Ambac Financial Group Inc (AMBC) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

All lines have been placed on mute to provide any background noise. There will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw, press the pound key. Thank you. You may begin. gt; > Thank you. My name is frank bivona. With me today are tom -- who is the controller and peter -- in charge of investor relations. After 15 years with the company, brian moore who used to be in charge of investor relations is leaving to return to the public nonprofit sector and I just want to say personally thank you to brian for all of the years of his support and we'll Miss him so we're sorry to see him go but pleased to have pete who is a 9-year veteran to replace him. Just a note. The ir phone number will remain the same at 212-208-3333. As you know we released earnings today. Our press release are on the web and will be mailed out to those who have requested it. If you do not receive it and would like to, give us a call or visit our web site at ambac.Com. Also this calls being replayed this afternoon at 2:00 p.M. The call is also being broadcast on the web. You can access it through our web site. I also ask you to mark your calendars for the 2nd quarter of 2002 earnings release which will be released on july 17 at 8:00 a.M. In the morning with the normal conference call to follow at 11:00 a.M.. During this conference call i will make many statements that will be regarded as forward-looking statements. These statements are based on management currents expectations and I refer you to our press release for fact -- factors that could change actual results. It was another strong quarter for ambac. Net income was $117 million or $1.07 per share up 19%. 19% on a per share basis from the 1st quarter of 2001. Operating earnings which excludes capital gains and losses were $119.7 million or 1.$10 per share up 20% from the 1st quarter. Core earnings were $115.5 million or $1.06 per shares. Up 19%. Ambac has had increases in core earnings in every quarter since we went public in 1991 and over that period of time we've averaged 18% growth. Moving on let's look at the top line or adjusted gross. It was an excellent top line quarter for us. Agp in the 1st quarter was $211.9 million. Up 34%. Let me take you through some of the details. Public structured and international. First, on the public side, ambac's financial agp was $73.5 million growing at a healthy 68% from the 1st quarter of last year. Over all municipal vroom was higher up 15% as was market penetration which came in at 54% versus 44% and think the highlight of the quarter was again we focused on the more highly structured part of this market that carries higher premiums and risk weighted returns. This is evidence by our 6% in agp versus only 20% in insured par. This was accomplished without compromising our underwriting standards and deals ensured during the quarter include a number of lisa cash back transactions. Excuse me. Moving on to structured finance. Structured agp grew by 27% in the 1st quarter. This sector includes mortgage backed, home equity and other consumer finance types of transactions, collateral debt. Invester owned utilities. A fair amount goes in here but all parts of this market were very strong including the home equity market where we continue to see good pricing and strong credit worthy structures. I will add that we renewed some relationships with three clients that we hadn't done some business with in the past few years in the home equity area so we continue to broaden that market. Also we had a pretty good quarter in the cbo area. Moving on to the international area, international agp growth was also positive with $59.2 million written. A 15% increase. Internationally, we begin see large deals dominatedding. This quarter was no exception. We saw several large deals including two large japanese consumer financed back transactions and also a large private finance initiative deal in the uk. Also on a smaller note, we also were able in the austrailian market to do a small triple a. Auto asset security situation and that marked a groundbreaking type of transaction in terms of develop thanking market. So we're seeing good balance but still dominated by large deals. The demand for our product continues to be strong and i will also say that we find pricing and structure to be strong as well. Before I go on to the earnings, let me give you a little general market commentary on the competitive and pricing environment. Both the pricing and competitive environment remains favorable as has been the case in recent years. What we mean by that is we're saying that we're able to achieve our twofold pricing objective. One is certainly to get an adequate return on our risk capital but the second and as important is really getting a fair share typically what we call 50% of the financial valor interest rate savings our product delivers. The one exception to this in the commodity end of the domestic municipal market as we have said for years where the industry generally adheres to the rating agency capital models for return purposes but tends to understand price the product relative to the financial value. So as a result, ambac in recent years has limited its activity in this one sector. This modest concern aside, the overall competitive environment is responsibly disciplined and far more favorable as a whole as was the case a few years ago. New market -- the markets that have developed has substantially dampened industry pricing precious that tended to build up whenever a particular market slowed so those are generally favorable comments about the pricing environment and the competitive environment that we're n. Moving on to premiums earned. In the 1st quarter excluding refunding increase today $102.6 million up 23%. Accelerated premiums which result present 4 cents a share in the quarter as compared to 6.1 or 3 cents a share? 1st quarter of last year. This was due to the municipal refunding caused by still over all low interest rates. As we said in our press release if you've red that earnings only represented about 3.6% of operating during the quarter during this 1st quarter. Last year, refundings represented only 5% of operating earnings for the whole year. Compare this to 1993 which was another very large or heavy low interest rate environment or heavy underwriting year for refunding. Ask sell rate rated -- accounted for 29% of operating earnings. The impact of operating earnings or refundings on our bottom line has declined over time as we have broadened the markets that we serve. The fact that we're outside just the municipal market clearly has helped us. And this is a trend that we expect to continue. We don't think refundings are going to be a big part of our picture going forward. Investment income was up $72.5 million up 12% in the quarter due to an increase in the investment portfolio. The income line also benefited from the fact that we issued $200 million of debt in october of last year. Partially offsetting investment earnings growth is the lower market interest rates on the new money that's invested lower rates invested at lower -- more money invested at lower yields. Financial services had a very good quarter. Coming in at $16.6 million up 14% from the 1st quarter of last year. It was a good quarter for our investment agreement business as we saw spreads widen and volume grow. We also on the derivative sided several transactions including interest and curb see swaps in all parts of our market. You might remember that we started that business in the municipal side and we're able to provide clients in all markets now our capability across the board in financial services. Also third party investment management, income grew double digits in revenue delivering solid profitability. In summary, it was a great quarter with core earnings up 19% a share and operating up 20%. Before I open it up to questions and answers, I would like to discuss just a few items. First, and I'll entitle this cash flow. One thing that sometimes gets overlooked or under valued in the ambac story is cash flow from operations. As you know ambac defers premiums received and certain underwriting cost as we'll have recognize these costs and premiums over the life of the guaranteed expose you are. The net result is the deferral of significant amount of income. To sill straight this point you should note that our cash flow generated from operations for 12 months was $663 million. This is $211 million higher than our reported net income of $452 million for the same period. With this strong cash flow from operations illustrates the high quality of our reported earnings. Also the excess cash flow accumulates over time and will be earned and recognizes earnings. In fact, ambac's net premium revenues that will collect in the future now totals $3 billion. That's over seven times nearly eight times net premium earned that we earned all last year. So very big number and a growing number. This $3 billion will be earned over time and will provide consistent and predictable earnings in the future. The earnings consistency is solely a function of our long-term product and business model. One other topic is what I will entitle transparency. I'd like to point out that since we have become a public company in 1991, we've only reported two one time or extraordinary type of income items on our financial statements. One was $120 million net gain from a sale of a subsidiary and the other was a $9.5 million write off from a small venture we had closed down. So when I say that we average core earnings growth of over 18% over 10 years, the only one time items I'm excluding is the $110 million of net one time gangs not losses, gains. Our impressive earnings and earnings growth has been just that. Also, our dedication to clearly and promptly communicating with our base on potential risk. It has remained strong. I know of no other industry or company that consistently discloses the material details more than we do. And that goes for the industry as well. And whether it's our detailed financial statements, our conference calls or the fact that the rating agencies see every deal we ensure we believe we are fully transparent which I think sets us apart from the market. The last piece but I open it up for questions is a comment on earnings projections. Our guidance for 2002 is I a range of $4.50 to $4.60 in operating earnings which represents a 13% to 15% increase. This is up a modest penny from our last guidance reflecting the stronger writings in the 1st quarter. Once again embedded is the expectations that refundings may be lower this year and that core earnings will grow between 14% and 16% and much of this will be dependent upon the economy and the capital markets in general. With that I would like to open it up for any questions. > > At this time, I would like to remind everyone in order to ask a question, please press the star and the number one on your keypad. Your first question comes from rob gephardt. gt; > Good morning. Couple of questions on the structure business. You went through and talked about the competitive environment I think just generally speaking but i wanted to see if you could maybe add more color particularly on the mortgage backed and home equity sectors. You know, there has been some discussion about the competitiveness. We know the spread is narrowed especially in the corridor. I'm wondering if you've seen any impact from the narrowing of spreads on the competitive nature of that business and then I guess secondly and don't know if this is related or not but it looked like you reinsured more of that business that you wrote in the first quart are than normal and just wondering what was happening there. > > Sure. First of all on the competitive front, e with aid very good mortgage backed quarter. Home equity and as I said we are very happy with pricing. Pricing based on quarter to quarter is pretty much flat but over the last couple of years it's up considerably so we get good pricing and very good returns and our structure remains strong and we see plenty of activity and flow. So I can't comment on what else is happening to others out in the market but our business is strong. Pricing is good and structures are good. We also is a mentioned were able to renew some business relationships that we hadn't done business with anyway while so that's good news for us as well. > > Just before you move on, do you typically see at the margin competitive, the competitive environment changinging? > > I think that's natural. Therefore, our product adds potentially less value in a tighter spread environment but we have to and think historically have dealt with relationships and particularly in the home equity area you're dealing with relationships so I think those relationships allow us to maintain adequate pricing levels. We're not going to be knee jerk reaction to pricing or tightened price with spread movement. They are long-term relationships. gt; > Okay. Sorry there was a second. > > On the reinsurance. It looks like you retained a smaller portion of that business. gt; > I think what you're seeing and there was a pickup but it was more related to the 4th quarter of last year than it was the 1st quarter of this year. We had a very strong 4th quarter and through our reinsurance mechanisms, reshoord insured some of that business out. So there was a little bit of a catch up there but not a lot. So no change in our reinsurance format which is to focus on single risk credits where single risk is rather high and us reducing our exposure. > > Okay. Are thank you. gt; > Your next question comes from rob ryan. gt; > Good morning. gt; > Morning. gt; > The international diversification that you talked about had a loft to do with outside of europe this time at least in terms of deals that you chose to highlight on this call. Could you focus on europe and any changes you have seen in that particular market whether we're seeing more of a diversification of the types of structured interested national deals out of europe. Most specifically meaning perhaps more business other than cdo's which have been so strong in recent years. > > I think our particular strength and if I mislead led you, I didn't mean to do that. My highlighting was to tell that you for example we're doing very well in japan right now which is an area where we had great expectations in the past and was slow to start. But it's humming along nicely. Australia is a competitive market but we're all dealing in and we're seeing good diversified deals. But that was notment to lessen what's going on in europe. We have very good activity particularly in the uk. And you know highlights of this quarter included as i said a very large public/private finance issue deal but also we did mortgage back securities there. We've done other types of transactions there so there is a good mix of business internationally and i continues to feel pretty good about that. Our business traditionally is not been internationally it has not been dominated by cdo's although that continues to be a strong market for us but it's been more dominated by psi deals and relationships on other front so it's good balance quarter. > > Okay. On the european mortgage backed side, are you seeing deals essentially for capital relief and therefore remaining on the balance sheets or are these actual securities going into some kind of secondary mortgage market? > > First of all it's small. So there is nothing big going on here. We're seeing some deals that are mortgage based but the deal I was talking ordeals I'm talking about in particularly in the uk is for financing in the market. So financing their actually it's a u.S. Company that's financing in the uk market issuing I believe sterling or I'm not sure, but they are issuing in the uk market and financing their operations there so that's good activity. That's good -- you want that good activity and we're starting to develop that. > > Okay. Great thank you. gt; > Your next question comes from robert-- > > Just looking at one snapshot in the capital markets. You know a lot of discussion about the structureal decline in commercial paper outstanding. I think declining may be 400 billion billion over the last six months or so. Do you see other changes in the capital markets and any -- I've asked this before but specifically as it relates to commercial paper opportunities or developments that enhance ambac's prospects in some of these markets that are undergoing such significant change. > > Well, as you know we don't sure commercial paper per say and I think what has happened the commercial paper market has been hit on a corporate side by events risk type events and I think what is replaced that is acid backed commercial paper. I think it represents about $750 billion market today. It represents about half and of course that's a much bigger percentage in the past of the commercial paper market and i think people like it better because it doesn't have the same vents risk and it's hard to weave that into a real definitive benefit to ambac but I think any time the markets moved towards a more structured form of security, and acid back security is that, it favors our product or our ability to provide some type of enhancement and in fact, we do credit enhance this market in a pretty big way so I think if that trend continues, it's indirectly positive. > > That's great and one follow up. In your talking about the pricing trends and competitive in the mortgage area, and in the home equity area specifically, are these the products in which you are directly competitive with the mi companies or is this wholesale execution of the products that they are insuring individually? > > I think what they do is different. They insure the mortgages and percentages of the mortgage and the way they compete with us is through higher percentages of value there. Of loan to values and by going deeper into the penetration of the mortgages, they are able to finance themselves more efficiently at times. We are seeing competition on that front but it hasn't real affect us. We continue to see good volume but I think our method of financing of product is very different. We provide unconditional guarantee. And represent a very different thing to the investor. The investor who invest in something that the mi companies get involved was taking on different types of risk than if they would have strayed buy paper. We think over time our product is better and we don't see any major concern. > > Thanks, frank. Kron draegsz -- congratulations. gt; > Your next question. > > Good morning. Just a couple of quick questions. Can you give us a refresher on how you guys take into consideration lower interest rates when you price new business? Is it die ma'am I can or a straight line interest rate sums assumption. gt; > That's a tough one. We can't -- we're not good at predicting interest rates but I will say that in higher interests rate environment, clearly there is a couple of things working for you there. And you're able to earn more on the cash you receive and in many cases we'll get the cash up front so you get a higher return on the investment and also there is greater opportunity in a higher interests rate environment for that security to refinance out. Conversely in a lower interests rate environment or perceived lower interests rate environment, you're investing at low rates and the possibility for that to refinance out is certainly lower. So you know we will take that into consideration. As we go. Also, interest rates higher interest rates could affect spreads and create larger spread opportunities. So there is a balance there. We've been trying to tell the people over the years that we think that our economic and business model is somewhat naturally edged interest rates down and we've proven that over the years. > > The other question was just on the financial services segments. You mention that spredz spredz wide ends out. How much of this is sustainable going forward and how much of it is do you think is attributable to growth in 1/4? gt; > I don't think of of our business is 1/4 type of events. You say a trend last year. We saw a reversal. We went through a massive change in interest rates last year. We don't expect that this year. So I think the growth that you've seen is somewhat sustainable. I think that the points to note there is I kind of mentioned it in my remarks is that on the derivative side where we provide many years ago we provided derivatives to municipalities and we do that and that creates a lumpiness. But we have over the years broadened our capabilities and now we provide interests and currency and other types of transactions with the very same risk profile as ambac has meaning remote. And have substantially broadened the markets. We can now serve our entire client base and that means structured finance clients who need interests rate swaps or international creditors who want to do the same. So and that does two things. We earn money off of it but these businesses are come men tree the ambac and really help us provide our client with and now our global client with a good platform of service. > > So if we look at the earnings from that segment of that $11 million pretax is it fair to assume that it is and sustain able. > > We expect that segments to grow in line or faster within the overall company based on certainly last year's comparisons and I think the numbers are sustain afternoon. > > And how much was the benefit from the reversal of the employee benefit snes. > > It was a net $500,000. You know you want to call it a mistake. We over accrued benefits for about a year or so. And we saw it and ri versed it and that was it. gt; > After tax. gt; > Increased our run rate $500,000 and that would be fair. > > Great. Thank you very much. > > > Good morning. I want to follow up on bob's question earlier. Of to the extent that -- force reconsolidation on an individual silo basis, how much would that impact the demand for your product? If the rules change? gt; > It's all very hard to speculate on. Because you know I think it's moment by moment development in terms of the story and what's going to happen. But I think it's very fair to say that this is a market whether it be the acid back market that is driving in many ways big parts of our economy and it's a major, major funding source and investments source of everyone. Not only in this country but around the world. For an accounting rule to disrupt that, I think that would be temporary meaning that these financing are real financing that have to be done and any disruns through accounting changes should result in short-term disruption but long-term, these are legitimate and i don't expect anything to change on that front so we're confident that the products that we credit enhance will continue along the same lines in terms of position bills. Another thing is that we're ---this is a business that is -- you know where complexity is added. Our product backs more valued so to the extent that something has to change to meet new accounting rules, we're prepared to do with that. > > Is it fair to say when talking talking more broadly than the paper market that you're still optimistic that the change in the accounting rules will be a boost in your business over all? > > I think you can say that in the long-term yes. But immediately, I don't know. But certainly over the long-term, yes because it's going to add complexity. It's going to increase the demand for our product in more complex transactions which is where ambac leads. > > Thanks. gt; > Your next question comes from jeffly dunn. > > Good morning. gt; > Morning. gt; > Wanted to circle back to the prepays in the mortgage back book. Can you give an idea of what sort of trends we've seen since the 3rd quarter? > > I'm looking backwards, we were surprised that this quarter even though we grew 23% in premiums earned, we continued to see a fair amount of pay down in that book so we're still being hurt from pay downs but the only thing i can say looking forward is that in the last couple of days, we did see some reports on bloomberg that prepayment rates have slowed and but we certainly haven't seen that in our numbers yet but one would expect them to slow going forward but not giving any predictions and we'll report next quarter on what we've seen but right now no real change. > > And I'm not sure if you can quantify this but to give us an idea of why you stay strong in home equity market versus come pet terse. Can you --. > > You know it's virtually all of it. And as I said, we had three new clients but they are not new clients, they are clients that we had two or three years ago and we're back in the market w. I think what happens is you know people don't shop around for deals. They made the occasional deal but they come back to the same place each time. We're in the documents. They have recuring financing needs. They come to us because we can execute well. And pricing is going to factor into that. Of course. It does in everything but it's not going to drive their decision to do something else. So we continue to see good business here. gt; > And last question. In the moony world, past several quarters we've talked about the competitive in the plain vanilla stuff, have you seen any price competition creep into the more complex areas or is it still the go. > > It's mainly the commodities or go. > > But the airports where one would expect that pricing would greatly expand in this area as credit spreads have greatly expanded. Pricing has nearly doubled for financial guarantee tors. But we're still -- we're still getting 25% of the spread. Instead of 15%. So as an city still under pricing airport credits and to that extent we're not winning those deals and it's not an accident that our return on equity as leaders in the industry. We do that because we get those results because we price not only against risk model but against fair market value for our product. > > Thank you. gt; > You're welcome. > > Your next question. gt; > Just one question. Can you give us an update on the underlying credit quality of the insured portfolio? > > It's improved to some extent. In the municipal market it's about 80% better today. In the structured and international deals, we're seeing again an increasing and I'm talking about the underlying quality of the rating of security before we insure it but we're seeing an increasing amount of double and aaa type structures. So on the surface the numbers are slightly better. I think you know where we do see some pressures are -- there have been some stressed areas like airports where we're seeing some down grades. We've had about $6 billion of exposure there although we don't expect any kind of problems there. But it's fair to say that that sector has been under stress and we're seeing some down grades there. Also in the municipal areas because municipalities have generally been dealing with deficits. We're seeing some slight deterioration there as well too. But generally and think this is mainly due to the fact that the new business we're suring is good and-quality. Things are staying quite stead. gt; > Okay. Thank you. gt; > Your next question comes from jeff road. > > Nice quarter. Can you give us some sort of comment on penetration rates in both the public and structured markets. > > On the public side, we hit a-54% and I think that's about it. I get nervous any time it goes over 50%. It just means we're saturating the market too much so I think I don't think it's going to go any higher. It's nice that there is demands for the paper fw but i think the focus is on pricing and returns and the structured area, we've seen continued demand. Post september 11th, we've seen increased demand for our product and increased across the board. In terms the types of deals and whether it be structured or international deals. So, penetration rate is I can -- it's very hard for me to give you penetration rate numbers for the structured business or the international business because there is a dirt of information on this in terms of public information but the sense we get is that the structured market is study. And the international is growing in terms of penetration. > > And then on the public finance market, is it safe to assume that premiums written should grow in line. > > Yeah. So we're not expecting huge growth out of that market. Nor has that been our expectation over time. gt; > Thank you. > > At this time, there are no further questions. gt; > Well, comment or, if there are no further questions, i would like to thank everyone and we will be available for your calls. Thank you.