Q3 2023 Ambac Financial Group Inc Earnings Call

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Ladies and gentlemen, good morning, and welcome to the Ambac Financial group third quarter 'twenty 'twenty earnings Conference call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It's just not my pleasure to introduce your host Charles Sobecki head of Investor Relations. Please go ahead.

Thank you good morning, and welcome to Amdocs third quarter 2023 call to discuss financial results speaking today will be closed 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.

For those of you following along on the webcast during the prepared remarks, we will be highlighting some slides from our investor presentation, which can be located on our website.

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 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, and 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 and other materials in our investors section on our website Ambac Dot com.

I would now like to turn the call over to Mr. Claude Leblanc.

Thank you Chuck and welcome to everyone. Joining today's call I'm pleased to report that Ambac had a very strong third quarter.

We completed the evaluation of the strategic options for the legacy financial Guaranty business and at the same time recorded very strong financial results across all of our businesses.

The results generated by our core P&C franchise puts us squarely on track to achieve our stated 2023 strategic goals.

Clothing ever span achieving initial profitability in the second half of this year.

Our consolidated financial results for the third quarter included net income of $66 million and adjusted net income of 94 million.

We also completed repurchases for just over 120000 common shares.

David will discuss our financial results in more detail shortly.

But first I would like to provide some additional information on our achievements for the quarter, starting with an update on our legacy financial Guaranty business.

Working with our Wisconsin regulator, the new regulatory capital model for AC is now substantially complete.

As a result of our progress with the OCI. We were also able to complete the internal review and analysis of the strategic options I previously discussed for our legacy business.

And we have now formally engaged moelis and company along with certain other external advisors to commence discussions with interested parties and assess potential transactions to maximize value from our legacy business.

In parallel we continue to actively pursue certain prioritized options to further enhance the value of the company.

The goal of this process remains the same to.

To maximize value realization from our legacy business a little bit.

Time, and a risk adjusted basis.

We expect to update shareholders with additional information, including an expected timeframe as we progress.

Yeah.

With respect to our core specialty P&C business, we continue to record significant top and bottom line growth as ever span and sirona scaled their respective business platforms.

This quarter on a combined basis these platforms that generated over $140 million of premium production, 840% increase over the prior year's quarter.

Year to date premium production has exceeded $360 million, representing an approximate 90% increase over the same period last year.

In addition, both businesses generated positive net income for the quarter.

For 2024, we have provided our preliminary guidance.

For our P&C businesses ever span of Toronto, where on a combined basis. We are now forecasting over 700 million of premium production with attractive margins. As a reminder, this excludes any future acquisitions or startups not previously announced.

Turning to ever spend there.

The business continued its upward trajectory generating gross premium written of 77 million, which was up 160% over the third quarter of the prior year.

The company continues to expand and there were diversify its MGA program partners, which currently stand at 20 up from 13 programs a year ago.

One of our third quarter additions is it workers' compensation program.

Workers' compensation is a line of business ever spent abuse is attractive from a profitability and diversification perspective.

We took advantage of an opportunity to partner with an industry, leading workers compensation program partner in the quarter to right assumed reinsurance business.

They were spending tends to write some limited assumed reinsurance programs, where we believe the terms conditions and pricing to be attractive.

We see this as a natural fit for our spend given our program expertise.

To retain risk and diversify.

They were spends book has continued to become more balanced across risk classes, given the new program additions.

Which should have the long term benefit of more stable and predictable underwriting results.

From an overall industry perspective, we believe market conditions remain supportive of our continued business growth I'd ever spend particularly in the E&S markets.

Demand for E&S capacity remains robust with many programs transitioning out of the more rigid admitted markets and moving forward on a non admitted basis. We expect this trend to continue in 2024.

They were spend is on target to generate approximately $250 million of gross premiums for 2023.

And we're now forecasting close to $400 million of gross premiums for 2024 subject of course to market conditions.

At scale, we are still targeting mid teen roe's for ever spend with a mid single digit ROE we forecasted for 2024.

This quarter, we saw the continuation of elevated loss cost trends, particularly in certain commercial auto classes, which have experienced a frequency uptick in recent quarters.

We still see pricing trend exceeding loss cost trend as the market continues to push rates.

However, there may be some timing differences before the full effect of pricing comes through earned premium and hence loss ratios.

Turning to the cerrado.

We had a strong quarter generating $62 million a premium of 119% over the prior year, which produced nearly 4 million of EBITDA all of which reflects the ongoing benefit from prior quarter acquisitions and growth initiatives.

We continue to see significant opportunities for cerrado, whether by a product expansion across our current businesses or through additional M&A transactions.

Toronto is on track to exceed its 2023 target premium of 200 million at 45 billion of gross revenue, while maintaining attractive margins.

Looking ahead to 2024 without the addition of any acquisitions, we are targeting over 300 billion of premium and $60 million of gross revenue, while maintaining our 20% plus EBITDA margins.

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

Thank you Claude and good morning, everyone for the third quarter of 2023 Ambac is happy to report net income of 66 million or $1 41 per diluted share compared to net income of $340 million or $7.41 per diluted share in the third quarter of 2000.

And in 'twenty two.

Adjusted net income was $94 million or $2 per diluted share compared to an adjusted net income of $339 million or $7.40 per diluted share in the third quarter of 2022.

The change in net income and adjusted net income for the third quarter of 2023 compared to the third quarter of 2022 was mainly driven by the $319 million RMB S litigation gain related to the settlement with bank of America recognized in the prior year period.

Our favorable results this quarter were driven by improved arm best recoveries.

And a higher loss reserve discount rates.

Favorable investment results emanating from our legacy financial Guaranty segment.

As well as growth within our specialty property and casualty.

<unk> distribution segment.

Aerospace as net premiums written in the quarter with $25 million were up 341% over the prior year period.

Growth in existing programs and the addition of new programs accounted for the significant advance.

Ara spans a retention rate of approximately 32% of gross premium compared to 19, 19% last year.

The increase retention level stemmed, mostly from new Workers' compensation program, which Claude mentioned written in the quarter as assumed reinsurance.

Earned premiums and program fees were $12 million and $2 million, respectively up 192% and 170, 776% respectively from the third quarter of 2022.

The loss ratio was 78% in the third quarter of 2023 compared to 65, 2% last year.

The increase was primarily driven by higher commercial auto claim frequency.

Within this quarter's loss ratio was seven 1% of prior period development.

The increase in losses was partially mitigated by a benefit just sliding scale commissions.

The program loss ratios recognized through net acquisition costs.

Consistent with our previous guidance ever spend generated a modest pretax profit in the third quarter compared to a loss of $1 5 million for the third quarter of 2022.

Our response continues to see and evaluate a steady stream of opportunities.

Momentum combined with the progress made to date is set the course for ever spend to generate a mid single digit ROE next year on our path to mid teen Roe over the cycle.

Cerrado premiums placed.

$62 million in the quarter were up 119% compared to the third quarter of 2022.

Benefiting from both recent acquisitions and organic growth.

The insurance distribution segment produced $3 5 million of EBITDA for the third quarter.

Up from the $1 6 million produced in the third quarter of 2022.

On the EBITDA margin of 24, 1% versus 22% last year.

The margin increase is largely driven by some margin expansion at existing businesses and the impact of recent acquisitions.

Our legacy financial Guaranty segment continued to benefit from active asset liability management.

Third quarter.

Legacy sector generated net income of 66 million versus $346 million.

Prior year period.

Solid performance of the legacy business. This quarter was primarily driven by RMB S recoveries and strong investment results, which I'll review with our board of consolidated results.

Consolidated investment income for the third quarter was $30 million compared to 11 million in the third quarter of 2022.

The improvement stemmed from higher average yield on fixed income securities, which increased 120 basis points in the third quarter of 2023 compared to last year.

Implementing the yield generated by our core fixed income portfolio was our alternative investment portfolio, which produced strong results leading to an $11 million increase over the third quarter of 2022.

We're often loss adjustment expenses were a benefit of 76 million in the third quarter compared to a $353 million benefit in the third quarter of 2022.

Well, a wristband losses grew $7 million from last year, the legacy financial guaranteed business produced a benefit of $86 million driven by incremental arm B S recoveries and a discount rate benefit from higher rates.

General and administrative expenses were 49 million for the third quarter.

From $31 million in the third quarter of 'twenty to 'twenty two.

The increase in operating expenses was due to a $17 million increase in defensive litigation costs at AAC.

Strategic advisory fees and higher head count in our growth segments.

These increases more than offset continued product cost reductions in the legacy financial Guaranty segment, driven by lower head count and other cost reductions.

Interest expense was approximately $16 million down from 49 million in the third quarter of 'twenty to 'twenty two.

Following the significant deleveraging of AAC.

These remaining surplus no debt as of September 30th 2023, with $982 million inclusive of accrued and unpaid interest.

Shareholders' equity of one point to $7 billion or $28 per share.

Camber, 30th 2023 was up slightly from $27 59 per share at June 30th 2023.

The increase was driven by $66 million of net income, partially offset by a $23 million increase to unrealized losses on available for sale investment.

Foreign exchange translation losses related to a U K, a 29 million in the quarter.

Adjusted book value of 1.26 billion or $27 90 per share at September 30th 2023 was up over 3% from $26 97 per share at June 32023.

During the quarter, we repurchased 120000 shares an average price of $12.94 per share, which when combined with other repurchases in the year largely offset shares issued in 2023 for employee and board member compensation.

At September 30th 2023 F. G on a standalone basis, excluding investments in subs at cash investments and net receivables of approximately 209 million or $4 62 per share.

Now I'll turn the call back to Claude for some brief closing remarks.

Thank you David.

Looking ahead to next year I believe ambac is very well positioned to maximize options to generate significant value for shareholders.

Working with Moelis <unk> company, who will now engage in formal dialogue with interested parties I expect that we will be able to chart. The optimal path forward to crystallize value from our legacy financial Guaranty business.

Additionally, both ever span and cerrado or scaling rapidly supported by the 700 million of premium production, we're targeting in 2024.

I'm encouraged by the significant progress we have made in our specialty P&C insurance businesses and look forward to their ongoing contribution to both near term and long term profitability.

We have been steadfast in our focus to generate long term value for shareholders and I look forward to updating you in the coming quarters.

Operator, please open the call for questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session.

If you would like to ask a question. Please press star and one on your telephone keypad.

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All participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.

Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Our first question is from the line of agility, Leangle, but looking out.

From Compass point. Please go ahead.

Good morning, Chris good corners of phones in the.

Yes, yeah hiring at a moelis.

One thing I was curious about asking is you know this has obviously been yeah, yeah yeah.

I'm totally wrong process I've gone through everything with Wisconsin, and everything else and then you know moving forward was actually.

Engaging Melissa I'm curious if you're already starting to see if you're if you're already in discussions with already contacted you know potential interested buyers at this point.

And you are kind of related to that if there's any sense of timelines or milestones related to oh lifecycle process and I realize that there can be a lot of different you know.

Yeah.

A lot of different you know what else.

Yeah, two forms a M central transaction stay here.

Thanks, Joanna and good morning.

Yeah, I think we can say that we've had some limited conversations with a certain interested parties, but we are commencing as I mentioned, a formal process that multiple lead for us. So I expect to to broaden the discussions with a number of other parties in the coming weeks and months.

And from a timeline perspective, you know it.

It is our intent and we've said this over and over that we are looking at this.

Ah the options for the company both on a risk a time adjusted basis that we will be aggressively.

Engaging with interested parties to evaluate the various options that we've outlined.

And considering where we believe we can maximize value for our shareholders.

That's great and then maybe on a slightly different.

There's obviously some defensive litigation cost in the corner.

I'm curious if there was anything one time or kind of episodic about this quarters run rate and then how we should think about the trajectory for.

That expense going forward.

Yeah.

Yeah Julien thanks.

Thanks, It's David the you know.

This quarter is not you know predictive of future quarters, you know, it's very difficult to comment about.

Litigation that we're engaged in but I would say that I wouldn't take anything from this quarter as predictive of future quarters, we're doing.

What we have done historically in terms of trying to manage litigation and exit our litigation and whatnot.

Consider what we've done this quarter is any form of view of a run rate for go forward periods.

That sounds good that's very helpful. I appreciate the answers.

The answers on the congrats on moving forward with the process or easy and I will jump back in queue.

Okay.

Yep.

Yeah.

Thank you.

Our next question is from the line of Dennis Chalk, but I bet taught partners LLP. Please go ahead.

A quote and David Congrats on the great progress this quarter I have two questions.

First question on buybacks. So it's great that you did some buybacks in the quarter and although it was admittedly small.

And I think that I think folks understand that there is a 5% shareholder a restriction that maybe you can you can you talk a little bit more about some of the ways to use our explore in trying to do the buybacks and whether or not you know this is something that we can expect going forward as I can think of a buyback.

And the second question kind of related to what to the analyst question wasn't timeline and milestones at the allergy process.

Clearly when you responded to that and you said time adjusted to just wanted to clarify that that means a preference for sooner rather than later outcomes and I ask that because then you know, there's obviously a big NOL asset.

G.

So yeah two questions.

Thanks, Todd so in terms of buybacks to date, our year to date, we've bought back 325000 shares.

And that's relative to just over 500000 shares of our issued this year related to compensation.

So you know what I think we've accomplished to help minimize the dilution the dilutive effects of employee and board member issuances and since we put the program in place we've bought back about one 9 million shares spent about $19 million.

And cash on that and our average price is about $9.70. So I think you know the program. We've implemented has been effective but as we've said before.

Our objectives really are to continue to allocate and.

Deploy capital to build the specialty P&C franchise, and you know we're going to continue to do that we always evaluate or opportunities there against the.

The opportunities within buying back the stock.

Against also the restrictions as you pointed out of a 5% shareholders. So it's a delicate balance that we try to strike a into that and you know we have explored and I think we've commented on this in the past some alternative types of buyback programs, which we've spent a lot of time.

On internally, we've talked to outside financial advisers legal advisers tax advisors about that.

And put a fair amount of Ah, you're kind of human resource if you will behind it.

And unfortunately at this point, we have not been able to come up with a alternative program other than direct buybacks.

So you know we will continue to be I think selective in terms of buybacks going forward and again balancing.

What we can do against you know the 5% shareholder limitation as well as our desires to build a value long term shareholder value.

The P&C business.

And Dennis Good morning on your second question to clarify and I. Thanks for asking the question are we see the the comment around timing.

Time adjusted value is really you know the time destroys value. So I think it should be interpreted as.

The sooner the better but also considering the.

Oh, the execution risk around certain of our options. So we are eager to put in place and execute transactions that we believe will be sooner rather than later and those that we believe will maximize value.

To to AFG.

Thank you.

Thank you.

There are no further questions at this time.

This concludes today's conference we thank you for your participation.

May now disconnect your lines.

Okay.

Uh-huh.

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