Q2 2019 Earnings Call

Greetings and welcome to the Ambac Financial group Inc. second quarter 2019 earnings call.

At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host.

Lisa Gill.

Head of Investor Relations.

Well the blah blah blah.

Chief Executive Officer, and David <unk>, Chief Financial Officer.

I will now turn the call over to Lisa.

Thank you good morning, and thank you all for joining today's conference call to discuss Ambac financial group's second quarter 2019 financial results.

We'd like to remind you that today's presentation may contain forward looking statements.

Any forward looking statements are not guarantees of future performance of events.

Actual performance and events may differ possibly materially from such forward looking statements.

Factors that could cause. This include the factors described in our most recent FCC filed quarterly or annual report.

Under management's discussion and analysis of financial condition and results of operations and under risk factors.

Ambac is not under any obligation and expressly disclaims any obligation to obtain any forward looking statement.

Whether as a result of new information future events or otherwise.

Today's presentation contains non-GAAP financial measures.

Reconciliations of such measures to the most comparable GAAP figures are included in our earnings press release, which is available on our website at Ambac dotcom.

Please note that presentations have been posted to the events and presentations section of our IR website, which support our comments today.

I would now like to turn the call over to Mr. quote the block.

Thank you Lisa and welcome to everyone joining today's call.

During the second quarter, we continued to make significant progress on our key strategic priorities, including the active de risking weren't sure portfolio.

Further reducing aren't sure NEP her by approximately 2.3 billion to 42.2 billion with 1.6 billion the decline representing adversely classified and watch list credits.

This represents a further 41% decline in our overall ensure portfolio for the quarter and 10.1% year to date.

Following the 25% reduction achieved in 2018.

More importantly, adversely classified and watch those credits declined by 8.3% during the quarter, representing a large component of the overall portfolio decline.

The reduction in net par outstanding for the second quarter of 2019 was driven by several key de risking transactions, including the Valentine restructuring commutation, which closed on June 18.

The successful execution of the Valentine restructuring one of the largest credit exposures of Ambac UK reduced or adversely classified credit exposure by 900 million and dramatically improved ambac UK regulatory capital position to near record levels.

We continue to actively explore various options to sculpt and de risk our insured portfolio and reduce potential tail risks, which may include large scale commutations remediations reinsurance transactions that could in certain scenarios negatively impact or book value add or adjusted book value, but that we believe will improve the overall quality of our book value.

As well as accelerate the timing and options to distribute capital for from our insurance subsidiaries.

For the quarter ended June 32019, Ambac reported a net loss of 128 million or $2.79 per diluted share.

And a decrease in book value per share up $2.85.

$32.78 from March 31, 2019.

Adjusted earnings were 86 million or $1.88 cents per diluted share for the second quarter of 2019, resulting in an increase in adjusted book value per share of $2.05 to $29.57 at June 32019.

The key difference between the negative GAAP results and favorable non-GAAP results. During the quarter was primarily driven by the acceleration of an insurance intangible asset related to the Valentine transaction.

David will provide us with more details when he reviews the financial results for the quarter.

In another major development, we're pleased to finally receive a decision on the allocation of funds to ambac in connection with the FCC Citigroup settlement.

Yesterday, the Federal Court in New York approved the distribution plan allocating approximately 142 million of the settlement proceeds to Ambac assurance.

The amount allocated to ambac is within the range of our expectations, but was not accrued for previously and is not reflected in our second quarter results.

However, we expect that the proceeds will be received and recorded in the third quarter.

Turning now to Puerto Rico.

The island continues to show significant economic improvement in revenue outperformance, despite the relatively poor governance and elevated political risk.

This week, the Puerto Rico Treasury announced that the Commonwealth's General fund revenue for fiscal year 2019 increased by 22% were $2 billion over fiscal year 2018 levels.

And exceeded the latest revenue projections of the Promesa oversight board by approximately $670 million.

This significant year over year improvement in tax revenues was due to increased business in consumer activity as well as the growing momentum of the economic recovery either by Hurricane disaster related payments from private insurance and federal aid.

These and other metrics underscore the Commonwealth improving financial strength and debt servicing capacity, which unfortunately has not been properly reflected in the Commonwealth fiscal plan certified by the oversight board.

As we have stated numerous times the oversight board needs to act responsibly and definitely the revised fiscal plans reflect the actual performance and realistic expectations in order to facilitate acceptable and conceptual debt restructuring deals and the costly and increasingly disruptive effects of a long term bankruptcy on the people of Puerto Rico.

In addition, the oversight board needs to make progress on structural and legislative reforms that would meaningfully strengthen Puerto Rico's institutional framework.

Improved policy effectiveness and enhance the government's policy implementation capacity.

The governance challenges and pervasive corruption exposed by recent events is not surprising.

Ambac hopes of the current political turmoil in Puerto Rico, and any impact on the local local economy is short lived that there was increased cooperation between the local government and the oversight board in addressing public policy and government reform issues.

And the next Governor has a renewed focus on long term economic development and reestablishing credibility with the federal government and the capital markets alike.

Switching now to a loss recovery efforts, we are winning the appellate court decision on all arguments heard them a second in our main RMBS litigation case against Countrywide and Bank of America.

Once the decision as announced we hope to progress towards the confirmation of a trial date preparation for which is well underway.

With regards to new business initiatives, we continue to actively evaluate very strategic options that we believe will optimize our business model diversify our platform and drive long term shareholder value.

As we have previously stated any decision on new business will be always measured against a return of capital to our shareholders.

In closing, we continue to actively progressing our strategic priorities in 2019, and I remain optimistic about our ability to continue to generate material long term value for our shareholders.

I would now like to turn the call over to David trick to discuss our financial results in greater detail David.

Thank you Claude and good morning to everyone.

During the second quarter of 2019, Ambac incurred a net loss of 128 million or $2.79 per diluted share.

Compared to a net loss of 43.2 million or 94 cents per diluted share in the first quarter of 2019.

As well discuss the main driver of second quarter results was the execution of the bounce on restructuring and commutation, which resulted in a GAAP net loss of 83 million.

The losses were the result of accelerated amortization of the insurance intangible asset.

In addition to the impact of bounce on second quarter results were impacted by net positive development loss and loss expenses.

Higher net loss on derivative contracts compared to the first quarter 2019.

Adjusted earnings for the second quarter were 86 million or $1.88 per diluted share compared to an adjusted loss of 9 million or 20 cents per diluted share in the first quarter.

Adjusted earnings were driven by a $119 million gain from the Valentine commutation. The primary difference between adjusted earnings from GAAP earnings being the exclusion of the insurance intangible asset amortization expense.

Notable items. The second quarter include premiums earned of 8 million versus 28 million during the first quarter.

Well normal earned premiums only decreased by about 2 million to 14 million due to the continued reduction of the insured portfolio.

Accelerated premiums declined $18 million from the first quarter.

The swing and it accelerated premium was mostly a result of $6 million of negative accelerated premiums realize in the second quarter driven by the Ballantine commutation.

Compared to $12 million positive accelerated premium realized in the first quarter, mostly related to the COFINA transaction.

Investment income for the second quarter was 86 million.

$32 million increase from 55 million for the first quarter of 2019.

The increase in net investment income for the second quarter was due to accelerated discount on approximately 153 million fair value of Ballantine bonds held in the investment portfolio.

Net realized investment gains were $36 million for the second quarter.

The principal source of these gains was foreign exchange gains related to the balance sheet restructuring and gains from sales of new COFINA bonds.

Proceeds from the sale of new COFINA bonds at a C and other cash have and continued to be redeployed into a range of other investments, which are designed to create greater diversity in the portfolio and generate attractive returns to defease, our insurance and other obligations.

Loss and loss expenses incurred were a benefit of 133 million in the second quarter compared to an expense of 12 million in the first quarter.

The improvement was mostly due to favorable development within Ambac UK.

RMBS, partially offset by an increase in public finance reserves.

Public finance loss and loss expenses in the second quarter were 50 million driven mostly by lower discount rates, resulting from the drop in long term interest rates.

Ambac UK another credits experienced in incurred benefit of 111 million during the second quarter, primarily as a result of the Ballantine computation.

RMBS and student loans combined produced and incurred benefit of 73 million driven by the impact of lower interest rates on excess spread.

And a $19 million recovery from the settlement of an article 77, RMBS proceeding that we had not previously accrued for.

Net losses on derivative contracts with 35 million for the second quarter compared to 16 million for the first quarter.

Attributable in both periods to decline going forward interest rate.

Interest rate derivative losses in the second quarter were more than offset by approximately $96 million gains recognized in the insured and investment portfolios driven by forward interest rate movements.

Turning to expenses second quarter operating expenses were 29 million an increase of 4 million from the first quarter.

The main driver of the increase was higher performance based deferred compensation payable primarily to ambac UK employees triggered by the close of the Ballantine commutation.

Non compensation expenses were 11.6 million for the second quarter up 1.3 million from $10.3 million in the first quarter, driven by consulting and legal fees.

<unk> expenses increased this quarter increase is mostly a function of our success is related to the de risking of the insured portfolio, which created significant value for stakeholders.

That said, we remain focused on reducing our core operating expenses and note a few key successes this quarter towards this objective, including changes to our RMBS analytics platform, which beginning in the second quarter slowed due to annual expenses by 1 million.

Scheduled personnel consultant reductions beginning in the fourth quarter related to the Ballantine commutation and general risk reduction at Ambac, Ambac, UK, which will reduce annual operating expenses by over 1.2 million once fully implemented.

This aside we do expect volatility quarter to quarter for expenses, given the nature of our operations.

Insurance intangible amortization for the second quarter of 2019 increased to 190 million to 226 million from 36 million in the first quarter of 2019 as noted earlier. This increase was due to the accelerated amortization recognized as a result of the Valentine computation.

Provision for income taxes in the second quarter was 28 million 26 million higher than the provision for the first quarter of 2019.

The second quarter tax expense was related primarily to foreign income taxes on the gains from the Valentine commutation.

Turning now to the balance sheet.

Shareholders equity decreased $2.85 per share from March 30, Onest 2019.

$232.78 per share at June Thirtyth, 2019, due mostly to the net loss for the quarter.

Just a book value increased to 1.35 billion at June Thirtyth 2019 from 1.25 billion at March 30, Onest 2019, primarily driven by second quarter adjusted earnings.

Adjusted book value on a per share basis increased by $2.05 to 20 957 per share at June Thirtyth 2019.

On a standalone basis as of June Thirtyth 2019 F G held cash investments and receivables.

Of approximately 469 million or $10.30 per share.

That concludes my formal remarks, I'll now turn the call back to Claude for some brief closing remarks. Thank you David.

We are proud of our achievements for the second quarter. Our progress this quarter reflects our ongoing commitment to execute on strategies that we believe will deliver long term value to our shareholders. Thank you again for joining US today I will now turn the call back to the operator and open the line for questions.

Thank you we will now be conducting a question and answer session.

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Our first question comes from the line of.

Giuliano ammonia with BTI Ji. Please proceed with your question.

Good morning.

Good morning.

Well just trying to think about the city studio.

Proceeds.

Now that you have approval or Youre expect receives about $142 million in the third quarter do you have any pub goals related to the deployment of that capital would you deploy it for loss mitigation or essentially back to buy down some of your outstanding debt.

Hi, Good morning, Julien that's a good question, it's something we're still evaluating from a capital allocation perspective, but Oh, we have a couple of different uses that we're we're evaluating and expect to make a decision.

In the near term, but of course I don't have an answer for you. This morning.

That makes sense.

Then I guess a follow up on a similar question.

No. The also the Ballantine transaction done are there any opportunities for other new business or capital releases from Ambac UK.

Yes, Hi, Julianna, so we're getting closer on the solvency to capital.

Physician.

It because as we disclosed that the whole and solvency two standpoints down to about 133 million pounds.

It's about a 130 million pound improvement over first quarter.

So we expect that that will continue.

To improve over the next few quarters and hope to reach solvency too.

Thresholds in the next couple of years.

Yeah, we'll have to have discussions with the PR Ray I'm because much of course of what happens in the UK, particularly from a capital release standpoint is subject to regulatory approval, we'll have to have discussions engage with them about the path forward from there in terms of capital.

Releases, but nonetheless, we're optimistic that we'll we'll be in a position.

To meet our solvency requirements in the next couple of years and as we de risk the book.

And continue to produce positive earnings there in the UK, we will get there sooner rather than later.

Yeah on the new business front again thats in the UK or it is something that we are evaluating.

In terms of.

How to use what is a very talented.

Staff in the UK, well, albeit relatively small staff.

Thats a process thats under evaluation and considering the opportunities for things that they can do primarily into a capital light type of a business approach, we'll have more to talk about that in the future.

If that's appropriate.

That sounds a very good deal only one a one follow up on relate to the comments you made about some of the expense savings.

But obviously of the RMBS platform then the personnel that you brought up are there any onetime cost associated with completing those cost savings initiatives.

There is ER and will be some severance expenses, we did have additional severance expenses at the margin in the second quarter, there will be potentially additional marginal severance expenses in future periods, but nothing.

Nothing too material.

That's great. Thanks for taking my question sure. Thank you.

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Ladies and gentlemen, there are no further questions at this time. This concludes today's conference. We thank you for your participation you may now disconnect. Your lines. Thank you once again.