Q4 2022 Ambac Financial Group Inc Earnings Call
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Speaker 2: Greetings and welcome to the AMBAG Financial Grouping, 4th Quarter 2022, On its call.
Speaker 2: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded.
Speaker 2: It is now my pleasure to turn the call over to Charles Sibensky.
Speaker 2: I'd often better predictions
Speaker 3: Thank you. Good morning and welcome to AMBAX Fourth Quarter 2022 call to discuss financial results.
Speaker 3: Speaking today will be Claude LeBlanc, President and CEO , and David Trick, Chief Financial Officer.
Speaker 3: They will discuss the financial results of our business.
Speaker 3: and the current market environment. And after prepared remarks, we'll take your questions.
Speaker 3: Our call today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance.
Speaker 3: Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of vectors. These vectors are described under the forward-looking statements in our earnings press release and our most recent 10-Q and 10-K filed with the SEC.
Speaker 3: We do not undertake any obligation to update forward-looking statements.
Speaker 3: Also, in our prepared remarks or responses to questions, we may mention some non-GAAP financial measures.
Speaker 3: Reconciliation to those non-GAAP measures are included in our recent earnings press release, operating supplements, and other materials available in the investor relations section of our website at amvac.com.
Speaker 3: I would now like to turn the call over to Mr. Claude Leblanc.
Speaker 4: Thank you, Chuck, and welcome to everyone joining today's call.
Speaker 4: Yesterday we posted a separate presentation to our website that I will be referencing during today's call entitled 2022 year-end review.
Speaker 4: I'm going to start on slide three of this presentation.
Speaker 4: 2022 was a transformational year for AMBAQ.
Speaker 4: year during which we resolved a number of our most significant challenges and at the same time materially progressed our new business strategy.
Speaker 4: Today, I am pleased to report that AMBAQ is in its strongest financial position.
Speaker 4: since the 2007 financial crisis.
Speaker 4: In 2022, we successfully resolved all of our remaining legacy R&Bs Reppen warranty litigations, recovering nearly $2 billion through settlements.
Speaker 4: and we completed the restructuring of our largest and most distressed financial guarantee exposures, notably our Pripha, CCDA, and HTA, Puerto Rico exposures amongst others.
Speaker 4: As a result of these successes, in addition to our active asset liability management activities, which resulted in the capture of over 150 million of discount.
Speaker 4: We reduced our outstanding debt by 1.8 billion and increased our book value by 214 million or $5.43 per share.
Speaker 4: In our specialty P&C businesses, we expanded our platform through both organic growth and acquisitions, producing an excess of 280 million of premiums.
Speaker 4: gross written premiums of 146 million for the year.
Speaker 4: In addition, we successfully recruited top industry talent to our businesses, all of which positions and back very well for strong future expansion and earnings growth.
Speaker 4: For the year ending December 31, 2022, Amback reported net income of $522 million or $11.31 per diluted share.
Speaker 4: and adjusted earnings of $555 million or $12.01 per diluted share.
Speaker 4: AMBAK ended the year with a book value of $1.25 billion, an increase of 21%, and adjusted book value of $1.27 billion, an increase of 46% over year-end 2021.
Speaker 4: David will discuss our results in more detail shortly.
Speaker 4: Turning now to the review of our Legacy Financial Guarantee business on slide 4 of the presentation. Each of AAC and AUK succeeded in materially increasing their book value and adjusted book value and the quality thereof, one of our key strategic priorities.
Speaker 4: Turning now to the review of our Legacy Financial Guarantee business on slide four of the presentation. Each of AAC and AUK succeeded in materially increasing their book value and adjusted book value and the quality thereof, one of our key strategic priorities. implies a
Speaker 4: Some of our key achievements for the year. First, we have monetized all of our outstanding weapon warranty receivables when considering the receipt of the Numerous Settlement in January of 2023.
Speaker 4: Secondly, we reduced our Puerto Rico exposure by 77%.
Speaker 4: our Puerto Rico exposure by 77%. Next.
Speaker 4: Our debt leverage is down 74%.
Speaker 4: That leverage is down 74%. Loss reserves are down 51%.
Speaker 4: Adverse credit exposure is down 26%.
Speaker 4: And finally, net parot standing is down 19%.
Speaker 4: Over this same period, book value per share increased 24%, and adjusted book value per share increased by 50%.
Speaker 4: Turning to slide 5 with a presentation.
Speaker 4: As outlined last quarter, our recent accomplishments coupled with our significant de-resking and de-leveraging activities positions us to begin the process of re-evaluating the amount of capital needed to support our legacy businesses.
Speaker 4: as well as initiate a comprehensive review of the alternative strategic paths available to maximize value.
Speaker 4: Our strategic review process will evaluate alternative options on both a time and risk adjusted basis.
Speaker 4: I would also like to point out that certain alternatives are not mutually exclusive and may be considered in connection with others. Options under active consideration include 1. The ongoing active runoff of a profitable, delevered and de-risked legacy platform, potentially consolidated with AUK.
Speaker 4: Two, strategic portfolio de-risking transactions with a goal of freeing up capital and further increasing the value of our businesses.
Speaker 4: Three.
Speaker 4: Strategic Joint Venture arrangements to generate increased value and financial flexibility at AAC and AFG.
Speaker 4: And lastly, a full or partial sale of the legacy business which would consider the value for the well-preserved NOLs held by AAC.
Speaker 4: As previously mentioned, managing through the operating and capital reevaluation process with our regulator will take some time, but I wanted to offer an update on our progress thus far.
Speaker 4: First, our periodic examination process with our insurance regulators is well underway, and we are working towards establishing a new capital and operating framework with our Wisconsin Insurance Regulator by the middle of this year.
Speaker 4: Second, we are working with advisors in both the US and the UK to assist us in the evaluation of strategic options for both AAC and AUK in order to further maximize value creation and recovery for shareholders.
Speaker 4: The outcome from this analysis combined with the outcome from the operating and capital framework in addition to other considerations.
Speaker 4: is expected to provide us with greater clarity on preferred options and the timing thereof.
Speaker 4: We will update you further once the review process is complete.
Speaker 4: Starting now to our specialty P&C business on slide 6 of the presentation.
Speaker 4: Ever Span Group, our specialty PNC program business, had a great first four-year business.
Speaker 4: generating gross premium written of 146 million.
Speaker 4: up over tenfold from its launch in May 2021.
Speaker 4: Everspend continues to expand and diversify its program partners, which currently stand at 14, up from 7 at the start of 2022.
Speaker 4: The team remains focused on growth with strong underwriting focus program partners, backed by a leading panel of highly rated reinsurers. The USMG market remains robust and expanding, with an expected range of 70 to 100 billion improvements.
Speaker 4: which supports a strong pipeline of new program partners forever spent.
Speaker 4: While growth is important, Everspan is a disciplined underwriting platform and selective in its risk assumption.
Speaker 4: In 2022, Everspan received over 180 submissions, but only contracted with nine that met their desired risk profile.
Speaker 4: The January 1st reinsurance renewals provided evidence that the disruptive forces within the PNC supply and demand dynamic identified earlier in the year were real.
Speaker 4: especially as it relates to property cat exposed business.
Speaker 4: However, Ever Span, which has limited property exposure and program renewal spread throughout the calendar year, has so far been able to successfully mitigate these challenges with the broader industry.
Speaker 4: And to some degree, we believe that these industry dynamics may well provide Everspan with additional growth opportunities, especially in our preferred classes of business.
Speaker 4: as competitors work to address the changes in property cat capacity.
Speaker 4: We expect these factors along with the strength of Ever Span's current programs to provide the business with the opportunity and resources to keep building on its gross premium growth.
Speaker 4: This year we expect Everspan to generate in excess of $250 million of gross premium and reach profitability in the back half of the year, and to continue growing to upwards of $500 million of gross premium over the next several years.
Speaker 4: Turning to slide 7 in our insurance distribution business. Serrata, our insurance distribution segment, had another good year with premiums placed at 135 million, up 15% over 2021.
Speaker 4: which generated 7 million of EBITDA. Sarada is just getting started and there is a lot of runway for growth, forth, organically and strategically.
Speaker 4: Notably, Serata's 2022 performance only includes two months of results from the fourth quarter acquisitions of all trans and capacity Marines.
Speaker 4: Xchange, our first MGA acquisition, has recently announced several growth initiatives that we are very excited about. First, XchangeRE, a reinsurance MGU that will underwrite accident and health reinsurance coverage on a worldwide basis utilizing US fire as a carrier.
Speaker 4: Secondly, distribution re, a captive for exchanges employer stop loss clients that will ensure accident and health risks, mainly in the form of high deductible medical stop loss plans, both of which will add to top and bottom line growth in 2023.
Speaker 4: As our business continues to transform, we have continued to successfully attract top P&C talent, including the recent hire of a leading industry executive, John Tatum, who is in the process of building out our second Denovo incubation, an MGA in the construction space.
Speaker 4: These accomplishments combined with an active eminute pipeline positioned Serata favorably to hit projections exceeding 200 million of place premium with attractive margins for 2023.
Speaker 4: Lastly, I would like to take a moment to acknowledge Jim Preer, who stepped down from our board after having served as a director for over seven years. The board and management have benefited tremendously from Jim's Council and service over the years, leading to the significant milestone accomplishments dating back to the segregated accounts.
Speaker 4: exit from rehabilitation in 2018.
Speaker 4: through our numerous other achievements culminating to where we are today.
Speaker 4: On behalf of the Board of Management, I want to personally thank Jim and wish him the best on his next endeavors. We plan to use Jim's departure as an opportunity to refresh our Board. The Board routinely reevaluates its composition to ensure the expertise and other qualities of the Board as a whole are well suited to the company's business and strategy.
Speaker 4: In light of the accomplishments and significant growth in our specialty P&C business, the Board's Governance and Nominating Committee is well advanced in its search to add a highly skilled director that brings additional specialty P&C insurance expertise to help Stuart and back in its next phase of growth.
Speaker 4: We look forward to updating you on that initiative at the appropriate time.
Speaker 4: I will now turn the call over to David to discuss our financial results for the quarter.
Speaker 5: Thank you, Claude. Good morning, everyone.
Speaker 5: For the fourth quarter of 2022, Amback reported net income of 175 million or $3.86 for diluted share compared to a net loss of 22 million or 42 cents per diluted share in the fourth quarter of 2021.
Speaker 5: Adjusted earnings for the fourth quarter of 2022 were 190 million, or $4.18 for diluted share, compared to an adjusted loss of 10 million or 16 cents for diluted share in the fourth quarter 2021.
Speaker 5: Adjusted earnings excluded legacy financial guarantee insurance.
Speaker 5: and tangible amortization expense of $12 million and unrealized foreign exchange transaction losses of $2 million for the fourth quarter of 2022.
Speaker 5: The $197 million increase in net income for the fourth quarter of 2022 compared to the fourth quarter of 2021 was driven by several notable items.
Speaker 5: First, we realize a $121 million net gain from the previously announced settlements of legacy RMBS litigations.
Speaker 5: 78 million of the 121 million net gain related to the Bank of America settlement.
Speaker 5: and $43 million related to the Nemours settlement. For the sake of clarity, I will walk through the various components of the gain and where they are recorded in our financials.
Speaker 5: As it relates to the net bank of America gain, 126 million of the gain is recorded as a litigation recovery in our income statement and related specifically to our allocation of a portion of the settlement to the Harvard Review for litigation.
Speaker 5: And $5 million of the gain represents realized gains recorded in realized investment gains on CIFCA notes we held in the investment portfolio. Netted against these gains was $53 million of CIFCA note call premium and accelerated discount amortization expense recorded through realized gains and losses on extinguishment of debt.
Speaker 5: as it relates to the Nomura litigation.
Speaker 5: 43 million of net gains were recognized through loss and loss adjustment expenses.
Speaker 5: Secondly, we realize a $77 million gain from the repurchase at a discount of $364 million of principal and accrued interest of surplus notes. This gain was recorded in net gains on the stinglishment of debt, and was partially offset by the previously mentioned $53 million dollars that Gnode expense.
On account of these debt reductions, interest expense was 14 million less this quarter compared to the fourth quarter of 2021.
As they occurred throughout the fourth quarter, the full impact of these debt reductions on interest expense will not be realized until the first quarter of 2023. Premiums earned were 17 million in the fourth quarter, up from 10.5 million earned in the fourth quarter of 2021. For the quarter, Evertspan earned premiums grew.
5.3 million while legacy financial guarantee net-earn premium grew 1.3 million due to the acceleration of premiums related to the diversking and Puerto Rico.
Total net premiums earned for the quarter included $13.3 million of normal earned premium.
Everspan accounted for over 40% of normal earned premium in the fourth quarter of 2022, compared to just 5% in the fourth quarter of 2021.
As Everspan continues to grow and we continue to de-risk the Legacy Financial Guarantee insured portfolio, we expect Everspan's earned premium to exceed that from the Legacy Financial Guarantee book in 2023.
In addition, we would highlight that of the $52 million of specialty P&C gross written premiums in the quarter, Erspan retained about 20% or $10 million, which will earn in over the next year. Erspan's business model allows it to retain up to 30% of gross written premium.
Ever Span also collected 2.3 million and earned approximately 1.4 million a program fees in the quarter.
As a reminder, program fees earn in over the course of a policy so that it can help premiums earn.
Therefore, ZeverSpan continues to add programs and gross premiums written, both earned premium and program fees will grow significantly.
The rotter distribution segment also continues to grow both organically and strategically.
Premium's place of 38 million in the quarter were up 46 percent, that is fitting from both the recent acquisitions of all trans and capacity marine in November , as well as organic growth from exchange.
The Scharn's distribution business revenues come from commissions earned as a percentage of premiums placed.
Total revenues for the quarter were $9 million, up 42% from the prior year period.
The insurance distribution segment produced nearly 2 million of EBITDA, net of non-controlling interests for the fourth quarter, up from the 1 million produced in the fourth quarter in 2021.
Revenues in Ibadah were favorably impacted by two months of all trans and capacity marine results in organic growth at exchange.
Investment income for the fourth quarter was 23 million, down from 27 million in the fourth quarter of 2021, as a result of volatility across markets and a smaller allocation to alternatives. More specifically, the decrease in investment income during the fourth quarter of 2022 ???
related to a net gain on fund investments of about $2 million compared to a $13 million gain in the fourth quarter of 2021. Allocations to alternative fund investments have been reduced by approximately $58 million year-to-date in connection with the regular rebalancing of the portfolio.
Income from fixed income securities was up $7 million compared to the same period last year due to higher average yields.
Capital deployed in fixed income available for sell securities for the fourth quarter was at a yield of approximately 5.7%. Lost and lost adjustment expenses were a $55 million benefit in the fourth quarter of 2022.
compared to a $15 million benefit in the fourth quarter of 2021. The structured finance portfolio generated a benefit of $58 million this quarter compared to an expense of $24 million in the fourth quarter of last year.
The principal driver to this quarter's results was the $43 million gain from the Nomura settlement. The remainder of the benefit for the quarter related to an overall net improvement in the performance of the reserve portfolio.
Net gains on derivative contracts which remain positioned as a partial economic hedge against interest rate exposure in the financial guarantee and investment portfolios were 5 million for the fourth quarter compared to 3 million for the fourth quarter of 2021.
During the quarter and year, we reduced the sensitivity of the macro hedge, generally in line with the exposure we are hedging.
As of year end 2022, the sensitivity to a one basis point change interest rates was approximately 156,000.
compared to over 530,000 at the beginning of the year. We expect to continue to reduce the DVL1 throughout 2023.
General administrative expenses were $51 million for the fourth quarter, up from $29 million in the fourth quarter of 2021. The increase in operating expenses was due to an increase in legal expenses at AAC, higher headcount for specialty PNC and other associated costs.
with the continued growth of the business, acquisitions of all trans and capacity marine, and the impact of timing on certain corporate expenses which impacted fourth quarter 2021.
to more than offset border expense reductions in the legacy business. Interest expense in the fourth quarter was approximately 30 million.
down from $44 million in the fourth quarter of 2021.
and 49 million in the third quarter of 2022. Approximately 12 million or 40% of this quarter's interest expense related to Sitka and Tier 2 notes, all which are now fully redeemed.
During the fourth quarter, we also repurposed surplus notes totaling $364 million of par in accrued interest which resulted in the previously mentioned $77 million gain.
and a $2 million reduction of interest expense. As a result of these repurchases, AAC's remaining surplus note debt, as of 12-31-22, is $945 million, inclusive of accrued and unpaid interest.
Shareholders' equity increased by $244 million or $5.42 per share to $1.25 billion.
for $27.85 per share at December 31, 2022, from the end of the third quarter.
The increase is primarily due to fourth quarter earnings on realized gains on available sales investments of 11 million in foreign exchange translation gains related to AUK of 51 million.
Adjusted book value increased to $1.27 billion with $28.29 per share at December 31, 2022 from $1.04 billion with $23.13 per share at the end of the third quarter. The total is $5.16 per share increase in ABV.
$4.96 per share. During the quarter, AFG sold all of its AAC surplus notes back to AAC, which increased AFG liquidity by approximately 95 million.
I will now turn the call back to code for some brief closing remarks.
2022 was an exciting year with achievement of meaningful value enhancing
As we look ahead to 2023, our key strategic priorities will focus on one, growth and diversification of our Spain Group.
to targeted growth at seraudible organically and through M&A.
and three, as it relates to our legacy business, completing the following.
as it relates to our legacy business, completing the following. One.
the legacy business capital and operating framework.
Two are comprehensive review of strategic options for the legacy business. And three, initiating key strategic steps towards maximizing value for shareholders. We look forward to updating you on our progress in the coming months.
Operator, please open the call for questions.
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One moment please while we poll for questions.
The first question is from the line of Paul Devon with C Devon and Association. Please go ahead. Awesome.onda Gary. Nice.
Good morning folks. How are you? A couple things. First, I can't believe Colin and David will never be talking really about Puerto Rico or BMA or NOMARA again. So first off, congratulations to everybody on the team for getting that behind you.
But now it's time to sort of what have you done for me lately and looking forward and I wonder Claude if you can talk a little bit about more granular on the growth plans for Serrata also ever span and then I had one minor question for David with respect to the unassigned negative surplus in AAC.
I know that was a down till about 80 million at the end of the third quarter. When do you think that will go positive? Thanks, Colm. Appreciate the questions and we're also happy not to have to talk about Puerto Rico and Numer going forward. So good point in history. In terms of our GoFord businesses, we are seeing.
through a business service offering in addition to having the possibility of ever-span as a as a capacity provider I think distinguishes us in a way that has led a lot of whether ZB sellers or individuals who are looking to either launch an MGA or take an MGA to the next step.
consider us as a true Bible option relative to other options in the markets. I think we've been very pleased with the types of options we've been seeing. And we're seeing more and more as time goes on. And I think we're very excited about the prospects for growth.
on the scale of hybrid front and rear as we are on the far right where we retain up to 30% of risk and I think that is distinguished us significantly in the market and I think the team that we have built with leading underwriters, actuaries, claims people, you know, really...
Distinguishes us in the market as being really a primary platform for the program business relative to peers. So again, we feel very confident that that business will continue to scale. We are attracting high quality partners and seeing a very very deep pipeline of opportunities approaching us in the future.
So with that I'll turn it over to David on the Science Surpluses. Sure, thanks. Thanks for the question. So, on the Science Surpluses about 75 million negative at the end of the year, it actually would have been positive, had not been for the repurchase of the surplus notes.
which are carried on a statutory basis at their par amount, not their par plus accrued amount. So while we don't provide financial projections of earnings and retained earnings in the future, certainly our objective is to continue to deliver and de-risk the balance sheet of AAC.
as part of our border strategic initiatives and as certainly as part of that we would expect to continue to grow.
both the size and quality of the surplus. And the factors that will go into the timing of that unifying surplus becoming positive will include, of course, the earning power of the business, but also our capital management activities.
including any future debt transactions and de-risking transactions. So there's a bit of timing to the magic of when that number may become positive in the future. David, fair enough. Thank you for that. And then, Claude, just to follow up with Serata.
Obviously, you've done all transit to Capacitor Marine and you're looking at a lot of things.
Obviously, you've done all transitive, capacitive, marine, and you're looking at a lot of things. I appreciate it's hard to say.
what opportunities you're seeing, but perhaps are there certain areas where Serata is just not interested? What don't you want to get into as much as what might be attractive?
You know, I think we have a relatively broad appetite at Serrata and we certainly are focused on MGU MGA as well as wholesale. We're not focused, obviously, on the retail broker side, but I think fundamentally what's core to...
platforms in Sarada is really their underwriting performance and distribution performance. We are really looking at each of our MGA partners at Sarada and that goes as well as program partners forever span for platforms that are very strong in the underwriting area that we believe and we can assess their
at areas where we see strong synergies as between our MGA partners and distribution partners and also potential synergies with Ever Span. So those are other categories in the areas that we would focus on in terms of identifying good opportunities at Serrata.
Thank you very much. Thanks, go on.
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