Q3 2024 Ambac Financial Group Inc Earnings Call
Speaker Change: and David L. Sebastian. A S E B L E G A M A N A N A M A N A M A N A M A N
Speaker Change: Greetings and welcome to AMBAC Financial Group Inc. 3rd Quarter 2024 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.
Speaker Change: 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.
Speaker Change: It is now my pleasure to turn the call over to Charles Sebaski, Head of Investor Relations. Please go ahead.
Charles Sebaski: Thank you. Good morning and welcome to AMBAC's third quarter 2024 call to discuss financial results.
Speaker Change: Speaking today will be Claude LeBlanc, President and CEO, and David Trick, Chief Financial Officer.
Speaker Change: They will discuss the financial results of our business and the current market environment, and after prepared remarks, will take your questions.
Speaker Change: For those of you following along on the webcast, during the prepared remarks we will be highlighting slides from the investor presentation, which can be located on our website.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Also, in our prepared remarks or responses to questions, we may mention some non-GAAP financial measures.
Speaker Change: I would now like to turn the call over to Mr. Claude LeBlanc.
Thank you, Chuck, and welcome to everyone joining today's call.
Speaker Change: The third quarter was a milestone quarter for AMBAC as we materially advanced our strategy towards becoming a pure play PNC business with the acquisition of Beat Capital.
Speaker Change: The quarter also reflected the very strong organic growth behind their businesses with the announcement of multiple new MGA launches.
Speaker Change: Last night, after market closed, we also announced the acceleration of our $50 million share buyback program, which will commence immediately.
turning to our distribution business.
Speaker Change: With the acquisition of BEAT, we have further advanced our goal towards becoming a leading destination for MGA and underwriting talent, which we believe will lead to exceptional long-term growth.
Speaker Change: While acquisitions will remain one pathway for future expansion, organic growth is our key strategic focus as we expand our distribution business.
Speaker Change: Between BEAT and Serrata, we have launched six new programs this year, including one during the quarter and two in October.
Speaker Change: These six new MGA's cover a broad set of risk classes, including E&S casualty, management liability.
Professional liability.
technical commercial property and credit
Speaker Change: The exceptional leadership of these franchises come with the pedigree from some of the best in the industry, including names like ARCH, AIG,
Speaker Change: Nationwide, FM Global and Hiscox amongst others. These six new MGA's will help drive significant future organic growth to our business starting in 2025.
Speaker Change: As our business scales, we will also be providing the costs associated with launching these DeNovos.
Speaker Change: There is likely to be some volatility to the expenses as the timing, size, and pathway to profitability of each new startup opportunity fluctuates. However, it is reasonable to think about each de novo typically incurring approximately $1.5 to $3.5 million of expenses.
Spread over six to eight quarters from watch
Speaker Change: These startup expenses will diminish relative to the overall results as we continue to grow.
Speaker Change: We will provide additional details regarding startup expenses in the coming quarters.
Speaker Change: As for market conditions, broadly speaking, we believe that markets remain quite favorable for us in the U.S. casualty lines we are focused on, as rate increases are keeping up with or exceeding loss-cost trends.
Speaker Change: We're also keeping a close eye on commercial auto and certain professional lines and remain optimistic based on the subclasses we target.
Speaker Change: With respect to the property markets, pricing has softened. However, it was coming off multi-year peak levels to start the year, so not unexpected.
Speaker Change: We do expect the effect of Hurricanes Milton and Helene to stabilize property insurance pricing going into 2025, whereas the effects on non-property lines is limited.
Speaker Change: In summary, we see the overall commercial insurance market conditions, including the secular trends towards E&S and risk specialization, as supportive and conducive to our continued expansion.
Speaker Change: As we look ahead to our future as a PurePlace specialty PNC platform, I am extremely pleased with the overwhelming shareholder support we received for the sale of our legacy financial guarantee business.
Speaker Change: I'm also happy to report that Oak Tree has received PRA approval for the sale, and we now await the only remaining approval from the Wisconsin Office of the Commissioner of Insurance.
Speaker Change: We continue to anticipate closing this transaction in the fourth quarter or the first quarter of next year. As we have stated on prior calls, the regulatory process is outside of our control.
Speaker Change: Turning now to our third quarter results. Our consolidated specialty PNC insurance platform continued to generate strong production with $260 million in premium, an 86% increase over last year.
Speaker Change: Over the first three quarters, our total premium production totaled $611 million, an increase of 68% over the prior year period, and on pace for $900 million this year.
Speaker Change: To date, our PNC businesses generate approximately $20 million of combined EBITDA.
Speaker Change: The acquisition of Beat contributed $64 million of premiums placed to our third quarter production.
Speaker Change: For B, July is a relatively strong production month in the third quarter, and consequently, it has a disproportionate impact on the business's result in the quarter, given our close on July 31. David will discuss our quarterly results in more detail in a few minutes.
Speaker Change: I am pleased to report we continue to make significant progress on the integration of BEAT. We have already been able to identify a number of early-day synergies and are confident in our ability to realize a broader set of synergies as we progress our integration efforts and our platform continues to grow.
Speaker Change: I can now confidently state that the combined breadth and depth of our capacity relationships, distribution channels, and a highly desirable operational environment makes AMVAC a premier destination for top underwriting talent. Turning to Everspan's results for the quarter.
Speaker Change: Everspend had a strong quarter. The focus continues to be on underwriting profitability, which improved both this quarter and year-to-date, as the benefits of scale, diversification, and proactive underwriting actions take effect.
Speaker Change: Looking towards 2025, Everspan maintains a strong pipeline of internal and external program opportunities, which we believe will further our goal to diversify the portfolio, support growth, reduce our combined ratios, and deliver strong future ROEs.
Speaker Change: I will now turn the call over to David to discuss our financial results for the quarter. David.
David Trick: Thank you, Claude, and good morning, everyone. For the third quarter of 2024, AMBAC generated a net loss of $28 million, or $0.63 per diluted share.
David Trick: Adjusted net loss was $19 million, or $0.46 per diluted share, for the quarter, compared to adjusted net income of $94 million, or $2 per diluted share, in the third quarter of 2023.
David Trick: Approximately $17 million of legal and advisory expenses related to the acquisition of BEAT and the pending sale of AAC.
David Trick: A $13 million loss at the legacy financial guarantee business, mostly driven by lower loss reserve discount rates.
David Trick: $3.8 million of short-term financing costs associated with the BEAT acquisition.
$1.3 million of incurred startup expenses at Serata.
and net Serrata FX losses of $1.4 million.
David Trick: These expenses were partially offset by a $7.5 million net gain on the sale of Scenic, an Everspan-admitted carrier, and a $5 million gain at AFG related to the hedging of the British Pound purchase price of BEEP.
David Trick: During the third quarter, we continue to experience meaningful growth in our specialty PNC businesses.
David Trick: The RADA premiums grew by 133% to $145 million and total revenue increased by 64% to $24 million compared to the third quarter of 2023.
David Trick: Net revenue equaling total revenue less commission expense grew 135% to $14 million compared to the third quarter of 2023.
David Trick: Growth was driven by the acquisition of B-Capital, an additional month of Riverton results, and organic expansion.
David Trick: EBITDA was $2.4 million, $2.7 million after not controlling interest for the third quarter of 2024, compared to $3.5 million, $2.9 million after not controlling interest, respectively, reduced in the third quarter of 2023.
David Trick: The resulting EBITDA margin before the impact of non-controlling interest was 10.2% this quarter, compared to 24.1% in the third quarter of 2023.
David Trick: This quarter's insurance distribution segment results were affected by several items worth highlighting.
David Trick: During the quarter, we incurred $1.3 million of DeNovo startup expenses.
Speaker Change: While these expenses suppress earnings in the short term, they are an investment which will help drive future organic growth. As Claude noted, there will be volatility to the start-up expenses, but they will diminish relative to overall results as we continue to grow.
Speaker Change: We incurred 1.4 million of net foreign exchange losses as BEIT's functional currency is the pound. Since BEIT does a significant amount of business in U.S. dollars and other currencies, we will experience foreign exchange losses when the pound depreciates.
It historically hedges approximately 50% of its estimated exposure.
Speaker Change: This quarter included two months of BEATS results, given the July 31st close date.
Speaker Change: Timing impacted results as a disproportionate amount of quarterly revenue occurs in July compared to August and September, while expenses are incurred relatively evenly.
Speaker Change: For the quarter, BEAT contributed approximately $64 million of premiums placed.
Speaker Change: $7.8 million of revenue and a slight loss resulting from the aforementioned items.
Speaker Change: Everspan's net premiums written in the quarter of $33 million were up 32% over the prior year period based on a retention rate of approximately 28% of gross written premiums of $115 million.
Speaker Change: This compares to a 32% retention rate, a gross written premium of $77 million last year.
Speaker Change: The growth and gross premiums over the prior period stem mostly from the addition of five new programs, contributing $42 million of premium, offset by about a net $4 million reduction to existing programs.
Speaker Change: Mostly related to our exit from 26 million in commercial auto programs.
Speaker Change: There was a minor prior accident year development in the corridor amounting to 0.2% for about $100,000.
Speaker Change: The expense ratio of 26.1% in the third quarter of 2024 was down from 28.5% in the prior year quarter, benefiting from the overall growth at Everspan.
Speaker Change: One of the ways Everspan manages risk is through sliding scale commissions, which are recorded against acquisition costs and linked to loss performance.
Speaker Change: For the third quarter of 2024, sliding scale commissions produced a benefit of 1.9% compared to 8.1% benefit last year.
Speaker Change: The resulting combined ratio for the third quarter was 100.5 percent, an improvement of 600 basis points from the respective prior year period.
Speaker Change: The year-to-date combined ratio of 102.8% is down 950 basis points from 112.3% last year-to-date.
Speaker Change: During the third quarter, we stopped retaining any net exposure on one commercial auto program, and effective October 1st, exited a non-standard auto program.
Speaker Change: These moves are designed to help drive down our loss ratio, but will have some short-term impact on revenue, which will impact the expense ratio. Nevertheless, our objective remains to drive the combined ratio to be consistently below 100.
Speaker Change: For the quarter, Everspan produced just under $9 million of pre-tax income, compared to a roughly break-even result for the third quarter of 2023. As previously noted, this quarter's results were bolstered by the $7.5 million net gain on the sale of Scenic.
Speaker Change: For the third quarter, the Legacy Financial Guarantee segment generated a net loss of $13 million versus net income of $66 million in the prior year period.
Speaker Change: The year-over-year change was primarily driven by lower discount rates in the third quarter of 2024 compared to higher discount rates and elevated RMBS recoveries in the prior year period.
Speaker Change: It is noteworthy that the economics of the legacy business, whether positive or negative, reside with the buyer effective March 31st, 2024. With a successful shareholder vote in October in support of the sale of the legacy financial guarantee business,
Speaker Change: We anticipate that we will be switching to help-or-fail accounting for the legacy business in the fourth quarter. As a result, we will be recording a loss on the sale of the business.
Speaker Change: If we would have changed to health-of-sale accounting this quarter, we would have recorded a loss of approximately $639 million and a reduction to book value of $549 million.
Speaker Change: Shareholders' equity was $1,470,000,000, or $30.89 per share, at September 30, 2024.
Speaker Change: Adjusted book value was $1,390,000,000 or $29.28 per share at September 30th, 2024, up from $29.23 per share at June 30th, 2024.
Speaker Change: AFG, on a stand-alone basis, excluding investments and subsidiaries, had cash, investments, and net receivables of approximately $147 million, or $3.09 per share.
Speaker Change: In addition to health-safe accounting and consistent with our transition to a pure-play PNC insurance and insurance distribution platform.
Speaker Change: We also expect to introduce new non-gap measures in the fourth quarter that better align with our go-forward business.
Speaker Change: I will now turn the call back to Claude for some brief closing remarks.
Thank you, David.
Claude LeBlanc: As we head towards the end of 2024, I am very excited by the prospects of AMBAC's future and our ability to create shareholder value both near-term and long-term.
Claude LeBlanc: Here are a few notable items on our horizon. One, launching our $50 million share buyback program, which we will commence immediately.
Claude LeBlanc: 2. Closing on the sale of our legacy financial guarantee business, which completes AMBAC's transformation into a specialty P&C franchise and materially replenishes our capital resources.
Claude LeBlanc: 3. Continue to scale and diversify our insurance distribution business, both organically and strategically.
Claude LeBlanc: And lastly, an anticipated rebranding of our company in 2025 following the sale of our legacy business.
Claude LeBlanc: As previously reported in September, we have our sights set on delivering the 2028 EBITDA goal of 70 to 80 million and I feel that we are solidly positioned to deliver on these results. Operator, please open the call for questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, please restrict yourself to one question and one follow-up. One moment, please, while we poll for questions.
Speaker Change: The first question comes from the line of Mark Hughes with TrueSecurities. Please go ahead.
Thank you. Good morning.
Speaker Change: For your Everspan business, you talked about the combined ratio a little bit above 100. I think you suggested your goal was to
Speaker Change: keep that below 100. Is that the longer-term target? Is there a...
Hey, uh...
Speaker Change: Combined ratio you'd like to achieve and what does that translate into in terms of returns ROE within Everspan?
Thanks, Mark. It's David Trick. Appreciate the question.
Speaker Change: Yeah, I mean, absolutely. In the short term, we're looking to get that combined ratio below 100.
Speaker Change: Longer term, we've indicated before that we're looking at a combined ratio closer to 90 long term, and in terms of ROEs, we see that as translating to mid-teen ROEs.
Speaker Change: When you left your guidance kind of the or your longer-term objective the 70 to 80 million dollar goal, is there a rough split between Serata and Everspan and should be a balanced model or do you think one will be a
more significant than the other.
Speaker Change: the predominant growth engine behind our platform. Everspan is a strategic component of that, as is our other managed capacity relationships.
Speaker Change: that we work with. So I think you should think of really the growth and whether it's 85 or 90% plus of the earnings growth really being attributable to the distribution side.
Speaker Change: Thank you for that. If I could squeeze in one more. As you're launching these MGAs, how do you find the appetite in terms of carrier capital support?
Speaker Change: maybe contrast now versus six, 12 months ago. Is that fairly straightforward? Just some thoughts that would be helpful.
Sure, so, um...
Speaker Change: As it relates to, you know, our start-ups or de novo's.
Speaker Change: components of having managed capacity, whether it be through Everspan, through the Lloyds Syndicates.
on acquisitions and on launches.
and typically third-party sources.
Speaker Change: as part of our growth strategy. But to date, it's not been as much of an issue. Clearly, there's some challenges.
or 100% of the capacity for the startups.
Appreciate that. Thank you.
Speaker Change: Thank you. Next question comes from the line of Dennis Chua with Repertor Partners. Please go ahead.
Speaker Change: I had two questions. One was on the buyback, the decision on pulling forward that buyback and starting it immediately. Obviously, we think that was a good decision, but what changed in the last couple of months?
such that the board decided to do it now.
Speaker Change: And then the second question I have was on Everspan. Notice that the year-to-date gross written premiums and program fees are really tracking.
Speaker Change: ahead towards your previous guide of I think it was like $375 to $400 million of gross rent premiums for the year, $12 million program fees for the year. Would you say that we're tracking ahead of that or is Q4 just seasonally a little bit weaker?
Speaker Change: And I'll be on track for that mid-teens ROE in the near to mid-term. Thank you.
Thanks, Dennis. Absurdly...
Speaker Change: Well, David, do you want to hit the respect question first?
David Trick: Yeah, so overall I think we're tracking well to our previous guidance.
There will be...
David Trick: You know, some moderation in the fourth quarter, a little bit of seasonality, but as I mentioned, I think in prior calls and on this call a bit, we are exiting certain programs that don't align with our
a long-term goal that I outlined before in terms of
David Trick: The combined ratio and long-term ROE. So there'll be some noise in the fourth quarter, but I think we'll be, from a production standpoint, we'll be around our guidance level for the full year.
the sale of the legacy business.
David Trick: but given where we are in terms of our progress on that, the shareholder vote being behind us, the PRA approval being in hand.
David Trick: really down to the Wisconsin approval, which again, we don't have control over.
David Trick: process and feel highly confident that we will get to a close in a not-too-distant future. I think that was certainly one factor.
David Trick: What we believe the true value of our platform is relative to the current stock price, just presents a very attractive opportunity anywhere near the current trading values of our stock. So the board thought it was a good time to press forward.
That's why we decided to move forward earlier.
Speaker Change: Make sense. Can I squeeze in one more, if you don't mind? Sure. So the $70-80 million long-term EBITDA target
Speaker Change: would you say that's a stretch goal or or more on the conservative side and you know is the what do you think of the biggest biggest driver for her for you know surpassing that that number
Speaker Change: Yeah, I wouldn't say it's a stretch goal. It is absolutely something we're focused on and the biggest driver to get there is certainly the organic growth.
Speaker Change: As Claude had mentioned, acquisitions will continue to play a part, but it's really the underlying organic growth of our existing businesses, as well as startup entities.
Speaker Change: that we are pursuing, and as Claude mentioned, a number of them have been launched this year that will really drive big components of that 2028 guidance.
Speaker Change: You know, I looked at recently some of the, you know, the forecast for some of those startups that launched this year, and the business plans, and it were very
Speaker Change: Excited about it and very optimistic that those business plans will be successful and be a big contributor to the 70-80 million guidance. And then secondly, as we mentioned, in terms of the aspirations for Everspan,
Speaker Change: is on the right track and we continue to be optimistic about the guidance we provided.
Speaker Change: We have under our control to a large degree So that also gives us a great deal of confidence in terms of getting to our numbers
Thank you.
Speaker Change: Thank you. Next question comes from the line of Harry Fong with Roth MKM.
Good morning. Claude, just a quick question.
Speaker Change: sort of in part a follow-on to the prior question in terms of long-term growth.
I was extremely pleased to see...
the new partnership with Mike Miller, formerly president of Scottsdale.
Speaker Change: He's a very visible player in the E&S insurance market along with his team. I'm sure...
Speaker Change: Mike had a lot of other potential partners that he could have teamed up with, but he selected AMBEC. Similarly, you could say the same thing about
Speaker Change: Pete Capital. Pete has very very good relationships and and is well thought of in the UK market.
Speaker Change: How were you able to convince both Mike Miller and Beat to partner up with Ambeck when they likely had many other potential partners?
Thanks, Jerry. Yeah, I think the...
Speaker Change: you know, our model and strategy that we outlined, you know, going back.
Speaker Change: underwriting performance with our MGAs that would be in the top quartile. It's also a partnership model where we have strong alignment of interest with our MGA partners, and that's true for acquisitions as well as startups, so that would cover both Mike and John and his team.
Speaker Change: We're also a permanent capital vehicle. A lot of these participants, whether they're taking the company to the next stage, as in the case of Beat, or they're launching what they hope to be and expect to be a very, very strong and successful platform, are looking for that permanent capital.
Speaker Change: are operations to support their businesses as they continue to grow.
There aren't many, in fact I'd say there's...
They're hard to identify.
Comparatives to the offering that we bring to the market.
and of course...
Speaker Change: The cultural fit is probably the most important factor that we look for, and we were able to find that with Mike and John.
Speaker Change: For that matter, the other MGA's that we brought into the team that we're also very impressed with and proud to have as part of our family.
Speaker Change: So, we're very pleased that, again, we were able to partner with these.
Speaker Change: Two excellent leading teams in the marketplace, but we will have many more to come and a number in the pipeline that we think will also be part of the growing family that will be equally as impressive.
Speaker Change: I guess I'd leave it at that, Harry, unless you have other questions.
Yeah, well, I guess a follow-on question might be...
Speaker Change: to the distribution business, but by 2026, it will now be organic growth.
Speaker Change: How are the numbers looking as we go into 2026? What do these two companies need to do to make it easy for you to hit your EBITDA numbers by 2027-2028?
Speaker Change: Good question, Harry. So I would say organic growth wise, I mean beet will be contribute to organic growth in 2025 and 26 as we obviously acquired them effective July 31st. So the latter part of the of 25 will include beet on our organic basis.
Speaker Change: and Mike's business, PIVX, as a startup really is organic, we're capitalizing that business and getting it off the ground. So I think, you know, we went into both these acquisitions and investments and partnerships.
And so I think, you know...
Speaker Change: That plan is reflected in the guidance we've given, so they have to, you know, they have to hit their plan.
Speaker Change: I don't think it's anything more special outside of that, and as you pointed out, these are industry-leading people with strong backgrounds and experience in the space.
Speaker Change: and we went in, you know, as I mentioned, with a plan in place and we have the utmost confidence that they'll deliver on their plan.
Speaker Change: And here, I think, again, we talk about this, but the shared service offering and support that we bring to these platforms, you know, outside of capacity and distribution.
Speaker Change: even in the case of BEAT with its significant expansion into the U.S.
Speaker Change: a basket of tools to help them manage and expand at the scale and pace that they want to get to, which I think will be critical in terms of getting them to where they meet their plans and even exceed their plans in the coming year or two.
Speaker Change: And if I may ask one more question, with respect to the Wisconsin regulator, I know that, you know, at this point in their review, they're more likely to be talking to Oakshree than you to make sure that...
Speaker Change: Oaktree is the rightful, not rightful, as the right owner of the Financial Guaranteed Business. So have you heard
Speaker Change: Yeah, anything from either Oaktree or the regulator to suggest that there might be any issues related to the final stage of the regulatory review?
Speaker Change: We've not heard of any issues, Harry, and you're right, I mean, a lot of the dialogue is between O3 and our regulars at this stage. We're kept informed, but we have not heard of any issues and we understand things continue to progress.
Thank you.