Ambac Financial Group Inc (AMBC) 2017 Q1 法說會逐字稿

Good morning. My name is Krista, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ambac Financial Group, Inc. First Quarter 2017 Earnings Teleconference.

Our host for today's call are Lisa Kampf, Head of Investor Relations; Claude LeBlanc, Chief Executive Officer; and David Trick, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 11:30 A.M. Eastern Standard Time. The dial-in number is 1 (800) 585-8367 domestic or (416) 621-4642 internationally using ID number 17187813. (Operator Instructions)

It is now my pleasure to turn the floor over to Ms. Lisa Kampf.

Good morning, and thank you all for joining today's conference call to discuss Ambac Financial Group's first quarter financial results.

We'd like to remind you that today's presentation may contain forward-looking statements, which are based on management's current expectations and are subject to uncertainty and changes in circumstances. 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 SEC filed quarterly or annual report under management's discussion and analysis of our financial condition and results of operation and under risk factors. Ambac is not under any obligation and expressly disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Today's presentation contains non-GAAP financial measures. The 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.com.

Please note, we have posted slides on our website to accompany this call.

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

Thank you, Lisa, and welcome to everyone joining today's call. I'm pleased to report we've accomplished a lot over the past few months as we continued to successfully execute on our strategic priorities. During the quarter, we made considerable progress and achieved key milestones as we strive to improve our risk profile and financial stability. We were aggressive in accomplishing risk remediations, bond purchases, realizing litigation settlements and developing our long-term strategic vision.

During the quarter, our financial results were significantly impacted by the deteriorating situation in Puerto Rico. Yesterday, after the market closed, we reported a net loss for the first quarter of $125.4 million or a loss of $2.77 per diluted share, and an adjusted loss of $91.2 million or $2.01 per diluted share reflecting continued material adverse development in our municipal exposures.

While we are disappointed with our bottom line performance in the quarter, I am encouraged by the successes achieved by our team. Included in these accomplishments, we were very active during the quarter to reduce our risk exposures. Our insured portfolio decreased by 6% to $75 billion as of March 31, down from $79 billion at December 31, and our Adversely Classified Credits down 7.6% to $15.8 billion from $17 billion at year-end. The reduction in Adversely Classified Credits resulted from RMBS run-off and remediation initiatives. In addition, we upgraded certain public finance and international exposures in part due to remediation actions we took to improve the credit profile of certain credits.

During the quarter, we also purchased over $200 million of distressed Ambac insured securities and acquired $114 million par of surplus notes. We now own just over 12% of our PRIFA and 16% of our COFINA-insured bonds.

Turning now to litigation. We had a very active quarter and recognized a number of key achievements. During the quarter, we announced a settlement of our Ballantyne lawsuit, generating a gross benefit of $91.6 million, initiated new litigation by filing 2 lawsuits against an RMBS trustee and filed 4 suits related to Puerto Rico. We also reached an agreement in principle to settle a litigation brought against us in 2008 by certain California municipal bond issuers.

Our main rep and warranty litigations were relatively quiet during the quarter while we continue to wait to hear from the courts on the appeals that were argued at the beginning of the year. Our litigation efforts remain a key value driver for Ambac moving forward, and we plan to continue to aggressively pursue remedies to protect our rights and mitigate losses.

Turning now to Puerto Rico. As you read in our earnings release, the key driver of our first quarter results was an increase in public finance reserves. This increase was influenced heavily by the developing situation in the Commonwealth. During the quarter, a number of events occurred. The most a significant of which was a certification of the Commonwealth's fiscal plan, which implies an opportunistic and unrealistic 77% haircut to debt service, doesn't respect lawful priorities and liens of [per debt] and fails to live up to the standards required under PROMESA.

Following the close of the quarter, additional events occurred including: first, the passage of the Fiscal Plan Compliance Law, which opened the door for the Commonwealth to opportunistically reroute sales and used tax revenue to the general fund instead of to the COFINA structure. The public release of restructuring proposals, which seek to maximize recoveries for certain chosen creditors. And finally, the Title III filing of the Commonwealth of Puerto Rico and COFINA by the oversight board.

Clearly, we are very disappointed with the developments in Puerto Rico, which we believe reflect a breakdown in process. Ambac and other creditors expected a fiscal plan with a laser focus on cutting expenses and promoting growth while respecting creditor's rights and priorities at each of the instrumentalities of the Commonwealth.

Additionally, we expected the fiscal plan to prioritize a holistic restructuring of all Commonwealth debt including PRIFA, HTA and CCDA through a combination of negotiated debt deferrals and modifications to allow the Commonwealth to grow its way into debt sustainability. In this way, the fiscal plan will provide a credible path forward for Puerto Rico and renewed access to the capital markets. Unfortunately, the fiscal plan fails on all fronts.

Additionally, and contrary to expectations, the oversight board and its advisors have shown no willingness to engage in broad consensual negotiations. There was a limited engagement with GO and COFINA creditors and negotiations did not yield any progress. There have been no talks relating to or complete lack of engagement on PRIFA, HTA and CCDA debt by the Commonwealth and the oversight board.

Additionally, the oversight board has publicly stated that the assumptions behind the certified fiscal plan will not be revised. This, despite the fact that the fiscal plan and its compliance with PROMESA has been publicly criticized, not only by creditors but also by Senators, including Thom Tillis and Tom Cotton. The oversight board has derailed the debt restructuring process and certified a fiscal plan based on unrealistic and overly pessimistic assumptions.

The result has been stalled negotiations and on-island strikes and protests. Moreover, the Commonwealth has put in legislation that violates laws and contracts in order to comply with the certified fiscal plan, prompting legal challenges from creditors, including Ambac. It appears the oversight board and the Commonwealth have adopted a once and done strategy, premised entirely on cost-cutting debt to a level well below that of any U.S. state or any country that has undergone an IMF restructuring.

Against this backdrop, we continue to assess all of our options, refine our strategy and evaluate our Commonwealth exposures. We've been in conversations with various stakeholders to develop constructive proposals as well as discuss solutions based on fiscal reform, economic growth and creating an atmosphere that can attract private capital.

In summary, we are focused on arriving at a fair, holistic restructuring of the Commonwealth's debt. We believe this is possible if: one, the oversight board significantly revises the fiscal plan to include more reasonable assumptions and to respect creditor's rights; two, any restructuring incorporates short-term deferrals and doesn't rely on outside investor losses to subsidize the Commonwealth's budget; three, the recommendations of the Bipartisan Congressional Task Force on economic growth to Puerto Rico are adopted and implemented to provide the Commonwealth with appropriate support from the federal government; and four, the Commonwealth and the oversight board and U.S. Congress recognize that the President of Puerto Rico sets with its debt restructuring now could materially and adversely impact municipal debt markets in the future.

Puerto Rico is the biggest municipal bankruptcy in U.S. history and its ramifications could be far reaching. We believe restructuring proposals based on these four principles are critical. They are necessary to stabilize the Commonwealth's financial profile, reopen capital markets and establish an environment to support long-term economic prosperity for the citizens of Puerto Rico. We look forward to engaging with parties to identify and achieve a better path forward for all stakeholders.

While the situation in Puerto Rico will remain a key focus for us, it has not and will not distract from our continuing focus across all of our priorities going forward. During the quarter, we actively engaged with a rehabilitator and creditors in progressing a plan for the segregated account exit rehabilitation, and we're pleased to receive, on April 10, our regulator's expressed support to continue progressing our plan over a 60-day period.

We can provide no assurance that a deal will be reached with creditors within the OCI's time frame or if it is, whether the deal will be acceptable to the OCI or the court. If we do not develop a consensual plan acceptable to the rehabilitator within this time frame, the rehabilitator may pursue a plan that he believes will provide for durable action and that is protective of policyholders. We do not know what that plan may be, however, as we previously indicated in our risk factors, any changes to the segregated account rehabilitation plan could have an adverse effect on the interest of holders or subset of holders of securities issued or insured by Ambac or the segregated account.

To advance our efforts to improve the company's financial position and potentially allow for an exit from rehab, we took several key steps during the quarter. Some that I've already mentioned including advancing certain derisking initiatives, refining aspects of the plan and engaging with creditors and their advisers. In response to feedback from shareholders, we've also made significant changes to our compensation practices and revised our short-term incentive compensation program for our executive officers in 2017. A structured and more objective approach was designed to determine bonus award payouts based on performance metrics.

In addition, beginning with 2016, a percentage of compensation became payable in equity. Certain additional policies were also adopted, such as clawbacks and holding requirements. These plans are detailed in our proxy. It is the board's view that as the company looks to move past the rehabilitation of the segregated account and works to develop a new long-term strategy, it is particularly important that management compensation be focused on and aligned with creating long-term value for shareholders.

During the quarter, we were also active in commencing initiatives towards evaluating and establishing a business strategy for Ambac as well as making future operational improvements. We believe Ambac is well positioned to capitalize in a broad range of strategic options to create long-term shareholder value. We look forward to sharing more details of our plan with you later this year.

I'll now turn the call over to David Trick to walk you through our first quarter results. David?

Thank you, Claude, and good morning. During the first quarter of 2017, Ambac produced a net loss of $125.4 million or $2.77 per diluted share compared to a net loss of $94.7 million or $2.9 per diluted share for the fourth quarter of 2016. Adjusted loss in the first quarter was $91.2 million or $2.01 per diluted share compared to an adjusted loss of $12.7 million or $0.28 per diluted share in the fourth quarter. The results were impacted by adverse development in our public finance insured portfolio, related mostly to Puerto Rico, and relative to fourth quarter 2016, lower investment income and interest rate derivatives revenue and higher foreign income taxes. These results were partially offset by a benefit from settling the Ballantyne litigation and lower operating expenses.

Turning now to some more specifics. Premiums earned were $47.6 million during the first quarter versus $49.9 million during the fourth quarter. Normal earned premium decreased during the quarter to $31.3 million and $35.7 million or 12% primarily due to the continued run-off of the insured portfolio and as a result of a lower benefit recognized for the change in uncollectible, future structure finance premiums relative to the fourth quarter.

Accelerated premium on the other hand increased by approximately $2.1 million to $16.3 million during the first quarter, while at approximately $3 billion, the level of public finance call activity was similar in both the fourth and first quarters, a change in the mix of insured transaction called positively impacted accelerated premiums. As net par continued to decline, we ended the quarter with a total claims ratio of 13:1 compared to 14:1 at the end of December 31, 2016.

Net investment income for the first quarter of 2017 and the fourth quarter of 2016 was $81.6 million and $90.9 million, respectively. Net investment income for the first quarter of 2017 declined due to cash flow volatility associated with Ambac's investment in insured RMBS and lower mark-to-market gains in the trading portfolio, primarily related to investments in Ambac U.K. Mark-to-market gains and invested assets classified as trading were $7.2 million in the first quarter of 2017 compared to $10.5 million in the fourth quarter of 2016.

During the first quarter, we acquired $200.2 million of distressed Ambac insured securities including $71.4 million of insured RMBS and $128.8 million of other securities including Puerto Rico insured bonds. Our investment in deferred amounts, including interest thereon, totaled $1.5 billion or 41% of the total amount outstanding as of March 31, 2017.

Losses incurred were $135 million for the first quarter, down from $215.5 million for the fourth quarter. The first quarter incurred loss was primarily driven by a first loss development in Puerto Rico, partially offset by the benefit realized from the Ballantyne litigation. This compares to the fourth quarter, which was driven by the impact of higher interest rates and adverse development in Puerto Rico.

More specifically, RMBS incurred losses were $34.9 million in the first quarter, including $43.6 million from interest expense on deferred amounts. During the quarter, the RMBS portfolio benefited from our continued remediation efforts, one of which yielded a benefit of approximately $15 million, improvements in credit performance and a relatively muted interest rate environment compared to the fourth quarter of 2016. These results were partially offset by a $14 million reduction to our estimate of representation and warranty recoveries, stemming from improved credit performance from the associated deals and higher loss expenses incurred of approximately $6 million. The fourth quarter was negatively impacted by excess spread compression resulting from higher interest rates.

Public finance incurred losses were $169.4 million due mostly to Puerto Rico. Similar to last quarter, the increase in Puerto Rico reserves was in line with our developing views of the situation, as Claude spoke about earlier. Ambac U.K. incurred losses were a benefit of $73.8 million resulting from the impact of the confidential settlement of litigation brought in the name of Ballantyne Re against JPMorgan investment management. The benefit realized from the settlement was nearly $92 million but was partially offset by $18 million of losses associated with the changes and other assumptions. The net benefits from the settlement resulted from the reduction of loss and loss expenses previously established in relation to Ballantyne and not from a direct cash payment to Ambac U.K.

Net losses reported interest -- in interest rate derivatives for the first quarter of 2017 were $1.5 million compared to $84 million of gains in the fourth quarter of 2016. The net loss for the first quarter included an Ambac CVA loss of approximately $2 million. The decline in interest rate derivative revenues had a significant impact on our first quarter results relative to the fourth quarter. During the fourth quarter, rising interest rates had a meaningfully negative impact on our RMBS and student loan insured portfolios, which adversely impacted current losses. By design, these losses were partially offset by our interest rate derivative positions. In contrast, during the first quarter of 2017, our incurred losses were impacted more by credit developments in Puerto Rico and not due to the interest rate sensitivity of the insured portfolio.

First quarter operating expenses decreased by $8.2 million from the fourth quarter to $28 million. During the first quarter, we incurred a $1.5 million litigation charge versus a $10 million charge in the fourth quarter. The $8.5 million reduction in litigation charges accounted for the sequential decline in expenses. Other expenses incurred in the fourth quarter of 2016, including a $3.5 million -- including $3.5 million of net cost related to the CEO change did not reoccur this quarter but were supplanted by incremental costs associated with our efforts to exit the segregated account from rehabilitation and cyclical compensation in other expenses. No further litigation charges are anticipated, thanks to the fact that we've reached an agreement in principle to settle litigation brought by a number of California municipal bond issuers, subject to receipt of all necessary plaintiff and other approvals.

As we noted last quarter, we remain focused on reducing our core operating expenses but also anticipate that we will experience volatility quarter-to-quarter associated with normal course operations and various initiatives, including those related to the segregated account and our ongoing efforts towards the successful exit from rehabilitation.

With regards to taxes. The first quarter provision was $19.6 million compared to $8.8 million for the prior quarter. The first quarter included $19.3 million of foreign taxes mostly associated with the impact of the Ballantyne litigation on Ambac U.K. With regards to tolling payments, AAC is expected to make its 2016 payment of $28.7 million to AFG in the near term. Upon payment, AFG will have cash and investments of approximately $376 million or over $8 per share.

Stockholders equity at March 31, 2017 was $1.6 billion or $35.92 per share, down $89.1 million from December 31, 2016, due to the total comprehensive loss of $89.2 million. Comprehensive losses were lower than our net loss primarily due to an increase in unrealized gains in the investment portfolio and the translation impact of foreign currency rates on our investment in Ambac U.K.

Adjusted book value was down $106.5 million to $1.2 billion or $27.09 per share at March 31, 2017. The main contributor to the decline in adjusted book value was the first quarter adjusted loss and a reversal of earned premiums already included in adjusted book value, partially offset by a benefit to UPR from favorable loss development on certain public finance credits.

That concludes my formal remarks. I will now turn the call back to Claude for some brief closing remarks. After which, we will open the line for questions.

Thanks, David. I want to emphasize that the board, executive management and all employees at Ambac are committed to and working diligently towards generating a long-term value for shareholders. In order to do so, we are focusing on executing on our strategic objectives as outlined and delivering results. I look forward to updating you on our progress next quarter.

We will now open up for questions.

(Operator Instructions) Our first question comes from Andrew Gadlin with Odeon Capital Group.

I wanted to know if you could provide some color on the timeline for negotiations with creditors and completing an exit? There was a 60-day deadline imposed from the regulator. What do you think the odds are that if a deal doesn't come together by then, the regulator steps in at that time? Or is it likely the regulator takes quite some time to develop a plan of his own?

Thanks, Andrew. I think the regulators been fairly consistent, clear with us. I think they, at year-end, indicated they would provide feedback to the market and to Ambac by the end of the first quarter, which they did, in and around that time frame. And I believe that the assessment of the 60-day period was formulated with an understanding of the company's plan in mind. And I think their expectations and the certainty around the date, which suggests that there is a hard stop at 60 days. And they've expressed clear objectives to see us progress our plan. And we remain in active dialogue with the regulator. I would assume that if we're not making progress, that timeline could be shorter. But I believe that at this point, they will provide us a 60-day time frame to evaluate options and to present a consensual plan to the regulator for their consideration and support.

And how long do you think it would take to effectuate a deal once it has been reached?

That's a great question. I think the plan that we have outlined in our -- in discussions with the regulator on, we believe, with core proceedings and other aspects involved in that transaction, it could -- it is likely something that would -- if successful, would close in the latter part of the year, possibly late third quarter -- maybe early fourth quarter.

Okay. And then I was wondering if you could talk a little bit about the decision to purchase a considerable amount of surplus notes at the holding company and swap out of DPOs and into surplus notes in that plan. It's now almost [200 in native] surplus notes following the additional purchases in April. Out of the $300-odd million of liquidity at the holding company? So could you talk about that strategic decision?

Sure. I'm not sure I'd characterize it completely strategic, but we did exit certain AAC, DPO positions. We still maintained some at AFG. And as you pointed out, we did purchase and replaced that with more general account surplus notes. We also purchased a sizable interest in our senior segregated account surplus notes, which also, I think, that component makes up more than half the increase. And I would say part of the decision was made based on relative value and capital allocation decisions, and the other part, as it relates to the senior segregate account surplus notes, we believe we now control 100% at AFG of those notes on hold, 100% of the outstanding as segregate accounts surplus notes. And we also believe that those notes have strategic value to us given they have certain consents under plan amendments as well as the bank settlement agreement, which could be valuable to us in the future.

(Operator Instructions) Your next question comes from the line of Mark Doyle with Sterling Grace.

I have a question concerning the clawback credits in Puerto Rico and whether or not, in your opinion, there is room to negotiate or whether or not those clawback credits are going to continue to be clawed back despite the fact that it would seem that, that money is being used to make appropriations rather than to pay the general obligation debt?

Yes, I think -- thank you for the question. Well, first us all, I'd -- and I know that the nomenclature has been used as clawback debt, but we actually define those as revenue bonds. There are -- in the case of certain revenue bonds, as you noted, certain very narrow prescribed matters in which there could be periodic clawback of funds, specifically for the purpose of payments on GOs, where payments not -- are not being made on GOs. And I think the way that it's been presented by the OB and the Commonwealth is more of a disregard for the structure of these bonds and really suggesting almost a perpetual clawback rate, which does not exist nor does it exist for a broader set of purposes other than, again, the narrow definitions and it varies by revenue bond. And there are also very strict repayment requirements and priorities in the following year that there's a clawback that is also not been recognized by the OB or the Commonwealth. So I think, we obviously have significant concerns in that what has been presented doesn't appear to respect lawful priorities and liens per debt, and we also believe it to be unconstitutional. So for a variety of reasons, I think we are positioned on this as very different than what has been expressed by the Commonwealth, at least by way of its fiscal plan and narrative shared with us. So it is something that we're very interested, in engaging with the Commonwealth. As I mentioned earlier, there has been little or no discussion or mediation, vis-a-vis. A number of these revenue bonds, which further concerns us, given we do view them as significant and important exposures and instrumentalities in Puerto Rico. And for those reasons, as we've initiated and as other creditors have initiated, significant litigation, we think will form part of the process in getting to resolve. As I also indicated, we're also -- we also maintain very open position to engaging in active negotiations around these revenue bonds. But I think for now, we don't have a specific timeline, but we are very focused on finding a reasonable and acceptable solution around the revenue bonds. But a lot of this, as we mentioned earlier, has to come back with a revised fiscal plan and understanding and respect of law priorities -- lawful priorities and liens per debt. So again, we're hopeful that with the new Title III in process and Judge Swain leading the process, we remain optimistic that there'll be a clear process towards a resolution, and we look forward to engage in discussions.

A follow-up question. In the past, you guys have mentioned, with regard to the substantial net operating loss carry forwards that you have, that you were looking for a business that would throw out some cash in order to use those NOLs. And in the past couple of years, were -- after you first mentioned it, we haven't seen any movement on that front. Is the -- has the company's attitude towards that changed? Or are you still looking to acquire another business or create a new business to use the NOLs?

Yes, it's a great, great question. And I think as we know the last quarter, and again this quarter, we have undertaken and as of today, we have initiated the review of our strategic options, as I mentioned earlier. And the purpose of that is really focused on exploring new businesses that would provide long-term sustainable value for shareholders. And as part of that equation, obviously, we also consider the tax attributes that we have at both the holding company and AAC. But we are focused on developing a plan, and we look forward to updating shareholders likely sometime in the third quarter. So it is still our plan, and again, we look forward to talking more about it at our next call.

And this does conclude today's conference call. Please disconnect your lines at this time, and have a wonderful day.