Ambac Financial Group Inc (AMBC) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Ambac Financial Group, Inc.'s First Quarter 2021 Earnings Call. (Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your hosts, Ms. Lisa Kampf, Head of Investor Relations; Claude LeBlanc, Chief Executive Officer; and David Trick, 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 first quarter 2021 financial results.

We'd like to remind you that today's presentation may contain forward-looking statements about our business, including but not limited to, new business, credit outlook, market conditions, credit spreads, financial ratings, loss reserves, loss mitigations, loss recovery, investment returns or other items that may affect our future results. These statements 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 reports, 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 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, the presentations have been posted to the Events & Presentations sections of our IR website, which support our comments today.

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

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

This morning, Ambac reported net income of $17 million, or $0.08 per diluted share, and adjusted earnings of $41 million, or $0.59 per diluted share, for the first quarter. At March 31, our book value was $1.1 billion, or $23.02 per share, and adjusted book value was $908 million, or $19.66 per share.

Our first quarter results were positively impacted by material progress on our strategic priorities, including gains of $37 million realized from our junior surplus note transaction and the inclusion of operating results from our new MGU platform exchange.

We also regained significant derisking momentum during the quarter and materially progressed our specialty property and casualty insurance strategy.

Starting with a review of our derisking activities, net par exposure was $31.4 billion at March 31, down 7% from year-end, and watch list and adversely classified credits were $12 billion at March 31, down 8% from December 31.

Active derisking transactions accounted for 56% of the total decline in net par exposure for the quarter. Notable transactions completed include, one, the execution of a material reinsurance transaction for certain public finance credits with net par outstanding of approximately $823 million. Par ceded included general obligation, lease and tax-back revenue, higher education and transportation exposures as well as $158 million of watch list and adversely classified credits.

Two, the successful exit of our Mets Queens baseball stadium exposure, a $540 million adversely classified credit, via the refinancing and quota share reinsurance transaction.

And lastly, the negotiation of additional credit and liquidity improvements for AUK's largest COVID-affected exposure.

The U.S. economy is experiencing a strong recovery year-to-date, with U.S. GDP expected to have grown at an annualized rate of approximately 9% in the first quarter. Higher retail sales, increased manufacturing output and government stimulus, including the $1.9 trillion American Rescue Plan Act, with $350 billion slated for state and local governments, together with other fiscal and monetary stimulus in 2020, are driving the strong economic recovery. Additional stimulus could come from the American Jobs Plan and $1.5 trillion projected in discretionary spending in the U.S. budget for 2022.

Given these strong economic conditions, we remain cautiously optimistic about the outlook for our insured portfolio, which we believe will continue to improve, particularly as vaccination rates continue to increase.

Turning now to Puerto Rico. As reported on May 5, the Oversight Board has reached a Plan Support Agreement with Assured Guaranty and MBIA, amongst other creditors. This agreement impacts 2 of our revenue bond exposures, HTA and CCDA. However, the agreement does not include PRIFA, our largest remaining Puerto Rico exposure.

Ambac is not a signatory to the Plan Support Agreement. However, we continue to believe that a consensual negotiated settlement leading to a global resolution of Puerto Rico's bankruptcy is in the best interest of the Commonwealth. Barring such a settlement, Ambac will continue to pursue all of its legal rights and remedies to arrive at a resolution that respects the property rights and security interests of revenue bondholders.

We are firmly of the opinion that Puerto Rico has ample debt-paying capacity to structure a reasonable outcome on revenue bonds. This can be achieved in a way that would not impinge on the Commonwealth's ability to flourish economically and to serve its residents who had to suffer through this lengthy and costly bankruptcy process.

Regarding our loss recovery efforts, our front appeal in our main case against Bank of America Countrywide was argued in April, and we expect a decision from the First Department within the next couple of months. We are preparing to go to trial with or without our fraud case. Assuming no change or developments that could impact the timing or nature of our case, we hope that Justice Robert Reed, recently appointed to our case, will schedule a trial date for the second half of this year or early 2022.

With regards to our capital management initiatives, during the quarter we executed a note exchange transaction, resulting in the acquisition of all outstanding junior surplus notes in exchange for the issuance of surplus notes. This resulted in the extinguishment of $76 million in debt and accrued interest. David will speak to these transactions in more detail in a moment.

Turning now to our new business initiatives at AFG. The P&C industry continues to report healthy rate increases, and we expect pricing will continue to outpace estimated loss cost trends, leading to improved underwriting margins. We believe that the improvements in combined ratios across the industry present a tremendous opportunity to generate strong risk-adjusted returns as we rapidly progress the ramp-up of Everspan and our P&C specialty business.

Everspan Group has made significant progress following its launch in February. Our license expansion initiatives for Everspan Insurance, our specialty admitted carrier, has progressed materially, and Everspan now has full P&C authority in 26 jurisdictions. Everspan Indemnity, our surplus lines carrier, is authorized for excess and surplus lines in all 50 states and is white-listed in a majority of the states that maintain a registry.

I am also pleased to report that Everspan's first program was recently launched with Cardigan General Insurance Services, a subsidiary of Venbrook Group and a nationally recognized managing general agency that focuses on specialty programs and services. We are very excited about the Everspan-Cardigan partnership, which will allow Cardigan to enhance their specialty transportation product offering and diversify their state footprint. Our first program was also backed by strong and highly rated reinsurance panel.

Our management team's expertise and collaborative field structuring approach has been positively received in the market. Everspan has a significant number of submissions under active review, and we expect that continued favorable market conditions will provide a robust program pipeline for Everspan in the coming quarters.

We are also exploring a number of strategic initiatives, including the potential acquisition of additional shell carriers to support Everspan's short- and long-term objectives.

Turning now to Xchange. The acquisition of Xchange under Pillar II, which encompasses fee-based MGA and MGU businesses, was accretive to our first quarter results, and we are pleased with our team's performance during the quarter. With strong renewals on its employer stop-loss business and growing revenue generation in its affinity business, Xchange is well positioned for growth in the coming quarters.

Consistent with the strategy, the team is pursuing opportunities for product diversification and expansion of its strong panel of insurance care relationships as well as opportunities to develop additional revenue sources.

We're also actively exploring opportunities to grow the MGA/MGU program manager business via additional acquisitions and/or partnerships as well as the establishment of de novo modeling MGAs in targeted specialty P&C lines of business.

With regards to Pillar III, we continue to actively explore various investment opportunities in businesses which are complementary to our Pillar I and Pillar II strategies.

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

Thank you, Claude, and good morning, everyone.

For the first quarter of 2021, Ambac reported net income of $17 million, or $0.08 per diluted share. This compares to a net loss of $14 million, or $0.31 per diluted share, in the fourth quarter of 2020.

Adjusted earnings for the first quarter were $41 million, or $0.59 per diluted share, compared to adjusted earnings of $4 million, or $0.08 per diluted share, in the fourth quarter.

The variance between adjusted earnings and GAAP net income relates mostly to the exclusion of insurance intangible amortization, which amounted to $19 million in the first quarter.

Our first quarter results reflect the advancement of a number of our strategic initiatives, most notably our continued efforts to simplify and deleverage our capital structure. To that end, we executed 2 transactions which, combined, results in all junior surplus notes being extinguished in exchange for surplus notes, a GAAP gain from extinguishment of debt of $33 million and a net realized investment gain of $4 million.

In addition, our first quarter results were favorably impacted by the inclusion of Xchange's results for the first time, continued strong results from our investment diversification strategy and gains on interest rate derivatives, partially offset by incremental reserves taken on Puerto Rico.

Briefly turning to some more specifics, premiums earned were $14 million in the first quarter, compared to $18 million during the fourth quarter. The decrease in the first quarter was driven by lower accelerated premium as a result of the proactive derisking of an international credit, which produced $6 million of accelerated premium in the fourth quarter of 2020, partially offset by an increase in normal earned premium as a result of a reduction in the allowance for premiums receivable in the first quarter.

Although down slightly, investment income remained strong, at $49 million, compared to $53 million in the fourth quarter. Performance was led by continued solid results in equities and hedge funds, partially offset by losses from the emerging markets debt and lower income from the Corolla Trust certificates. AFG sold the Corolla Trust certificates in exchange for AAC-issued surplus notes as part of the junior surplus note exchange.

Included in first quarter investment income were gains on pooled funds of $27 million and income from available-for-sale securities of $22 million, compared to $31 million and $23 million in the fourth quarter, respectively. Investments in pooled funds had a total return of 4.6% for the first quarter, compared to 5.8% in the fourth quarter.

Other income of $5 million for the first quarter included commission revenue from Xchange of $7 million, partially offset by foreign exchange losses and certain expenses related to consolidated VIE.

Loss and loss expenses incurred were $8 million in the first quarter, compared to $9 million in the fourth quarter. Domestic public finance losses incurred were $9 million, stemming from increased Puerto Rico reserves related to the recent developments which Claude just discussed, partially offset by the benefit of higher discount rate. The benefit of $7 million in the fourth quarter reflected the favorable impact of higher discount rates and positive credit developments, in general, resulting from the active management of the insured book, partially offset by an increase in Puerto Rico reserves.

Operating expenses were $33 million, up from $26 million in the fourth quarter. The increase was driven by the inclusion of Xchange's commissions to sub-producers and operating costs, costs related to the junior surplus notes exchange and seasonal compensation costs. While operating expenses increased this quarter, the increase, including nonrecurring costs, was primarily driven by the inclusion of Xchange and the advancement of other strategic objectives, all of which will generate both near-term and long-term value. Nevertheless, we remain focused on prudently managing expenses across the entirety of the Ambac platform.

Turning to the balance sheet. As a result of the exchange transaction, which eliminated all outstanding junior surplus notes' related accrued interest, AAC issued $279 million par of surplus notes, with associated accrued interest of $183 million, lowering its debt and outstanding interest by $76 million. Out of this issuance, AFG received surplus notes of $40 million par, with $26 million of accrued interest, which are eliminated in consolidation, in exchange for its equity investment in the Corolla Trust.

The exchange transactions were beneficial to both AAC and AFG in several ways. For AAC, the exchange lowered AAC's outstanding debt and accrued interest by $76 million, no cash outlay, and reduced its annual interest expense by approximately $4 million; further simplified the capital structure; and reduced the duration of outstanding debt. And for AFG, the surplus notes received in the exchange improved liquidity relative to the investment in Corolla equity; exceeded on a fair value basis the carrying value of the Corolla equity; and have an expected duration shorter than the Corolla equity. Through its investment in AAC, AFG is also the residual beneficiary of the deleveraging of AAC.

During the first quarter, we also early-redeemed another $16 million of the AAC secured notes, mostly through the sale of a portion of the securities collateral at market levels below the cost of the secured debt.

Shareholders' equity decreased $0.55 per share, to $23.02 per share, or approximately $1.1 billion at March 31, 2021. The decrease was due to net unrealized losses on securities of $24 million and a $13 million increase to the redemption value of Xchange's noncontrolling interest, partially offset by net income of $17 million and $6 million of foreign exchange translation gains.

Adjusted book value decreased to $908 million, or $19.66 per share, at March 31, 2021, from $919 million, or $20.05 per share, at December 31, 2020. This $0.39 decrease was driven by $13 million increase to the redemption value of Xchange's noncontrolling interest and the impact on expected future premiums from the reinsurance transaction and the Mets Queens ballpark derisking, partially offset by $41 million of adjusted earnings. Unlike book value, adjusted book value is not impacted by changes in unrealized gains and losses.

AFG on a standalone basis, excluding investments in subsidiaries, as of March 31, 2021, had cash, investments and net receivables of approximately $274 million, or $5.94 per share, including approximately $155 million of liquid assets. The decrease in assets of $92 million, or $2.05 per share, from December 31 was mostly related to the capitalization of Everspan.

I will now turn the call back to Claude for some brief closing remarks.

Thank you, David. I am very pleased with the accomplishments during the first quarter of 2021. We remain focused on all of our strategic priorities and expect our momentum to continue as we progress our efforts in the coming quarters.

Operator, please open the call for questions.

(Operator Instructions) Our first question comes from the line of Giuliano Bologna with Compass Point.

I think it would be interesting to touch on some of the developments. Obviously, getting deals on the Puerto Rico side is a positive. When we look at the loss reserves and the losses are in methodology kind of in the first quarter, is anything related to those -- the new announced transactions included in the scenario analysis that you're using for the first quarter? Or does that roll in during the second quarter?

Hi, Giuliano, it's David Trick. Thanks for the question. We fully incorporated everything we learned through -- I think it was the announcement on May 5 into our reserving process. And as you may recall, we were scheduled to release earnings on Thursday. But given the announcement that came out, we wanted to fully analyze and consider. That's why we delayed earnings to today. So we incorporated everything into our scenario analysis that we know of, as of and through the 5th.

That sounds good. And then thinking about the (inaudible) litigation and kind of the priority in largest cases out there against Countrywide, are there any big milestones in terms of hearings or anything coming up in the near term that we should potentially be focused on there?

So, yes, at this point, we're just waiting to hear back from the First Department on our appeal of the fraud case, and we expect that will come through, hopefully, in the next -- it could be as soon as the next week or two or could take a few months. And then following that, we're hoping that we'll have the opportunity to meet with Justice Reed to establish a trial date, which we hope could be as early as later this year or early 2022.

That sounds very good. Then one final one, just thinking about some of the holding companies have liquidity and liquid assets. Is there any plan in terms of how you want to manage that? Obviously, you're looking for more expansion, potentially more transactions on that side to keep adding new business lines. Or are there other uses of capital internally where you may need to capitalize some of the business lines that you're building out? Or how do you think about the excess above and beyond that?

Sure, Giuliano, a couple of things. I think you touched really on most of it. There are other transactions, I'll call it external transactions, that we're looking at, as we've talked about regularly. And in addition to that, we're looking at potential other sort of de novo transactions, particularly in the sort of Pillar II sector.

But in terms of Everspan, I think Everspan is pretty well capitalized at this point. There's some sort of capitalization -- and I should say operating investments we may make there. But I think from an Everspan standpoint, we're set.

So it's really those other types of transactions, de novo start-up opportunities and potential other third-party acquisitions, that we would be looking to allocate capital towards in the future.

Thank you. There are no further questions at this time. This concludes today's conference. We thank you for participating. You may now disconnect your lines. Thank you.