derisking accomplishments have supported the reduction of our insured par exposure from approximately $80 billion at the beginning of 2017 to 24 billion today.
This together with the expected near term resolution of HCA, our last remaining on restructured Puerto Rico exposure and the Bank of America settlement places Ambac in the strongest financial position since the great financial crisis.
In assessing derisking and deleveraging achievements relative to our adjusted book value since 2017.
Net loss reserves are down nearly 90%.
Adverse credit exposure is down 65%.
Net par outstanding is down 62%.
And pro forma debt leverage is down nearly 60%.
These achievements have progressed, our legacy platform towards a stable run off and materially improve the quality of our book value.
Having achieved this pivotal milestone we can now accelerate our plans to crystallize value from our legacy business.
We continue to engage in active dialogue with our shareholders as we progress our legacy business strategy.
In light of our recent achievements, we are now positioned to accelerate the timeline and strategy towards realizing value from the legacy business for which there are a number of options. We are actively pursuing however.
However, we also have to balance the desire for speed against one the existing regulatory constraints, we are subject to.
Two market dynamics that informed value maximizing opportunities and three the timing of any such options in order to create maximum value for our shareholders.
It is important to remember that AC remains subject to enhance regulatory supervision under the 2000, eighteens stipulation and order and the 2010 Bank settlement agreement, which means that we continue to operate under contractual limitations and the Wisconsin Insurance Department has ultimate decision, making authority regarding any capital move.
And that's from AAC.
Since the settlement AAC has repaid all outstanding secured notes representing approximately $1 two 1 billion about standing debt as well as $213 million of tier two notes.
This coupled with our de risking accomplishments paves the way for several critical next steps, including one <unk>.
The actively working with our regulator towards a revised regulatory capital and operating framework for our legacy business.
To actively continuing our asset recovery and Derisking initiatives.
Three opera.
Opportunistically pursuing additional asset and liability management transactions and for accelerated expense management initiatives.
Success in these near term initiatives will inform all of the strategic options available to maximize value.
As we progress our initiatives to resolve other risks and position the company for a stable run off we do expect some continued volatility in earnings and ABB, which should dissipate over time.
As we look towards the future steps, we are considering a number of broader strategic options, including one the continued run off of a profitable creating legacy business and then materially enhanced financial position.
Strategic reinsurance transactions with the goal of further derisking and freeing up regulatory capital.
And three a partial or full sale of the legacy business.
Shareholders should rest assured that we are aggressively pursuing these various initiatives in parallel subs.
Subject to existing constraints and efforts to expeditiously generate value.
Now on to our core strategic operating businesses.
Every bank group are specialty P&C hybrid platform had another strong quarter of growth with gross premium written of $30 million, representing a six fold increase from the prior year period.
For the first nine months of the year gross premiums written were $95 million compared to 6 million for the same period last year.
Ever spend continues to expand and diversify its MGA program partners, which currently stands at 13 up from 11 last quarter.
The team remains focused on growth with strong underwriting focus program partners.
By a leading panel of highly rated reinsurers.
The operating environment for <unk> and specialty insurance remains robust and supportive of a strong pipeline of new programs ever spend continues to see with a total of 43 submissions received this quarter.
We believe that the events of Ian for Cat exposed property business a category of risk for whichever spent has essentially no exposure.
Have a spillover effect into the casualty markets, including changes to risk appetites and reinsurance availability, which will enter and pave the way for new program opportunities, where strong balance sheet companies like ever spent.
In addition, commercial P&C pricing, while moderating in certain lines of business is still increasing and remains above loss cost trends. These factors along with the strength of ever Spence current programs will provide us the opportunity and resources to support continued strong premium growth.
As we look forward, we expect ever spent to generate approximately $250 million of gross premium next year growing to nearly 500 million in the 2020 for 2025 time frame subject to market conditions.
Turning now to cerrado, our insurance distribution business.
We are very excited about our recent acquisition of two mgs of Toronto.
All trends risk solutions, a 30 year old specialty transportation, MGA and capacity Marine a well established marine and international risk wholesale broker, which together place approximately $60 million of premium.
This transaction will be immediately accretive and will expand our mg a footprint diversification and network.
Serrato strategic positioning, including the value of its shared business service offering has led to increasing opportunities to deploy capital at attractive returns.
On the de Novo MGA front. In addition to our human services de Novo team led by Penny Paris off we're also seeing many attractive opportunities, which we are actively pursuing.
Year to date throughout the place 97 million of premium up over 7% from the corresponding period in 2021.
On a combined run rate basis with the addition of all trans and capacity Marine Cerrado is on track to deliver $200 million of gross written premium in 2023 subject to market conditions.
I'll 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 2020 to Ambac reported net income of $340 million or $7 41 per diluted share.
Compared to net income of $17 million or <unk> 35 per diluted share in the third quarter of 2021.
Adjusted earnings for the third quarter of 2022, or 338 million or $7 37 per <unk>.
Diluted share.
<unk> to adjusted earnings of $25 million or <unk> 53 per diluted share in the third quarter of 2021.
The difference between adjusted earnings and GAAP net income for the third quarter of 2022 related to the exclusion of $5 million of insurance intangible amortization expense and.
And $7 million of foreign exchange transaction gains.
The $323 million increase in net income for the third quarter 2022, compared to the third quarter of 2021.
Is it related to a $319 million net gain from the previously announced our MBS representation and warranty litigation settlement with Bank of America, and a $37 million gain on a macro interest rate hedge compared to a $5 million gain in the third quarter of 2021.
Premiums earned were $10 8 million in the third quarter slightly below the $11 2 million earned in the third quarter of 2021.
For the quarter ever spans 4 million.
Earned premium growth, mostly offset the $4 4 million earned premium contraction in the legacy financial guarantee portfolio, which earned $6 6 million.
As ever spend continues to grow its premium base growth and it's earned premium will eventually more than offset the contraction in the legacy financial Guaranty earned premium.
Active de risking and organic run off of the legacy financial guarantee insurance portfolio will continue to result in earned premium for this segment trending lower.
This trend will be positively or negatively impacted by accelerated earned premiums, resulting primarily from proactive derisking of the insured portfolio.
In the third quarter 2022, proactive proactive derisking resulted in net negative accelerated earned premiums of $1 7 million.
In addition, we'd like to highlight that up to $30 million of specialty P&C gross written premiums in the quarter ever span retained about 20% or $6 million.
These premiums will earn in over the next year ever spends hybrid business model allows us to retain up to 30% of gross written premium.
Over spend also collected $1 2 million and earned approximately 900000 program fees in the quarter as a reminder, our program fees earn in over the course of a policy similar to how premium is earned.
Therefore as ever spend continues to add programs and grow gross written premium both earned premium and program fees will grow significantly.
Tarata disc.
Distribution segment also continues to grow both organically and strategically.
While premiums placed a $28 million in the quarter were essentially flat with the prior year year to date premiums plays are up 7% and EBITDA rose quarter over quarter.
Insurance distribution business revenue comes from commissions earned as a percentage of the premium placed for.
For the quarter gross commissions were $7 million up 8% from the prior year period, and total revenues were $7 3 million up 12% from the prior year period.
Insurance distribution segment produced $1 3 million of EBITDA for the third quarter up slightly from the $1 2 million produced in the third quarter 2021.
Gross commissions and EBITDA was favorably impacted by changes in business mix Commission levels and the EBU EBU renewal rights transaction.
The acquisition of all Trans and capacity in Marine where effective November one and therefore, our fourth quarter results will include partial results for these new businesses, which are expected to be accretive to EBITDA.
Investment income for the third quarter was $11 million down from $21 million in the third quarter of 2021 on a kind of broad macro changes across markets more.
Specifically the decrease in investment income during the third quarter related to a net loss on fund investments of about $5 million.
<unk> to a $6 million gain in the third quarter of 2021 Alan.
Allocations to alternative fund investments have been reduced by approximately $45 million year to date.
Income from fixed income securities was up $2 million compared to the same period last year due to higher average yield, particularly from floating rate securities.
Loss and loss expenses were $353 million benefit in the third quarter of 2022 compared to a $55 million benefit in the third quarter of 2021.
The structured finance portfolio generated a benefit of $351 million this quarter compared to a benefit of $21 million in the third quarter of last year.
<unk> driver to this quarter's results was the recognition of a $319 million gain from the bank of America settlement.
The total gain from the litigation settlement is approximately $397 million.
The remaining $78 million will be recognized in the fourth quarter and includes a $126 million gain from the litigation itself and $5 million of investment gains, partially offset by $53 million of debt related charges.
Net gains on derivative contracts, which are positioned as a partial economic hedge against the interest rate exposure and the financial guarantee and investment portfolios by $37 million for the third quarter compared to a gain of $5 million for the third quarter of 2021.
During the quarter and year to date, we have reduced the sensitivity of the macro hedge generally in line with the exposure we are hedging.
Year to date into the fourth quarter, we have reduced sensitivity to a <unk> of approximately $230000 from over $500000 at the beginning of the year.
Operating expenses were $37 million for the third quarter up from $32 million in the third quarter 2021.
The increase in operating expenses was due to higher net underwriting expenses for specialty P&C.
Associated with the growth in the business.
Litigation expenses related to defensive litigation at AAC.
Higher compensation expenses, resulting from increases in head count for the specialty P&C platform and incentive plan costs, partially offset by lower head count at the legacy financial Guaranty business and higher sub produced the commissions and the insurance distribution segment.
As I stated with growth and changes to business mix.
Interest expense in the third quarter was approximately $49 million up from $44 million in the third quarter of 2021.
Approximately $25 million or 52% of this quarter's interest expense related to $1 $4 billion of debt that was repaid on October 29th from the proceeds from the bank of America settlement.
As a result of this redemption.
AAC has been significantly de levered with the remaining debt as up as of October 31, consisting of approximately $143 million of tier two debt and $1 4 billion of surplus notes inclusive inclusive of accrued and unpaid interest.
Shareholders' equity increased $4 99 per share to $22 43 per share.
$1 billion.
Timber 32022.
From the end of the second quarter.
The increase was primarily due to the $319 million settlement gain somewhat offset by unrealized losses on available for sale investments of $59 million and foreign exchange translation losses related to U K and the weakening of the pound of $58 million.
Adjusted book value increased to $1 billion $40 million or $23 13 per share at September 32022 from.
From $773 million or $17 20 per share at June 32022.
This $5 93 per share increase due to the $319 million settlement gain partially offset by the adverse effect of foreign exchange translation losses.
Higher discount rates on the PVA financial Guaranty installment premiums.
I'll now turn the call back to Claude for some brief closing remarks.
Thank you David.
This quarter marked another milestone for Amdocs legacy business and we believe the company is in a stronger financial position today than at any point over the last decade.
Combined with our growing core specialty P&C insurance business, we believe ambac is well positioned to deliver material long term value for our shareholders.
Our plan is to continue to aggressively pursue our strategic initiatives, including pursuing strong growth in our specialty P&C platform organically and through select M&A transactions and de Novo MGA build outs.
And secondly, pursuing strategic options for our legacy financial Guaranty business and in.
To create both short and longer term economic value.
As we evaluate the options available for us to deploy capital, we always measure such options against the return of capital to our shareholders as well as considerations relative to the protection of our significant tax assets in order to preserve our ability to unlock future value from our Nols.
We continue to evaluate alternate options to mitigate NOL risks associated with share buybacks and currently have $21 million in authorized capital available for our program.
Now that we have achieved a level of stability and growth in our legacy financial Guaranty and core P&C business. We are now actively seeking to broaden our investor base as we continue to transform the company. We look forward to updating you on our various initiatives in the upcoming quarter.
Operator, please open the call for questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question Keith.
And then one on your telephone keypad.
A confirmation tone will indicate your line is.
Thank you.
You mean.
And then two if you would like to leave you a question from the queue.
For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
The first question comes from Sheila <unk> from Redburn Partners. Please proceed with your question Dennis.
Hi, Claude Congrats.
Congrats on the settlement and it's great that you're providing details on the various segments, particularly the potential scenarios to unlock value at <unk>.
And the attractive opportunity to grow the specialty P&C platform.
On the topic of capital allocation I think you briefly touch on this but there are various competing considerations.
Obviously, a buyback at these prices is a straightforward value accretive move.
But on the other hand, we have billions of dollars of Nols that the company has done a great job protecting and you don't want to trip.
The 82.
And in addition by investing to grow our earnings and we get to utilize these nols.
Can you give us maybe a little bit more detail and how youre thinking about the balance between buybacks and investing to grow earnings in the near term.
Thanks.
Sure Good morning, Jeff I'll, let David handle this one.
Thanks Dennis.
As we stated in the past our primary consideration with deploying capital at AFG is return on capital.
<unk>.
We believe our stock is remains really undervalued as you note. There is a balance to be struck and we see tremendous opportunities in the market to deploy capital in new businesses Accretively with attractive returns on capital that.
That will create long term shareholder.
We create excuse me long term shareholder value.
But that's not to say, we're not wanting to buy back stock as a reminder, we purchased over one 6 million shares or approximately three 5% of our outstanding shares at the time in the second quarter at an average price of $8 83.
At the same time, we have to respect the constraints that we operate on it to protect our Nols, which we believe are a very valuable asset, including but not limited to the limited to the.
Regulatory requirements explicit regulatory requirements, we have to preserve and to protect the Nols. Therefore.
Therefore, we've been exploring ways in which we can affect buybacks while at the same time protecting the value of those Nols.
And we've been diligent as you know to maintain and protect them because they are so valuable for both our new and our legacy businesses.
And we believe.
Value has been validated by our own views, but also by third parties that have expressed interest in this asset.
As a result in further to close earlier.
Earlier comments, so we believe the Nols will contribute significantly to the value that we ultimately realize from AAC under any of the strategic options you laid out.
That address your question.
Yes, sorry, I was on mute. Thank you so much.
My pleasure.
Thank you Chris.
Question comes from Richard <unk> Private Investor. Please proceed with your question Richard.
Thank you and thank you guys for the call and taking my question.
This question is on foreign exposure can you discuss your exposure to foreign exchange.
So what is your exposure to European risk through your <unk>.
International instrument portfolio. Thank you.
Sure. Thanks, I'll address the question on foreign exchange in our clubs.
Touch on the.
Exposure to European risk, but our main exposure to foreign exchange lives of the assets and liabilities of Ambac UK.
Ambac UK as invested assets of about 492 million British pounds.
In about $76 million of let's just say pounds of premiums receivable.
About a third of the invested assets in the UK are held in dollars, which leaves about 300 British million British pounds of exposure to.
The British pound and we have a small exposure as well too.
<unk>.
On the insured portfolio side.
The British pound exposure is about $7 billion of insured exposure and we have about another $1 billion of euro exposure.
And against those is relatively modest reserves. So the long story as our primary exposure to foreign currency as the British pound and that lies with the.
The U K operation.
And as far as our UK exposure goes.
We've done significant.
Significant derisking over the last number of years in our main areas of exposure today are really the UK Pf VI regs.
Our regulated entities and some corporate securitizations, but the bulk really.
Being with the <unk> and regulated entities sectors, where we believe there is significant resilience.
And we believe that our.
Guaranty and our.
Credit support underlying those guarantees remains very strong.
With the increasing raw.
Rate environment as well on some of our index linked exposures, which tend to increase as the.
The inflationary environment.
When rates go up we also are better able to capture more premium as the premiums adjust to the value of the index linked exposures, which also helps out on our solvency II capital. So as we sit today, we feel very comfortable with our exposures and.
We believe that.
Strong resilience exists for a U K.
Based on the projected.
Economic trend currently in the UK and Europe .
Thank you.
Okay.
Okay.
Thank you and our next question comes from Giuliano Bologna from Compass point. Please proceed with your question Juliana.
Good morning, and congrats on resolving.
Resulting incontrovertible.
Countrywide litigation effort after many years.
I'd be curious.
A little bit too.
Actions you guys took over the past couple of quarters, you guys bought some surplus notes and some tier two notes.
I think listen with this presentation settlement fair.
Fair value of $69 million for the.
On the surplus notes I am curious are both of those securities Mark to market on September 30th.
And then I guess the follow on to that is yes.
Have you sold any of those.
After quarter end.
And then how should we think about it in here the market on CEB.
Mark to market again in the fourth quarter.
Higher prices compared to move after quarter end.
The right way of thinking about that.
Yeah. Thanks, Joe So the $69 million of surplus notes, we hold at the holding company our mark to market, that's a mark to market number as of nine 930.
And I believe they were marked probably around 57 cents on the dollar so at that time.
So they'll be remarks, obviously at the enduring for the fourth quarter.
In terms of other buybacks, we haven't tier two notes, we did have an investment in the silica nodes at AAC. So.
So we held about $91 million of par of Sika knows AUC.
And so as a result of the redemption of those notes, we'll be booking what it should be about a $5 5 million gain due to the.
A discount we bought them at plus the call premium 3% call premium.
That's great and very helpful.
Sure.
So obviously a market by market movements to market, probably next quarter when you have a little.
But additional.
Okay.
Somewhat related.
Alright, Gainesville recognize next quarter right.
Taking on a go forward basis.
If I go through just the mechanics of the settlement amount.
And the pay offs, because we'll have a few hundred million of additional cash that will be coming in kind of on a net basis from the settlement proceeds.
When you think about the best use of that capital is it.
Investing it to Jim.
Alright, more investment income or are there other opportunities to use our capital more strategically to.
To help you accelerate.
And then somebody is now deceleration of the value creation.
At AAC.
To kind of enhance yes.
Value on a quicker later.
Yeah.
Yes, I think we've talked about in the past July .
We are continually reviewing our capital position against the opportunities that we have of deploying that capital.
And in particular, we have to think about that in context of our evolving regulatory capital framework and make decisions based on both our expectations for risk adjusted returns as well as the new capital requirements. So.
It's a great question something that is a key focus of ours and is certainly an evolving.
Evolving situation.
Okay.
One last one kind of on the strategic.
Strategic considerations.
I'd be curious.
If theres been any.
If I could.
Sooner.
Spinoff transaction related AUC or U S equity.
Yes.
As a currency to help resolve some security and things like that.
Yes, two separate kind of the value from the run off business from the growth businesses and then unrelated to that you guys, obviously, having been in a while you have a platform.
The bond market is actually yes.
Coming back given the higher rate environment, I realize a couple of quarters doesn't make a trend, but whenever it when it makes sense.
Mario it's complicated maybe to try and.
Separate AUC.
Attaining.
Without the impact of your Nols.
Thank you.
Might be able to turn back on or roll up other platforms in the industry to scale back up.
Yes, Thanks Giuliano.
And as I.
And earlier, we are considering a broad range of strategic options for AAC and certainly a transaction involving a partial sale of wholesale of the platform is in that category.
We believe there are transactions that can be completed.
In the category of partial sale, where the Nols would be preserved.
For the benefit of a buyer.
And that's something that.
We will be carefully looking at.
But as a you indicated there is also potentially other opportunities.
Through other types of transactions, including reinsurance transactions.
And capital redeployment transactions that could also prove to be.
Gary.
Valuable and accretive to our investors.
Looking currently at any transactions involving other.
Financial guarantee companies.
Or any transactions involving.
Other investments by AAC into other.
Financial Guaranty platforms, our new business activity is really limited to what's going on at the holding company and clearly to the extent, we can bring capital up to the holding company either through a distribution or a partial sale or sale.
We will then evaluate.
How to deploy that capital as we currently do.
Looking at both opportunities on the strategic side in terms of acquisitions.
Other capital deployment initiatives, but also.
Return of capital to shareholders and.
That's really the focus of.
Of our AAC strategy in the near term and longer term.
That's great. Thank you for doing that.
A question and then I'll jump back in queue.
Thanks.
Thank you ladies and gentlemen, just another reminder, if you'd like to ask a question Keith.
Then one if you'd like to ask a question. Please Chris Scott when we will pause to see if you all further question.
The next question comes from Paul Lang from fee decline in Jefferies. Please proceed with your question Paul.
Everybody in an absolutely congratulations on getting that.
Call. It it certainly was a journey for everybody involved.
Two questions for you.
First do you anticipate ever spend is going to require more capital to support this growth as you look out over the next year or so.
And then the second and you referenced the acquisition.
And your first de Novo launch and your distribution segment, how do you see that playing out is it going to be more de novo or do you see more M&A.
And maybe just if you could give us some thoughts about how much capital you might be willing to deploy.
Let me take the second question and I'll pass the first one back to David.
On the <unk>.
Acquisition side, we are seeing a number of very attractive opportunities to deploy capital.
In our new business segments.
The market has been very competitive as you probably were on the <unk>.
Your insurance distribution front however.
In the small to mid size.
Segment of the market, we are seeing very attractive opportunities.
Our offering is different than what's out there in the market. We are not looking to do outright acquisitions, we look to make acquisitions, where we have a controlling stake and we would have management role their interest so it's really.
Our model.
We partner with existing teams who are running <unk>.
Through our control transaction, we then make available to them.
Our business services infrastructure to allow them to further enhance their operating flexibility and enhance our growth and that model has proven to be very attractive and has really brought teams to us an MGA is to us.
That we have been able to to consider and we believe.
<unk> been able to attract at very very attractive valuations.
In the market.
De Novo side is obviously very accretive.
Very limited.
<unk> upfront, but they do take longer to grow.
And.
At scale.
We believe that a blend of the two is really the right mix.
We have a slight bias towards the novo potentially given.
The capital deployment requirements for acquisitions, but I believe the blend of the two is.
Likely the model that we will continue to.
To utilize going forward and.
Really looking for those opportunities that are highly accretive.
For the benefit of our shareholders longer term.
<unk>.
The opportunities that we will focus on.
Thank you.
And with regards to ever spend we still anticipate ever spend will breakeven sometime around mid next year. So we don't anticipate there'll be material.
Capital additional capital requirements for ever spend.
A few small dollars to true up.
But given there and given their cap.
Capital levels in general that business can be leveraged five to six times. So we believe it's capitalized the right way for long term.
Long term profitable growth.
Hey, David Thank you very much and thank you Claus. Thank you Paul.
Thank you. The next question comes from Geoffrey Dunn from Dowling and partners. Please proceed with your question Geoffrey.
Thanks, Good morning.
David can you elaborate or maybe two areas first of all.
With respect to expense levels in the.
The financial guarantee legacy business with countrywide now behind you.
You said Youre looking at an accelerated expense initiative. There are you in a position now to get that run rate below $20 million on a run rate quarterly basis going forward.
Yeah, Thanks, Jeff So.
I would generally put these expenses into three categories.
One is obviously interest expense too there is LTE and then there is operating expenses. So obviously as I said in my prepared remarks, we will see a substantial reduction in interest expense.
Over 50% going forward and quarterly basis.
In addition to that LTE.
It was.
Something that was running in the <unk>.
Last year about $7 million a quarter.
Most of that related to the bank of America trial preparations related expenses that will be going away and then in terms of core operating expenses, yes.
Definitely a focus of ours is to continue to bring bring.
Bring down the Opex.
Legacy business.
We're doing that and approaching that through multiple different channels in ways.
One of the things, we also hope and expect and are working on with our regulator is bringing down some of the regulatory costs. As an example, given now that we resolve this major.
Major sort of risk to.
The balance sheet.
So our focus clearly is on reducing those expenses where.
Going through our budget season now.
Spending a lot of time focusing on.
Efficiency of the business.
And as again noted.
In terms of expenses generally for the quarter.
There will be some volatility there we do still have some defensive litigation, which has proven not to be.
Cheap to defend.
And also with regards to the new businesses as those businesses grow of course, those expense base as well.
We'll grow with but definitely a focus of ours to continue to grow.
Down the cost of managing the business.
Okay and then.
With respect to Wisconsin, and I know this is a sensitive area. So I understand the comments can be limited but.
What are some of the restraints you're currently under that you might explore.
<unk> or or what are the areas of the capital model that you could try to work with Wisconsin to lighten up.
Yes, so historically.
A number of years, even post the segregated account exit from rehab, we haven't really had a very.
I guess I'll call it transparent capital regime.
<unk> put in place with the regulator.
And as you know most traditional P&C companies operate under a risk based capital model and the guarantors.
I have never had that type of regime.
So.
We very much welcome the process that we're embarking upon with the regulator in terms of getting more transparency and more definition around the capital requirements that are needed to manage the runoff business.
I think probably a big focus of that of course is going to be how much.
Capital do you need for the risk that remains in the insured portfolio wishes.
Which is again something we very much welcome because as you know we've been very focused on the quality of the insured portfolio and proactively de risking that book.
When you sort of look at the remaining risk within the insured portfolio.
It's very well contained.
So we think.
That's a process that we.
There will be an efficient one and then of course the regulator I'm sure we'll be looking at asset risk and other types of operating risk as well and assigning.
Charges to that so it's something we.
We'll do our best to.
With the regulator very closely and actively at the end of the day the regulator of course as in all these situations as the ultimate decision, making authority there, but we will be very much actively.
Actively.
Working too.
Get the best possible outcome from that exercise that we can get.
Okay. Historically the rating agencies have been kind of de facto regulators for capital is.
The state regulators effectively defer to the rating agencies historically, so this might be.
A longer process for them to get their hands around it.
I would say from my own.
Biased experience rates pre 2008, I would say that was certainly a.
A an issue with the rating agencies, but since then I think the regulators have become much more proactive and.
In terms of the capital management of the insurance.
<unk> industry, but at the same time I think there is opportunities to borrow some of the.
The methods.
That the agencies have in publicly disclosed.
Okay. Thank you.
Thank you. This concludes our question and answer session I'd now like to hand, the call over to Kelly for closing remarks. Thank you.
Sir you May proceed with the closing remark.
This concludes our call. Thank you everyone.
Thank you very much.
Does conclude today's call and you may now disconnect. Your lines. Thank you very much for your participation.
Yeah.
[music].
Okay.